Companies Bill [H.L.]

HL Deb 20 March 1989 vol 505 cc461-530

Report received.

Clause 2 [Accounting records]:

Lord Williams of Elvel moved Amendment No. 1:

Page 2, line 39, at end insert— ("() A parent company which has a subsidiary undertaking in relation to which the above requirements do not apply shall take reasonable steps to secure that the undertaking keeps such accounting records as to enable the directors of the parent company to ensure that any balance sheet and profit and loss account prepared under this Part complies with the requirements of this Act.").

The noble Lord said: This amendment repeats a point that we raised at the Committee stage of the Bill. It provides what we regard to be an important technical improvement of the original wording. In our view it is important that holding companies ensure that group accounts meet the requirements of this Act. We believe that this amendment achieves that. It will also achieve something a little extra. It will effectively require parent companies to ensure that unincorporated subsidiaries which, I remind your Lordships, are not subject to the Companies Act, maintain sufficient records to enable proper group accounts to be prepared. We believe that this amendment makes a minor improvement to the Bill. It is in that spirit that I beg to move.

Lord Lloyd of Kilgerran

My Lords, I have considerable sympathy with the amendment that the noble Lord has presented so well to your Lordships. But I wonder whether the control that he is seeking regarding business undertakings goes far enough. I understand that the Government have some sympathy towards this amendment. I wonder whether they have considered that the amendment should start off in this way: A parent company which has an undertaking and not "a subsidiary undertaking". To leave out the word "subsidiary" at that stage will mean that the control exercised by this amendment will go deeper than it would by leaving in the word "subsidiary". That is an important matter as regards the control of companies, as the noble Lord, Lord Williams, has indicated.

As I see it, the trouble arises because the Bill is spattered with definitions. Therefore I hope that your Lordships will not mind if I go through the definitions of what constitutes a parent company, a subsidiary undertaking and an undertaking, in order to establish that it would be preferable to have an amendment without the word "subsidiary" being included in the way that I have indicated; namely, A parent company which has a subsidiary undertaking should be, A parent company which has an undertaking''. I hope that your Lordships will allow me to take you through this rather convoluted argument. The definitions are to be found on page 39 of the Bill at the end of Clause 20. There your Lordships will see halfway down that page that a "subsidiary undertaking" is defined by reference to Sections 257 and 258 of the Companies Act 1985. A little lower on the same page the definition of "undertaking" and similar expressions are to be found at Section 259(1) to (3) in the Companies Act 1985.

A little higher up there is a definition of what a, parent undertaking (and parent company) comprises. For the moment I need not bother your Lordships with that. If your Lordships would care to look at the definition of "subsidiary undertaking" in Sections 257 and 258 of the Companies Act 1985, that is to be found earlier in the Act. At page 33 of the Bill, Clause 19 is headed "Parent and subsidiary undertakings". The whole of Section 257 of the Companies Act 1985 is included here which is itself helpful. The first subsection of that says: (1) The expressions 'parent undertaking' and 'subsidiary undertaking' in this Act shall be construed as follows: and a 'parent company' means a parent undertaking which is a company". The definition continues: (2) An undertaking is a parent undertaking in relation to another undertaking, a subsidiary undertaking". Therefore it rather implies that we are there dealing with subsidiary undertakings that are companies.

One would have hoped that the situation might have been clarified by subsection (3). Here we have somewhat of a gobbledegook definition that, (3) An undertaking is also a parent undertaking"— which by definition in the Act is a company— in relation to another undertaking, a subsidiary undertaking". That brings us back again to the position of a subsidiary undertaking— if it has a participating interest in the undertaking". There is then given a further definition.

Certain confusion arises again as regards subsection (4) which states: A parent undertaking shall be treated as the parent undertaking of undertakings". The parent undertaking is a company and I suppose that the undertaking must be a company. As one goes through that section one gains the impression that there is some confusion as to what is meant by "an undertaking". One then turns to Clause 20. That helpfully repeats Section 259 of the Companies Act 1985. It says: In this Part 'undertaking' means"— presumably that means Part I of the Companies Act 1985— (a) A body corporate or partnership, or— (b) an unincorporated association carrying on a trade or business, with or without a view to profit". I have failed to find what is meant by "association" in this Bill. I have perhaps missed the definition. If I have, no doubt it will be pointed out to me with some enthusiasm.

Subsection (2) of this part makes reference to shares and then goes on to describe the position of undertakings with and without a share capital. One hoped that in subsection (3) on page 36 some light would be thrown on the position. Subsection (3) confuses the matter a little further. It says: Other expressions appropriate to companies shall be construed, in relation to an undertaking which is not a company, as references to the corresponding persons, officers, documents or organs". It goes on to say: This is subject to provision in any specific context providing for the translation of such expressions". I assume that a little glimmer of light is being introduced and that the Treaty of Rome may be of some significance. In order to get the definition right one has to look at translations, because subsection (3) is, subject to provision in any specific context providing for the translation of such expressions". I apologise for my legalistic approach, but this is a matter of some importance to persons in industry who must try to construe convoluted passages in the Bill regarding the scope of "susidiary company", "subsidiary undertaking" and "parent undertaking". On that analysis it seems to me that the internal control, which the Government apparently seek through the amendment, is incomplete. It may not include partnerships associated with the parent company. It covers unincorporated associations, whatever that may mean, but it may not include research associations associated with the parent company, unless of course the Government say that "associations" apply only to research associations. However, that is not the way to construe the question. Some loss of control appears to arise from accepting the amendment in its present form.

In conclusion, I should like to thank the noble Lord, Lord Strathclyde, for the letters he has sent to me which clear up a number of points raised during discussion on various parts of the Bill. However, one letter which I received this morning says that in Part IV of the Bill—not necessarily in this part—the Government still have in mind what to do with unregistered companies. I suppose that that means unregistered undertakings. It seems that this letter adds to the difficulty of construing precisely what is the scope of the amendment. I support strongly the amendment as put forward by the noble Lord, Lord Williams, but I do not think his presentation of it goes far enough.

Lord Strathclyde

My Lords, I should like to thank both noble Lords for taking part in the debate. Notwithstanding the legalistic views of the noble Lord, Lord Lloyd of Kilgerran—I think he described them as such—I must point out that the provision is useful only for consolidated accounts and that therefore it is not sensible or meaningful to leave out the word "subsidiary". Furthermore, there is no confusion over what is meant by "undertaking" or "subsidiary undertaking". They are not restricted to Companies Act companies. As the noble Lord said, they could, for example, be partnerships as well as a number of other things.

Subsection (2) and (3) of new Section 259 are intended to adapt references to other forms of body in the Act which are appropriate only for companies. In our view they have that effect and are not in the least confusing. No one else has suggested that there may be a difficulty here.

In Committee we debated a somewhat similar amendment tabled by the noble Lord, Lord Williams, in response to which I said that the Government had some sympathy with the proposal and would consider it further. The previous amendment was unclear in several respects and could not be accepted. However, the version now before us is more direct in that the accounting records referred to are clearly those necessary to enable the proper preparation by the parent company of the consolidated accounts. That is a proper concern of the directors of the parent company. The Government are happy to accept the amendment as a modest but important impovement to company law. As I said in Committee, it will serve to remind directors of parent companies of their responsibility to make sure that they have adequate information about subsidiary undertakings which fall outside the Companies Act—for example, United Kingdom partnerships and companies incorporated outside Great Britain.

Lord Williams of Elvel

My Lords, I am grateful to the noble Lords, Lord Strathclyde and Lord Lloyd of Kilgerran. The noble Lord, Lord Lloyd, has a serious point in regard to the difficulty of defining what is a "subsidiary" and what is an "undertaking". This runs through the whole Bill and we had many discussions in Committee on this point. Indeed, the fact that there are two different versions of what is a "subsidiary" causes confusion in the lay mind and even in the minds of legal experts such as the noble Lord, Lord Lloyd. I am glad, however, that the drafting of my amendment is more acceptable to the Government than that of the one we moved in Committee. I hope that, having noted what the noble Lord, Lord Lloyd, said about the difficulty of defining "subsidiary", the Government will accept my thanks for adopting Amendment No. 1.

On Question, amendment agreed to.

3.15 p.m.

Lord Williams of Elvel moved Amendment No. 2:

Page 2, line 39, at end insert ("() If the auditor of a public limited company has reported to the directors any criticisms of the accounting records or internal controls maintained by the company or its subsidiaries during the financial year which in the opinion of the auditor are significant, the directors shall state that fact in the notes to the accounts, and indicate what steps they propose to take.").

The noble Lord said: My Lords, Amendment No. 2 follows on from a discussion in Committee on accounting records and internal controls maintained by the company. This amendment is rather different from the one I moved in Committee. I have accepted the government argument that to introduce on a statutory basis a responsibility for internal controls in the same way as it is found in the Banking Act and the Building Societies Act for banks and building societies would not be appropriate for the generality of Companies Act companies. I accept that banks and building societies have different kinds of activities and that the provision for enforcement of internal controls contained in the two Acts governing those types of company is not appropriate for industrial companies. Nevertheless, in Committee the Government recognised the importance of proper internal control, and all noble Lords will agree that that is right and proper. The amendment is designed to ensure that where there are criticisms by auditors of internal procedures these are brought to the attention of the directors and, through notes in the accounts, to the attention of the shareholders. Furthermore, the notes in the accounts should indicate what steps the directors propose to take to remedy the defects brought to their attention by their auditors.

The opinion of the auditor is significant. It should be left to the professional judgment of the auditor. After all, he is appointed by the shareholders to protect their interests and is professionally equipped to make judgments of that kind. He should be entitled to make judgments and should not have to put them, as is present practice, in an audit letter to the boards of companies. He should be entitled to know that his opinion will be revealed to shareholders. It is also our view that shareholders should be entitled to know what boards of directors who receive these comments from auditors propose to do about them. Moreover when shareholders come to elect the directors of their company they will no doubt wish to bear in mind the measures which directors are prepared to take in order to meet the criticisms that have been levelled at them and their internal controls by their auditors.

Further, I believe that an amendment along the lines of the one which I am suggesting here would be a useful step—not a critical step, but a useful one—in the fight against fraud. I say that because slack systems encourage fraud, and absence of proper reporting duty may encourage directors who are slack or idle. Directors who have been criticised in the audit letter should, in order to protect their shareholders against any possible fraud within the company, have a duty to reveal such criticisms to the shareholders whom they represent.

In many senses this is a milder amendment than the one which I moved in Committee. Nevertheless it marks a most important point; that is, that internal controls are of vital importance in the running of our companies. I do not believe that there is any difference between the Opposition and the Government on the matter. We seek to ensure that shareholders are aware of criticisms which may be made by auditors and that they should be able to judge their board of directors on the responses which they make to such criticisms. I beg to move.

Lord Lloyd of Kilgerran

My Lords, the noble Lord will be very pleased to know that I shall only intervene briefly on this occasion in order to declare my support for the amendment, subject of course to what I said before. I should like to thank the noble Lord, Lord Williams, for the courtesy with which he received my long speech on these legal matters.

It seems to me that what is suggested here would be a useful step in the fight against fraud, in that where an auditor has made some kind of criticism or other, the directors should state the fact in the notes to the accounts instead of, as is now the practice, only having a letter from the auditor in the matter. I also think it is right that the directors should indicate what steps they propose to take.

Lord Benson

My Lords, in my view this amendment should not be passed for three reasons. First, the statutory duty of the auditors is to report to the shareholders and not to the directors. It is extremely important that that statutory responsibility should be absolutely clear and not confused by any other reporting obligation such as that indicated in the amendment. Secondly, if any point of significance arises on: the accounting records or internal controls"— the words contained in the amendment—which is of sufficient importance to bring it to the attention of shareholders, the auditor has the statutory obligation, not the right, to refer to it in his report to the shareholders. He would do so under one of three aspects, all of which are contained in the Companies Act: either the true and fair view, the state of the books, or information and explanations —which is a widely embracing provision. All those factors automatically cause any such matter to be drawn to the attention of the shareholders in the auditor's report.

I agree with the noble Lord, Lord Williams of Elvel, that internal controls are of vital importance; but if they are so weak as to require comment by the auditor—I am not referring to small matters which can be corrected by the directors—then such comment must be included in the audit report.

The third reason why I think that what is proposed in the amendment would be unsatisfactory is that I believe it would defeat its own purpose. At the end of the audit it is the invariable practice of the auditor to have discussions with the directors on a wide-ranging agenda; that is, maters of general interest, matters of comment, and so on. If at some later date the general advice or discussion are going to be interpreted as having been a criticism, what will happen is that the auditors will not tender such advice at the end of the audit or in fact enter into those extremely valuable discussions. For all those reasons, it would be unwise to accept the amendment in its present form.

The Secretary of State for Trade and Industry (Lord Young of Graffham)

My Lords, I thank the noble Lord, Lord Williams of Elvel, for introducing the amendment which was supported by the noble Lord, Lord Lloyd of Kilgerran. At first sight this proposal looks quite attractive. It takes a different approach to the issue of a company's internal controls from that of the amendment moved by the noble Lord in Committee, on which, I think it is fair to say, there was a difference of philosophical approach between the Government and the noble Lord. Nevertheless I believe that this amendment, were it to be accepted, would do more harm than good and I shall shortly explain why.

The proposal would turn a private and extremely important and useful part of the relationship between a public company and its auditors into a more public and rather less useful exercise. The noble Lord's approach seems to be based on the blind assumption that the auditors would continue to comment on, and criticise, the accounting records and internal controls of the company as at present in the report to management which is sent to the company after an audit. Under the noble Lord's proposals the auditors would draw attention to points of significant criticism which the directors would then be required to disclose in the accounts. The directors would also be required to set out proposals for corrective action.

What I fear the noble Lord ignores is that the change itself would almost certainly have a profound and adverse effect on the way the auditor prepares the report to management. He would almost certainly be much more cautious. The auditor would think very hard before requiring the company to make the disclosure to which this amendment refers, which could have far-reaching repercussions. He would be under no statutory obligation to make such a report. The auditor would moreover be placed in the unenviable position of having to decide whether a criticism was significant. He may also come under pressure—or feel that he is under pressure—either not to report on such matters or to conclude that matters on which he has reported are not significant.

On the other hand the auditor may be concerned that he could be legally liable if he does not make comments. Either way, the effect of the amendment would be to put the relationship between the company's directors and their auditors on to a different and less satisfactory basis. A company genuinely wanting to improve its internal control systems, but not wanting to parade this in public, might look to someone other than the auditor. There is no sense in pushing companies in that direction.

What I have said so far is based largely on practical considerations: the amendment will not deliver what the noble Lord has promised. That argument must be overlaid with a more general difference of approach between the Government and the noble Lord about the role of auditors and the internal management of a company's affairs.

The Government's view is that the essential role of auditors under company law is to provide an independent verification of the information which the company is required to disclose to its shareholders in its accounts. In doing so, the auditors are required by law to check the quality of the company's accounting records. There will also be cases where the auditor concludes that a company's system of internal controls is so poor that it cannot make a proper audit judgment. In those cases, weakness of the internal control system will be reflected in a qualified auditor's report. I believe that that is the second point made by the noble Lord, Lord Benson. To that extent this amendment overlaps existing safeguards.

Further, under the law, the auditors are essentially concerned with the output of the company's accounting systems, not with the quality of the systems themselves. Of course the auditors may well report to the management of the company on the quality of the control systems. That is common practice and I am sure that it is entirely beneficial. I believe that that is the third point which the noble Lord, Lord Benson, made a short time ago.

I believe therefore that it would be wrong to confuse the auditors' public function, carried out on behalf of the shareholders, and the tasks that they carry out on behalf of management. The amendment introduces a confusion in that way, which is why we oppose it. Indeed, that was the first point made by the noble Lord, Lord Benson, for opposing the amendment. The Government believe that responsibility for the internal management of companies should rest with the boards of these companies. In carrying out its responsibilities for the management of the company, the board is accountable to the shareholders, not to the auditors.

I believe that in the end the amendment would do considerably more harm than good and would unduly interfere with the internal affairs of the company. Therefore, for the reasons I have outlined, I ask the noble Lord, Lord Williams, whether he would care to withdraw it.

3.30 p.m.

Lord Williams of Elvel

My Lords, perhaps I may reply first to the Secretary of State on the question of the role of auditors. I do not believe that the role of auditors is a matter of great political philosophy. We, from the Opposition, have not moved and passed the Financial Services Act, which lays the role of policeman on auditors. We, from the Opposition, have not moved and passed the Banking Act, which lays the role of policeman on auditors. We, from the Opposition, have not moved and passed the Building Societies Act, which also leaves the role of policeman fairly and squarely with auditors. The Government have laid burdens on auditors in successive pieces of legislation.

Lord Young of Graffham

My Lords, perhaps the noble Lord will forgive me for intervening. On those three pieces of legislation, we were of course concerned to protect members of the general public. In this instance we are looking at how the auditors report to the shareholders of a company in respect of their own interests. I suspect that the test is different.

Lord Wiliams of Elvel

My Lords, it may well be, but the auditors are appointed by the shareholders and not the general public. If the auditors are to be policemen, as the Government have decided in those three Acts which I mentioned, I do not see why they should not be reporting openly and fairly to shareholders as well as to the Government on behalf of the general public. I do not see that there is a great difference of opinion. The accounting profession complains bitterly that accountants are being made more and more policemen of the system rather than auditors in the old fashioned sense, as the Secretary of State tried to indicate. Nevertheless, I will leave that issue and come to the practical points.

We are here trying to define the difference between an audit letter and an auditor's report. That essentially is the object of the exercise. The audit letter, and discussions which follow it, are produced by auditors to boards of directors and indicates those areas where an auditor, having performed his audit, feels that there are problems in the accounting systems of the company which need rectifying.

All that is fair and proper. There may be many areas which are not, in the words of the amendment, "significent". Small matters which come to the attention of auditors and need correction will be reported in the audit letter, which will be discussed, as is right and proper, with the management of the company. At the other end of the scale, as the noble Lord, Lord Benson, points out, there is the qualification of the audit report. To have a qualification of an audit report is a serious matter for any company, especially a public company.

We are seeking to establish an intermediate situation where there is no qualification of the audit report, with all that that implies, but where nevertheless the shareholders are aware of any "significant" deficiencies in a company's internal control; in other words, parts of the audit letter, which of course will be discussed by the auditors with the board of directors, are literally made public.

I am afraid that I do not see that that would disturb the position of auditors. They would still be in a position to criticise. Indeed, they would be able to criticise with a little more authority than they do at the moment. They would say to management, "We have this criticism," the underlying persuasive threat being that if the directors do nothing about it they will be forced in the following year to declare that it is significant and should be published in the report.

I do not believe that there is a difference in philosophy on the role of auditors or that the practical difficulties mentioned by the noble Lord, Lord Benson, and the Secretary of State are of tremendous significance. Nevertheless, this has been a useful debate. The debate may well be carried on as we progress to Third Reading and when the Bill goes to another place. It is an important area. All your Lordships are concerned that there should be a proper system of internal controls in our industrial companies. Having debated the matter and having heard what the noble Lord, Lord Benson, to whose words I always pay attention, and the Secretary of State, to whose words I do not always pay attention, have said, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 3 [A company's financial year and accounting reference periods]:

Lord Strathclyde moved Amendment No. 3:

Page 4, line 15, leave out from ("is") to end of line 16 and insert ("required to be made up (by its constitution or by the law under which it is established), whether that period is a year or not.").

The noble Lord said: My Lords, the amendment clarifies new Section 223(4). That subsection is intended to explain what is meant by a financial year in relation to unincorporated undertakings and bodies corporate which are not companies within the meaning of the Companies Act. The Bill states at present that a financial year shall be any period in respect of which a profit and loss account is made up. It has been pointed out to us that an undertaking may make up any number of profit and loss accounts during a year for different purposes, quite possibly covering different periods. We agree t hat that would make it difficult to determine the body's financial year. The amendment makes that more precise by referring to any period in respect of which the body is required to make up a profit and loss account, whether by its constitution or by the applicable law. I beg to move.

Lord Williams of Elvel

My Lords, we believe that this is a useful amendment. It clears up a difficulty which was previously mentioned. We have no problem with it.

On Question, amendment agreed to.

Clause 4 [Individual company accounts]:

Lord Strathclyde moved Amendment No. 4:

Page 6, line 22, leave out second ("the").

The noble Lord said: My Lords, with the agreement of the House, I shall also speak to Amendment No. 10. The noble Lord, Lord Bruce of Donington, pointed out on the first day of consideration of the Bill in Committee that the accountancy profession was accustomed to refer to "the state of affairs" of a company rather "the state of the affairs", as the present text of the Bill does in two places. The noble Lord moved an amendment which would have removed the word "the" in new Section 226(2) but not in new Section 227(3). The two amendments simply remove the word "the" from the two places where it is redundant. This is simply tidying up. There is no change of substance. I beg to move.

On Question, amendment agreed to.

Viscount Caldecote moved Amendment No. 5:

Page 6, line 25, at end insert— ("(2A) The profit and loss account of a public limited company shall also show the expenditure of research and development which has been charged against profits.").

The noble Viscount said: My Lords, with the leave of the House I shall speak also to Amendment No. 7. We had a considerable debate in Committee on a similar amendment. In line with comments then made, the amendment has been slightly altered to apply to plcs only. It is an entirely sensible change and makes the amendment more logical, as I shall explain.

As I said in Committee, the amendment has two purposes; first, to ensure that the accounts give a true and fair view, and, secondly, to remove or at least weaken disincentive to investment in research and development. Any view of the accounts, other than a short-term view, requires that that information should be given, if a true picture of the company in the longer term is to appear in the accounts.

As I also said in Committee, there is a major disincentive to investment in research and development because of the reduction in profit that occurs when that research and development expenditure is deducted in the profit and loss account. If no clear reason is given, the share price almost inevitably falls if a major increase in research and development expenditure occurs in one year. The company becomes more attractive to predators mounting a takeover bid, and as that applies only to plcs it is entirely logical that the amendment should apply to plcs only.

In the United States such disclosure is mandatory; all companies make it. As a result, when large expenditure is made on research and development, the profits fall for a year or two, but the share price increases because analysts see that the company is investing for the long term. Without adequate investment in the development of new products, the company has no long-term future, whereas well directed, market-led development expenditure ensures long-term prosperity of the company even though the profits may decline in the short term.

Nationally, greater investment in new competitive products is urgently needed if the massive deficit on our overseas trade in manufactured goods is to be corrected. In Committee, all speakers except my noble friend Lord Strathclyde on the Front Bench supported the amendment. He accepted that disclosure is desirable, but opposed the amendment because the Government prefer to achieve the same results through SSAP 13 which of course is not mandatory because it applies to non-public companies. That objection has now been removed.

My noble friend further stated that Her Majesty's Government were not keen to add another regulation to the Bill. However, he recognised the strength of feeling and said: perhaps I could take it away and come back at Report stage; then we could discuss it further". — [Official Report, 30.1.89; col. 904.] So far as I can see, my noble friend has not come back with any amendment on the point.

He also pointed out that the Secretary of State has powers under Clause 18 to amend the disclosure requirements. I have considered that point very carefully, but if in this case such delegated power may be necessary, what is the objection to making this simple amendment to the Bill now in order to remove any doubt on the issue, which the Government agree is important?

The only outstanding reason given by the Government for opposing the amendment is that it adds unnecessarily to the Bill. The two amendments add about six lines to a long Bill on an important substantive matter affecting the prospects and prosperity of companies and the national economy. Compare that with page after page of regulations relating to auditors' powers to obtain information, registration of company charges and the like. All are no doubt important matters in their way, but with little relevance to the creation of wealth and the increased sales of British companies which become increasingly important as the days go by. I submit that the case for the amendment is overwhelming and that the reasons put forward by my noble friend for opposing it are unconvincing. I beg to move.

Lord Ezra

My Lords, I wish to support the amendment moved by the noble Viscount, Lord Caldecote. As he rightly recalls, on 30th January at Committee stage we went into the proposal very thoroughly. He amended what was then proposed in order to leave out companies which were not plcs. He has pointed out the vital importance for the growth of the economy of this country and the success of public companies that there should be an increasing amount of wealth devoted to research and development. That view has been many times reinforced by debates in your Lordships' House. Every time we have debated it and the Secretary of State has been present he has fully supported it.

Therefore it is difficult to see why such an obvious requirement should not exist for companies in the future, in this rapidly moving technological age in which we live, to reveal what companies spend on research and development. As someone who has been involved in a number of companies, I entirely agree that we do not wish to burden them with having to reveal more than is absolutely necessary in their annual reports. However, times change, priorities change. Research and development have now become such an important issue, with the creation of the single European market and the global economy in which we now live, that I should have thought that the Government would be the first to recognise that greater importance should be given to it. Therefore I very much hope that your Lordships will support the amendment and that the Government will also see fit to do so. The Minister pointed out in the previous debate that he would wait to see what amendment was proposed. A very reasonable amendment has now been put forward, and I very much hope therefore that the Secretary of State and his colleagues will support it.

3.45 p.m.

Baroness White

My Lords, I wish to speak very briefly in support of the amendment moved by the noble Viscount, Lord Caldecote, and supported by the noble Lord, Lord Ezra. I do so as a member of reasonably long standing of the Select Committee on Science and technology of your Lordships' House.

The noble Lord, Lord Gregson, is unfortunately not able to be in his place today but all of us who have been members of that committee have discussed the matter at considerable length. It has been referred to in reports from the Select Committee under the chairmanship of the noble Lord, Lord Sherfield, and particularly in reports on civil research and development. I hope that the Government will appreciate that there is the strongest possible feeling about the amendment among Members of the House who have been concerned with civil research and development. We are all of the opinion that the objective of the amendment is desirable. I very much hope that there will not be any unnecessary obstruction on the part of the Government when a thoroughly desirable amendment has been placed on the Marshalled List.

Lord Auckland

My Lords, I too hope that the Government will give serious thought to the amendment moved by my noble friend Lord Caldecote and supported by the noble Lord, Lord Ezra. Medical research is becoming more and more important in the country. Although the pharmaceutical industry, with which I have no financial connection, is often slated by governments because of the enormous profits it makes, much of the research which the industry carries out is responsible for the decrease in death from childhood cancers and other illnesses. I believe that the amendment will encourage more medical research. It is right that the Government should give it very serious thought in view of the amount of valuable research carried out these days.

Lord Bruce-Gardyne

My Lords, perhaps I might intervene briefly. First, I wish to apologise to your Lordships that I was not involved in discussions at the Committee stage. I had hoped to be able to do so but, unfortunately, at the moment, I am not entirely master in my own house.

I listened carefully to the most persuasive arguments in favour of the amendment from my noble friend Lord Caldecote and the noble Lord, Lord Ezra. I confess, however, that I still have some doubts. My doubts centre on this simple point. I should have thought that the accounts of a public company were first and foremost overwhelmingly for the shareholders. It is a worry to me that, particularly nowadays when we have some public companies with enormous numbers of small shareholders—of course I declare an interest as a director of the TSB, which is an obvious example in this context—we have a battle to make sure that accounts of the company are comprehensible to shareholders with limited experience.

Your Lordships will know that under the terms of the Bill it may well be that we shall authorise simplified accounts for large shareholders but we have not reached that point yet. While it does not exist, I must say that I cannot believe that it is altogether wise to add a stipulation like this to complicate further the information to which shareholders are entitled, and which for many of them is quite difficult to comprehend as it is. I personally have some doubts about the wisdom of accepting the amendment.

Lord Mottistone

My Lords, I wish to support the amendment of my noble friend Lord Caldecote. I think that his argument was very convincing indeed, particularly on the points he made about the practice in the United States. The CBI is neutral; its members say that they detect a possibility that the proposal would need a great deal of work. I do not suppose that matters because people have to work, but it is about the only adverse factor that I have heard.

What my noble friend Lord Bruce-Gardyne had to say is a warning, but as life moves on shareholders become more and more aware of the details of accounts. Many of the better companies present their affairs in such a way as to make it easy for both employees and shareholders to understand what the accounts seek to portray. So, on balance, I should have thought that the amendment needed support and I hope that the Government will be able to give it.

Lord Diamond

My Lords, when I see an amendment down in the names of the noble Viscount, Lord Caldecote, and the noble Lords, Lord Ezra and Lord Gregson, I find it is scarcely necessary to read or listen to what they have to say as it will obviously be a wise proposal. But I am bound to say that I do not find myself wholly satisfied that this is a necessary and wise proposal. Therefore I want to ask the Government to clear up some points because unfortunately I was not present in Committee when all this was thoroughly discussed. I apologise profusely beforehand if my questions were fully answered at that stage.

I am not wholly in support of this provision because, first, I am not persuaded by the principle that any step that a company should take should be encouraged by making reference to it in its profit and loss account. I do not think that is necessarily wise. Companies have to undertake all kinds of things. If every time a company does something that is useful and wholly constructive reference must be made to that step in the company's accounts to show that it has been done, the accounts will be too detailed and will not be straightforward enough to be understood by shareholders. So I am not wholly persuaded on that. I quite understand the argument that we need to invest in research and development. But again I am not wholly satisfied that everyone would draw the right conclusion from seeing a set of accounts in which research and development expenditure was included. I am not convinced people would then say, "Hoorah! What a jolly good company for doing that". If another set of accounts did not include research and development expenditure, I am not convinced that people would say, "Oh, why has that not been included? This company must be very badly run. It has nothing charged to its profit and loss account by way of research and development". There may be all kinds of other reasons why research and development has not been charged to the profit and loss account.

As regards giving full information to shareholders, of course they should get full information. But full information is not only related to what is in the profit and loss account. There are all kinds of other ways including the directors' report, in which companies can make their position very clear to shareholders. They can do that without the added responsibility of separating out a particular item.

But those are all preliminary matters. The main question is, what purpose does this provision serve? As everyone knows, companies have different methods of writing off their research expenditure. If they incur heavy research expenditure in one year and they take the view that it refers to benefits which will accumulate to the company over a period of years, they are naturally entitled to write that expenditure off over a period of years; or they may take the view that, as they are going to incur expenditure on development every year, it would be wise to set up a fund and write off the same amount each year. It is perfectly proper for them to set up such a fund so that what appears in the profit and loss account is either something written off over a very long period of years—that does not tell one what the company is doing in the year in question about research—or a regular amount written off every year. That again is perfectly proper but again it does not tell one what the company is doing about research in the year in question.

Having regard to the different ways in which different companies quite properly treat this semi-profit and loss, semi-balance sheet item of research expenditure, part of which can properly be capitalised and part of which has to be written off, if this provision is implemented as it stands there will be an additional responsibility placed on boards and auditors with regard to a specific item. That will not reveal anything helpful to the shareholders. I believe that that will be the case in the majority of companies. If the Government are going to support this amendment, I must ask them how they propose to treat this matter and whether they propose to introduce legislation to treat the different methods under which different companies write off this kind of expenditure.

Baroness White

My Lords, has the noble Lord read the report on this matter of the Science and Technology Select Committee?

Lord Diamond

My Lords, I apologise to the House in advance for the fact that I did not even attend the Committee stage of the Bill. I apologise again if all this ground has already been covered.

Baroness White

I am not speaking of the Committee stage. I am speaking of the report of the Select Committee of this House which has very strongly recommended the course of action proposed by the noble Viscount, Lord Caldecote.

Lord Boardman

My Lords, I support the intention of the amendment, but I share many of the reservations that have been put forward both by my noble friend Lord Bruce-Gardyne and by the noble Lord, Lord Diamond. I have two points on which I wish to comment briefly: first, the method of valuation or assessment of research and development. Such a valuation must be meaningful. The noble Lord, Lord Diamond, remarked on how it should be treated in the accounts. But the accounts are a fairly mixed bag which can list expenditure which is used just for maintaining the business and also expenditure on long-term research. It is difficult to be sure how one can accurately define that.

Secondly, a company which has added to its value and its long-term future by substantial expenditure on research and development will make a point of stating that somewhere in its report and accounts. As the noble Lord, Lord Diamond, said, there are ample opportunities to do that. That should be encouraged and I am sure shareholders will look for that. While I support the intention of the amendment, I believe it to be unnecessary at this time.

Lord Williams of Elvel

My Lords, we on these Benches support the noble Viscount in his amendment. I do not wish to spend a great deal of time answering some of the points that have been made. I would say to the noble Lord, Lord Bruce-Gardyne, that the report and accounts of a company are not simply for shareholders. In my view they are for potential shareholders, for creditors and for all kinds of people who are interested in the affairs of the company in question.

Lord Bruce-Gardyne

My Lords, I apologise for interrupting the noble Lord, but I certainly did not suggest that they were solely for shareholders. I said that they were primarily for shareholders. I stick by that view.

Lord Williams of Elvel

My Lords, I am sorry if I misinterpreted the noble Lord. I had the impression that he said that the report and accounts were solely for shareholders. They are of course for the world in general, but primarily for shareholders. Nevertheless they are also for creditors and for potential shareholders. In the United States it is becoming very clear that potential investors in a company pay much more attention than they used to to the research and development programme of a company. Analysts are now used to commenting on this. They assess companies by their R&D performance. So it is very important that the analyst or the person who recommends an investment should have proper information.

SSAP 13 is not mandatory and, to be honest, it is a little vague in its wording. We would like to see something a bit sharper. Nevertheless, we believe that SSAP 13 answers one of the points that the noble Lord, Lord Diamond, made as regards how one treats research and development and whether it should be expensed straight through the profit and loss or whether it should be capitalised and amortised over years through the profit and loss. That is a matter for guidance from the accounting standards committee

I believe that it is not an argument to say that to introduce a measure of this nature into the Bill would be overregulation. After all the whole of Part I regulates what will go in company accounts. I regard this provision as a minor addition, and to have this minor addition to company accounts does not seem to me to be a very serious matter in terms of an extra burden on companies. If they are attending to SSAP 13, they will probably produce this addition anyway.

I think I have said enough. I hope the Secretary of State recognises that there is a body of feeling in your Lordships' House which not only recognises the principle of the amendment, in the way that the noble Lord, Lord Boardman, does, but also supports the detail of this amendment. I hope he will pay attention to that.

Lord Milne

My Lords, I have one reservation in relation to Amendment No. 5. I should have thought that it is in the wrong place in the Bill. The section concerns compliance and general principles and states that the schedule should be amended accordingly. Amendment No. 7, which we shall come to in due course, is the amendment which amends the schedule. I shall not enter into the discussion as to whether this is a good argument, but subsection (2) is the wrong place for this provision.

As the law presently stands research and development cannot be capitalised, it has to be written off in the profit and loss account. I can see no difficulty with quantifying the figure for research and development in the profit and loss account. However, it must be remembered that as the law stands at present one would be bringing in the amortised part of development. That must be made clear.

4 p.m.

Lord Young of Graffham

My Lords, I did not entirely agree with the noble Lord, Lord Diamond, when he said that any amendment introduced by my noble friend Lord Caldecote and the noble Lord, Lord Ezra, need scarcely even be read, although I did agree with the point which he put to me subsequently. I could disagree even less when the noble Lord, Lord Williams, joined in the debate.

I should like to make one point at the outset. It is clear that noble Lords on all sides of the House attach importance to the disclosure of expenditure on research and development in company accounts. We fully share that view. One area in which I disagree with the preliminary remarks of the noble Lord, Lord Diamond, is that we think it important that companies should disclose the amount of research and development, and that shareholders and those who value companies should take into account the amount of money allocated to research and development. That is an area where the United Kingdom has perhaps not been very strong in recent years, although there is now considerable evidence that the amount spent on research and development is rising even more than in line with company profits. I think that that is something that we shall see and value in the future.

There is therefore no difference between us on the desirability of such disclosure and the stimulus it can provide to a greater understanding of the importance of research and development for a company's future prospects. However, I ask all in your Lordships' House to consider what I believe is a different method of achieving the same end and in many ways a more appropriate means of achieving the objective which we all share, and to which your Lordships' Select Committee paid tribute.

As my noble friend Lord Strathclyde explained when this subject was discussed during Committee, the Government firmly believe that the non-statutory approach is the best way of tackling this issue. I do not wish to weary the House by repeating at length the arguments advanced at that time by my noble friend, but I should like to outline one or two key points.

The Government's position was, and remains, that if the accountancy profession could provide for disclosure through a revision to Statement of Standard Accounting Practice 13, which deals with accounting for research and development, there would be no need for legislation. The profession's own accounting standards committee has recently reached agreement on such a revision and a new version of the standard, which has been endorsed by all the leading professional bodies, was published on 26th January this year.

There are two aspects of the revised standard which will be of particular interest to noble Lords. The first concerns the nature of the companies which will be covered by the disclosure requirement. The new standard will require all public companies, and very large private companies, to disclose their expenditure on research and development in their accounts. This fully meets the Government's objectives and goes further than noble Lords have proposed in their amendment to Clause 4 since that amendment is limited to public limited companies and would not apply to very large private companies, some of which may be leaders in their field.

The second particularly interesting aspect is that the new standard requires disclosure of the total amount of research and development expenditure charged in the profit and loss account, analysed between the current year's expenditure and amounts amortised from deferred expenditure. That again goes further than the amendments, which are confined simply to the disclosure of expenditure on research and development which has been charged against profits. That is a point which was made by my noble friend Lord Boardman and the noble Lord, Lord Diamond.

The requirement for the expenditure on research and development charged to the profit and loss account to be analysed between the current year's expenditure and amounts amortised from deferred expenditure will ensure that it is clear how much of the amount charged to the profit and loss account is new expenditure incurred during the current year and how much is being amortised from expenditure incurred in past years.

The Companies Act 1985 allows development expenditure to be included as an intangible asset to a company's balance sheet only in special circumstances. The standard lays down conditions for including development expenditure as an asset, and the ultimate commercial viability of a project must have been assessed with reasonable certainty. If a project meets the conditions of the standard then development expenditure may be included as an intangible asset and amortised so that the expenditure is matched against future revenue from the project. There is the simple question of the quality of the research and development expenditure that has been incurred. It hardly matters that one incurs a large amount in the accounts or writes off from past expenditure something which has., subsequently proved to be worthless.

We then come to the question of how good is SSAP 13. The way it has been devised, and the improvement it offers over the amendment, demonstrates the thoroughness and firmness with which the accountancy profession has dealt with this important issue. I see no reason to doubt that the new standard will be complied with and that companies will accordingly disclose all the information that, and indeed far more than, noble Lords wish to have available.

It may be asked, what happens if they do not? In those circumstances, I believe that it would be the duty of the accountants to qualify the accounts. If the accounts did not comply with SSAP 13 they would not reflect a fair view of the company. I believe that that would be a much better position than having a statutory obligation. As the years go by, it may well be that there will be differences of view concerning the way in which research and development is dealt with. I believe that a method based on SSAP 13 provides a more flexible approach for the future. In those circumstances, we see no need to add to the weight of primary legislation by making this disclosure a statutory one.

The noble Lord, Lord Milne, raised the question of the amendment to Schedule 1. I hope that noble Lords will recognise that the amendment goes much further than the amendment to Clause 4 since it would require disclosure by all companies of expenditure on research and development, rather than limiting such disclosure to public limited companies. I believe that the system we are suggesting, adherence to SSAP 13, would be the most effective way to proceed. However, I wish to reiterate that if that should not be so and experience shows that the new accounting standard has not proved effective, the Government will not hesitate for one moment to consider using their powers under secondary legislation to make disclosure by all public and very large private companies a statutory requirement.

With that reassurance and the knowledge that the Government fully share the view that expenditure on research and development should be disclosed, I hope the noble Lords will feel able to withdraw their amendment.

Viscount Caldecote

My Lords, I am almost more worried now than I was at the start of this discussion. I wonder whether certain noble Lords have even read SSAP 13. There is no intention that the inclusion of this amendment in the Bill should supersede SSAP 13, it would merely give it strength. SSAP 13 would still be available and auditors would have to take note of it. If all the details were not adhered to, as my noble friend the Secretary of State said, the auditors would qualify the accounts. But this amendment would give added statutory power to ensure that that very important information is included in the accounts.

Some noble Lords made the point that that would complicate the accounts unnecessarily. The feature that complicates accounts is the vast length of the notes to company accounts nowadays, not the simple statements in the profit and loss account. They are very easy for anyone to understand, but the pages and pages of notes to the accounts of public limited companies are hopelessly difficult for the lay person to understand. I do not therefore think that the reply of my noble friend the Secretary of State has added anything at all to what his noble friend Lord Strathclyde said in Committee. In effect, he is saying that SSAP 13 is adequate without legislation. If it is adequate without legislation— —

Lord Young of Graffham

My Lords, perhaps I might ask my noble friend whether he knows, from his own experience, of any board of a large public company, or of any form of plc for that matter, that would voluntarily risk having qualified accounts. If not, then surely the statutory requirement would give no added protection at all.

Viscount Caldecote

My Lords, that is perfectly true, but my noble friend the Secretary of State would also agree that some large companies have considerable influence over their auditors. That is in no way to say that auditors do not do their job, but it is a matter of judgment as to what makes a true and fair view of the accounts, and in certain cases——

Lord Williams of Elvel

My Lords, I am sorry to interrupt the noble Viscount. Did not a number of public companies disregard the SSAP on current cost-accounting?

Viscount Caldecote

My Lords, that is probably true. I am not an expert on the subject, although I spent some time on the Inflation Accounting Committee. We were disappointed about the lack of reaction to our report. That is perhaps another matter, but it indicates that some companies, particularly large companies, sometimes say to their auditors, in exactly the way I was suggesting, "We don't agree with you. We think we've made a perfectly good statement and presented our accounts in a true and fair way". Discussion continues and both the auditors and the company give a little. However, if the requirement were made statutory—as it has been in the United States of America where it has been entirely satisfactory and has had a highly beneficial result in that, when research and development expenditure is increased, the tendency is for the share price to go up, even though the profits do down——

Lord Harmar-Nicholls

My Lords, does my noble friend agree that his last statement—unless he can modify it to some extent—entirely undermines confidence in the audit system? An audit is either impartial and the auditors carry out their duties impartially, or it is not impartial. To suggest that there is a halfway house—the noble Viscount gave me that impresssion—would undermine confidence in the audit system on which so much depends.

Viscount Caldecote

My Lords, the noble Lord, Lord Williams of Elvel, gave an example from the inflation accounting SSAP to show that that was not carried through by a considerable number of companies. That is pefectly true. If that can happen in that case, why should it not happen in this case? If it is bad here, why is it not bad in the United States where it has been very satisfactory?

Lord Young of Graffham

My Lords, I think that the noble Lord, Lord Williams of Elvel, offered a very good red herring and I must congratulate him on this. However, while there was an SSAP about current cost accounting, there were still statutory requirements on companies at that period to produce their accounts in the normal way. There was an additional set of accounts. I suspect that it would not be seen as non-regard to SSAP 13; it would be seen as a method of qualifying accounts and, I am sure, would have been seen by everyone as a more serious breach.

Furthermore, I believe that if we introduce this provision by statute, we weaken rather than strengthen the case for showing the amount of R & D. As I have said, the Government wholly support the desire to see this point brought out and accented. However, if we have a statutory requirement at the same time as we have an SSAP which goes further than the requirement, it will become a matter of doubt as to whether the board will say that, under the legislation, it is entitled to put merely this year's figure for R & D, even though it refers to amortisation, past expenditure and a number of other matters.

Viscount Caldecote

My Lords, is the noble Lord suggesting that, if the amendment were passed, SSAP would in some way be weakened? I do not believe that that is the case. SSAP has been agreed as a standard accounting procedure and it would go ahead just as it does now, whether or not the amendment is accepted. However, if the amendment is passed, it gives it much greater strength and statutory support.

Lord Boardman

My Lords, I am most grateful to my noble friend for giving way. With great respect to him, does he not believe that the giving of one global figure for research and development, as the amendment suggests, might be misleading? Is it perhaps better to rely on a breakdown to give an evaluation of the various component parts and the value attached to them, as appears in SSAP 15?

Viscount Caldecote

My Lords, SSAP 13 mentions all the points to which the noble Lord, Lord Boardman, refers. I do not know whether he has read SSAP 13, but it is clear how the disclosure will be made in the accounts. The amendment would simply give SSAP 13 statutory backing.

My noble friend the Secretary of State emphasised the fact that the provision would complicate or add an enormous number of words to the Bill, but that is going a bit far. It is a matter of only six lines. As the noble Lord, Lord Milne, said, the amendment is perhaps not in the right place, but I believe that it is the normal convention of the House that, if an amendment is accepted in principle, it is the Government's job to put it in the right place and tidy up the Bill at Third Reading. Is my noble friend saying that that process would be so onerous and complicated that it would not be satisfactory from that point of view? That appears to be his main argument. I am disinclined to divide the House, but this is an important issue. We believe that expendi- ture on research and development for the future prosperity of companies and of the national economy is so important that a message should go out from this House to the effect that we endorse the amendment for the that reason.

4.16 p.m.

On Question, Whether the said 5 amendment (No. 5) shall be agreed to?

Their Lordships divided Contents, 70;Not-Contents, 118.

DIVISION 1
CONTENTS
Addington, L.	Jenkins of Hillhead, L.
Ardwick, L.	Kearton, L.
Auckland, L.	Kilbrack en, L.
Birk, B.	Kinloss, Ly.
Blease, L.	Leatherland, L.
Briginshaw, L.	Lloyd of Kilgerran, L.
Broadbridge, L.	Lockwood, B.
Bruce of Donington, L.	Lovell-Davis, L.
Caldecote, V. [Teller.]	Lucas of Chilworth, L.
Carmichael of Kelvingrove, L.	McNair, L.
	Mason of Barnsley, L.
Cledwyn of Penrhos, L.	Mishcon, L.
David, B.	Molloy, L.
Davies of Penrhys, L.	Monson, L.
Dean of Beswick, L.	Mottistone, L.
Dormand of Easington, L.	Mulley, L.
Ellenborough, L.	Nicol, B.
Elwyn-Jones, L.	Peston, L.
Ennals, L.	Phillips, B.
Ezra, L.	Ponsonby of Shulbrede, L.
Falkland, V.	Prys-Davies, L.
Fisher of Rednal, B.	Ritchie of Dundee, L.
Gallacher, L.	Rochester, L.
Galpern, L.	Seear, B.
Graham of Edmonton, L. [Teller.]	Scrota, B.
	Shepherd, L.
Grantchester, L.	Stoddart of Swindon, L.
Gregson, L.	Strabolgi, L.
Grey, E.	Taylor of Blackburn, L.
Hacking, L.	Taylor of Mansfield, L.
Hampton, L.	Tordoff, L.
Hanworth, V.	Underhil., L.
Hayter, L.	Wallace of Coslany, L.
Houghton of Sowerby, L.	White, B.
Irving of Dartford, L.	Wigoder, L.
Jeger, B	Williams of Elvel, L.
NOT-CONTENTS
Alexander of Weedon, L.	Carnegy of Lour, B.
Allerton, L.	Carnock, L.
Arran, E.	Cawley, L.
Aylestone, L.	Coleraine, L.
Balfour, E.	Constantine of Stanmore, L.
Bauer, L.	Cottesloe, L.
Beaverbrook, L.	Davidson, V. [Teller.]
Belhaven and Stenton, L.	Denham, L. [Teller.]
Beloff, L.	Diamond, L.
Belstead, L.	Dundee, E.
Benson, L.	Eccles, V.
Bessborough, E.	Effingham, E.
Birdwood, L.	Elliot of Harwood, B.
Blatch, B.	Elliott of Morpeth, L.
Boardman, L.	Erroll, E.
Borthwick, L.	Erroll of Hale, L.
Boyd-Carpenter, L.	Faithfull, B.
Brabazon of Tara, L.	Ferrers, E.
Brougham and Vaux, L.	Forbes, L.
Butterworth, L.	Fraser of Kilmorack, L.
Campbell of Alloway, L.	Gainford, L.
Campbell of Croy, L.	Glenarthur, L.

Grey of Contin, L.	Orkney, E.
Gridley, L.	Oxfuird, V.
Grimthorpe, L.	Oppenheim-Barnes, B.
Hailsham of Saint	Pennock, L.
Marylebone, L.	Platt of Writtle, B.
Harmar-Nicholls, L.	Rankeillour, L.
Havers, L.	Reay, L.
Henley, L.	Reigate, L.
Hesketh, L.	Renton, L.
Hirshfield, L.	Sainsbury, L.
Hives, L.	St. Davids, V.
Holderness, L.	Saint Oswald, L.
Hooper, B.	Sanderson of Bowden, L.
Ironside, L.	Selkirk, E.
Johnston of Rockport, L.	Sempill, Ly.
Kaberry of Adel, L.	Shannon, E.
Kennet, L.	Skelmersdale, L.
Kilmarnock, L.	Strange, B.
Lauderdale, E.	Strathclyde, L.
Lawrence, L.	Strathcona and Mount Royal, L.
Layton, L.
Liverpool, E.	Strathspey, L.
Long, V.	Suffield, L.
Luke, L.	Swansea, L.
McAlpine of Moffat, L.	Teviot, L.
McAlpine of West Green, L.	Thomas of Gwydir, L.
Mackay of Clashfern, L.	Thorneycroft, L.
Macleod of Borve, B.	Trafford, L.
Manton, L.	Tranmire, L.
Margadale, L.	Trefgarne, L.
Marley, L.	Trumpington, B.
Merrivale, L.	Vaux of Harrowden, L.
Milne, L.	Wigram, L.
Milverton, L.	Windlesham, L.
Munster, E.	Wise, L.
Nelson, E.	Wolfson, L.
Nugent of Guildford, L.	Wynford, L.
Onslow, E.	Young of Graffham, L.

Resolved in the negative, and amendment disagreed to accordingly.

4.24 p.m.

Lord Williams of Elvel moved Amendment No. 6:

Page 6, line 44, at end insert — ("In preparing individual accounts which comply with these requirements directors shall have regard to all relevant Statements of Standard Accounting Practice.").

The noble Lord said: My Lords, our last debate culminating in your Lordships' decision not to make it a statutory requirement to obey an SSAP gives a certain relevance to the amendment that I am now moving. In reply to his noble friend the Secretary of State laid great emphasis on companies obeying SSAPs. I mentioned that in one rather spectacular case a number of companies had failed to do so. It is certainly true that in the case of a failure there may be a qualification in the audit report. However, that does not necessarily help shareholders very much.

The amendment determines the relationship between statute and the SSAP. That relationship is becoming increasingly important as we move through the Bill. Our discussions touch first on one —the statute —and then the other —the SSAP. It is in our view somewhat unsatisfactory that at some points the Government rely on an SSAP and at others decide to write things into the statute.

Noble Lords will be aware of a review committee on the making of accounting standards which, for brevity, I shall call the Dearing Report. There has been consultation on the report. I should like to draw attention to the view made clear by the consultative committee of accountancy bodies and put before the Department of Trade and Industry. It states that most members of the committee accept that accounting standards will inevitably become more prescriptive and that strong measures are needed to ensure that they are uniformly applied. The committee supports therefore a legal requirement, applying at least to all listed companies, that a statement of compliance with accounting standards should be signed by the directors. At least one member of that committee asked that that legal requirement should be extended not only to listed companies but to all companies.

The amendment that I move is in essence rather modest. It requires boards of directors in preparing individual accounts to "have regard"; it does not say "to follow". They can if they wish take the view that they can break the SSAP. But they must "have regard", a fairly well known expression in law. It means that they must "pay serious attention to". It is almost tantamount to saying that they have to follow the relevant SSAP in compiling their accounts. If we are to rely on SSAPs in research and development expenditure, it seems right that there should be a legal obligation on boards of directors to have regard to those SSAPs.

As we go forward, we shall be pursuing this relationship between the two because it is important to get it right. I hope that the Government will pay attention to what the CCAB has said to them and will let us know what view they take of the Dearing Report. I beg to move.

4.30 p.m.

Lord Young of Graffham

My Lords, this amendment is similar to a number of amendments that were discussed in Committee and relates to an issue which is the subject of one of the recommendations of the Dearing Committee. The amendment would lay a duty on the directors of a company to have regard to all relevant accounting standards in preparing the company's individual accounts. As noble Lords will be aware, the Dearing recommendation goes further in one important respect. It proposes that in the case of all large companies the 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.

As I explained in Committee, the Government are sympathetic to this proposal, but we think that it is important to have the views of professional organisations, companies, shareholders and other users of accounts before we reach a final view. We therefore issued a consultative document at the end of January to approximately 800 interested organisations and individuals, inviting comments on the recommendations in the Dearing Report which would require legislative changes. As we were anxious to make progress quickly, bearing in mind the opportunity offered by the Bill to make such changes, we imposed an unusually tight deadline of only six weeks. This deadline expired last week and the majority of responses have therefore only just been received, with more arriving day by day. At this stage it is simply too early to assess the results of the consul- tation process, but I can assure noble Lords that we shall be carrying this work forward with all due speed.

As I explained in Committee, our aim is to analyse the comments received, decide what action to take on the Dearing recommendations in the light of that analysis, and to bring forward any necessary amendments as soon as possible. I am sure that all noble Lords will agree that it is important to conduct this analysis thoroughly and to ensure that we have fully considered all the points raised and that our decisions are soundly based. It would therefore be wrong to give an assurance that any amendments will be available before this Bill goes to another place, because that simply may not be possible. However, if in the event we are not able to bring forward amendments before Third Reading, noble Lords will have an opportunity to debate any amendments made in another place when the Bill returns to this House.

With the assurance that the Government welcome the Dearing Report, that we are sympathetic to the recommendation in the report which relates to the subject of this amendment, and that we will bring forward as soon as possible any necessary amendments in the light of the responses to our consultative document, I hope that the noble Lord, Lord Williams of Elvel, will agree to withdraw his amendment.

Lord Williams of Elvel

My Lords, I am most grateful to the noble Lord. The intention behind my amendment was to draw the attention of the Government to the Opposition's views on the Dearing Report and to encourage the Government to bring forward appropriate amendments as early as possible so that your Lordships may have an opportunity to discuss them. I understand the thrust of what the noble Lord is saying in reply. In the light of that, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 1 [Form and content of company accounts]:

[Amendment No. 7 not moved.]

Lord Williams of Elvel moved Amendment No. 8:

Page 139, line 21, at end insert —

("Reserves and provisions

6A. In paragraph 46 (reserves and provisions) insert the following sub-paragraph after sub-paragraph (2)— (2) The directors shall disclose the maximum amount of reserves which could be distributed under Part VIII of this Act. If this amount is significantly different from the balance on the profit and loss account the directors shall explain the reasons for the difference." ").

The noble Lord said: My Lords, I apologise to noble Lords for the very technical nature of the amendment. At present, accounts are drawn up in accordance with Part VII of the Companies Act 1985 and the related schedules. Profits are calculated according to those rules. For distribution purposes —for example, the payment of dividends—different rules apply in accordance with Part VIII of the Companies Act 1985. It is rather like the difference between calculating profit for accounts purposes and calculating profit for tax purposes, where different rules apply with regard to tax computations.

In some cases there may be substantial provisions or losses recorded for accounting purposes which can, for the purposes of distribution, be disregarded. For example, the write-down of a fixed asset or a realised loss can be treated as an unrealised loss, and in some cases dividend may be paid in spite of that fact. In other cases required depreciation may be added back to profits for the purposes of distribution. In an extreme position a company could pay a dividend even though the profit and loss account, on the face of the accounts, does not apparently warrant it. There is no statutory requirement at the moment for amounts which are available for distribution to be transferred to the profit and loss account; hence shareholders and others are still in the dark about what is allowed to be brought into the profit and loss account for the purposes of distributions.

Both SSAP 1 and SSAP 14 deal with the opposite situation where there are significant restrictions on a company's ability to distribute profits. However, the only remedy, in the absence of a specific requirement of this type, is to rely upon the true and fair rule, which requires additional information to be given in the appropriate circumstances.

This amendment seeks to clarify the position by imposing a specific disclosure requirement in appropriate circumstances. Therefore, it is in the other direction to SSAP 1 and SSAP 14. However, in our view it makes a minor but sensible addition to the Bill. I beg to move.

Lord Strathclyde

My Lords, the Government have some sympathy with the purpose of the amendment. It is not always apparent from a company's individual accounts how much of its reserves are potentially distributable to shareholders. Until the Companies Act 1967 companies were required to disclose separately the amounts of their capital and revenue reserves. Generally, the amount of the revenue reserves disclosed would have been the amount of the distributable reserves. although this was a matter of some debate at the time.

Since 1967 there has been no such requirement either in the Companies Act or under generally accepted accounting principles or practice. We should like to think carefully and consult quite widely before introducing such a requirement. Having said that, a requirement to state the maximum amount of reserves available for distribution may provide shareholders and other users of accounts with relevant information, although the figure would need to be interpreted with care. It should not be assumed, for example, that it is the amount that can safely be distributed to shareholders: a company's dividend policy will include consideration of its overall financial position, its future prospects and its future plans.

I should, however, make clear that we do not favour the second part of the amendment, which would require an explanation of any significant difference between the total amount disclosed and the balance shown on the profit and loss account. There are any number of reasons why differences might arise. For example, there may be distributable profits included in other reserves such as the "revaluation reserve" or "general reserves". We believe that such disclosure would not prove to be useful in practice and may simply confuse and bewilder.

To return to the main issue, we are willing to consider with an open mind requiring disclosure of the total amount of distributable reserves, but not the suggestion that explanations should be required where that total amount differs from the balance on the profit and loss account. In view of what I have said, I hope that the noble Lord feels able to withdraw his amendment. On our part we shall endeavour to come to a view by Third Reading, though I cannot promise that this will be possible.

Lord Williams of Elvel

My Lords, I am most grateful to the noble Lord. I accept what he says about explanations. It is always rather difficult for directors to engage in explanations about why things were different to what was shown in their original accounts. Nevertheless, if that is the view of the Government, I am happy to have half a loaf. I hope very much that the Government will be able to come forward at Third Reading with their considered views on the amendment that I have put forward. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 5 [Group Accounts]:

The Deputy Speaker (Lord Nugent of Guildford)

If the noble Lord, Lord Mottistone, moves Amendment No. 9 and it is agreed, I shall not be able to call Amendment No. 10.

Lord Mottistone moved Amendment No. 9:

Page 7, line 14, leave out subsection (3) and insert — ("(3) Consolidated accounts shall give a true and fair view of the financial position including the assets, liabilities and profit and loss of the undertakings included therein taken as a whole.").

The noble Lord said: My Lords, I moved a similar amendment in Committee asking the Government why they were not more closely following Article 16.3 of the seventh directive, from which it was derived. My noble friend Lord Strathclyde said that there was no obligation under the Treaty of Rome to repeat the directive word for word. However, he did not explain why it was that he did not want to follow it word for word. I did not explain why I believed that he should follow it word for word so perhaps I may do so now. It is not necessary that the Bill must precisely repeat a directive. However, the phrase "state of affairs" which appears in the present text is too vague and general. I suggest that for legal certainty the expression of what is to be included in the consolidated accounts —which is the basis of my amendment —is preferable.

I believe that the amendment clarifies the situation, gives legal certainty and reflects the requirements of the directive. It is of only secondary interest that it more closely follows its wording. I hope that now it has been more fully explained, my noble friend will give the amendment a more sympathetic hearing than he was able to at an earlier stage. I beg to move.

Lord Bruce of Donington

My Lords, I hope that the Minister will give favourable consideration to the amendment. The clause to be replaced appears to be more adequately reflected in the smaller version that has been given. If the Minister objects to the amendment I shall be interested to hear his explanation. If he does not, I shall support any acceptance that he may put forward.

Lord Lloyd of Kilgerran

My Lords, I should like to support the noble Lord in his amendment, which is an improvement to this part of the Bill. I also believe that the phrase "state of affairs" is most unsatisfactory. Government Amendment No. 11 would leave in the Bill a clause containing the vague term "state of affairs".

Lord Milne

My Lords, is there not a technical deficiency in the amendment? A consolidated bound sheet shows the situation taken as a whole so far as concerns members of the company. Should the amendment not have inserted at the end the words: so far as concerns members of the company"?

Lord Young of Graffham

My Lords, my noble friend has developed his argument somewhat further than he did at the Committee stage. I hope we agree that the Bill does not need to repeat the seventh directive word for word in order to give proper effect to it. If we were to do so we must take into account the differing legal and administrative frameworks and cultures of each member state. Were each member to follow precisely and slavishly the wording of the directive, it is highly unlikely that the objective of a common framework could be reached given the differing legal environments.

I do not believe that there is a great difference of substance between the wording of the Bill and the wording which the noble Lord's amendment would introduce. His version sticks fairly rigidly to the directive. Ours closely follows the corresponding provision in Section 230 of the existing Act which is well understood by the profession and all those dealing with accounts. Were the Government to agree to the change, I am sure that we should very quickly face at least as strong pressure from the accounting profession to move back to the wording in the Bill. I suspect it would use some of the same arguments as my noble friend: that we were introducing uncertainty by changing the existing wording and that everyone would have to rush to seek counsel's opinion to find out what it meant.

My noble friend refers in particular to the phrase "state of affairs", suggesting that it is too vague. I find that a little surprising. The words have been used in this context in company law at least since 1947. Indeed the phrase is so beloved by the accounting profession that, when the Bill was published with a reference to "state of the affairs", one of the accounting bodies argued strongly that the offending word "the" had to be removed. Your Lordships have already considered an amendment making precisely this change in a corresponding new section of the Bill.

The principal difference between the wording of this amendment and the provisions in the Bill is that the Bill, as it exists under United Kingdom law, includes the words: so far as concerns the members of the company". Their significance is that they set the perspective for which consolidated accounts are prepared—that is, for the members, as the noble Lord, Lord Milne. reminded your Lordships. The words do not appear in the directive, but that reflects its perspective.

I hope that I have said enough to persuade my noble friend that the wording of the Bill should not be of concern at this point. I hope that he is able to withdraw his amendment.

Lord Mottistone

My Lords, I thank my noble friend for explaining more fully why he wishes to adhere to the wording of the Bill. It appears to be an argument between experts advising him and experts advising me. Experts always confuse each other. The House has heard excellent advice from the noble Lord, Lord Milne, and I hope that it will be gazed at by members of the CBI when they read Hansard.

Thank heavens, the Bill has yet to go through all its stages in another place because one can be a little more relaxed: we are not in the usual position of being the last House to consider it. However, I do not believe that the argument can suitably be taken to Third Reading and I am sure that, having read what has been said, everyone concerned will decide whether to enter the lists again.

I am not entirely convinced by what the Minister has said. His argument goes so far but perhaps something in between the two would be a better solution. Members of another place may have an opportunity to include that, and at this stage I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

4.45 p.m.

Lord Strathclyde moved Amendment No. 10:

Page 7, line 15, leave out first ("the").

On Question, amendment agreed to.

Lord Strathclyde moved Amendment No. 11:

Page 7, line 33, at end insert ("to the extent necessary to give a true and fair view").

The noble Lord said: My Lords, the Government made clear at the Committee stage that they were happy to accept two matching amendments tabled by the noble Lords, Lord Williams of Elvel and Lord Peston, which make it absolutely clear that, where the directors are required to depart from the other provisions of the Act to ensure that the accounts show a true and fair view, they may do so only to the extent necessary to give that true and fair view. One of those amendments—that to new Section 227(6)—was, however, not moved by the noble Lord. This amendment simply repeats that amendment. It brings new Section 227(6) into line with the corresponding new Section 226(5). I beg to move.

On Question, amendment agreed to.

Lord Williams of Elvel moved Amendment No. 12:

Page 8, line 11, at end insert — (For the purposes of this section such notice shall be deemed to be valid if served within six weeks of the date of receipt by the registrar of a notice in accordance with section 225 ("Alteration of accounting reference date")

The noble Lord said: My Lords, the Bill gives shareholders an important right to require the production of group accounts. A reasonable period of notice appears to be required in order to enable directors to obtain the necessary information. That condition could, inadvertently or deliberately, be used to deprive shareholders of their original rights.

It is comparatively easy to change a company's financial year if notice is given to the Registrar of Companies in the prescribed form and if the statutory conditions are observed. As a result of group reconstruction, tax planning or whatever, it frequently happens that a change is required. A change to shorten a year immediately reduces the time in which the six months' period of notice is required to be given.

The notice is effective on change of year end as soon as it is received by the Registrar of Companies. Indeed, the date of receipt is marked on the notice. However, in practice and depending on the backlog at the registry of companies, it may take up to six weeks from the notice of receipt by the registrar before a new accounting reference date—that is, the new financial year end—appears on the public record. Therefore, any shareholder who consults the public record through a company's search may have inaccurate information about what is the year end of the company. Shareholders may have no reason to know that directors are changing the year end. It could be a decision entirely by the board until it becomes clear when the accounts are published.

This amendment is designed to provide a safeguard for shareholders based on known delays—because we have consulted the Registrar of Companies in Cardiff —in the backlog of registering and issuing receipts and publishing year end changes. It is a fairly small arrangement but one which would give a safeguard to shareholders. I beg to move.

Lord Strathclyde

My Lords, the Government accept that a small change to the Bill is needed here to ensure that a company cannot avoid the effect of a notice served under new Section 228 by shortening its financial year. We do not think that the actual amendment proposed by the noble Lord offers a satisfactory way of achieving that end, but, if he is willing to withdraw his amendment, I undertake to bring forward a government amendment on Third Reading which has the same objective.

Lord Williams of Elvel

My Lords, I am most grateful to the noble Lord. We are making progress with this Bill. A number of Opposition amendments have been accepted in principle. I look forward to Third Reading when the Government bring forward their amendment along those lines. I am glad that they have accepted our case. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Williams of Elvel moved Amendment No. 13:

Page 10, leave out from beginning of line 1 to ("or") in line 3 and insert — ("(b) it would involve expense or delay out of proportion to the value to members,").

The noble Lord said: My Lords, we have raised this matter previously and this amendment is designed to probe the Government's intentions.

The present wording in the Bill seems to me to be rather ambiguous and in our view the test should be made by reference to the interests of shareholders—that is, members of the company—and what is material for them to know. In our view, the present wording allows directors to subordinate the legitimate interests of shareholders to directors' convenience or, indeed, administrative concerns; that is, the cost of obtaining information or processing it into the statutory accounts. In any event, there is a problem with the word "disproportionate". I should be grateful if the noble Lord, Lord Strathclyde, would give attention to the points I have raised. They are not vitally important but they clarify the Bill. I beg to move.

Lord Mottistone

My Lords, without wishing to appear pedantic, I am concerned about the wording of this amendment because it does not seem to me to be right to start paragraph (b) with the word "it". What is "it"? It seems to me that if one reads back, "it" is the subsidiary undertaking at the beginning of subsection (3). That makes a nonsense of the amendment. I am sorry, but that just stuck in my gullet.

Lord Strathclyde

My Lords, as the noble Lord has explained, he moved an identical amendment at the Committee stage. I said then that we were willing to consider the point carefully and report back. I am grateful therefore to the noble Lord for tabling this amendment and giving me the opportunity to explain why, on reflection, we have concluded that we cannot accept a change on this point. There are two questions here: first, whether to follow this particular amendment; and secondly, whether some other change should be made instead.

On the first point, the noble Lord's amendment picks up on the existing wording of the 1985 Act, which gives as a ground for exclusion from consolidation that inclusion would involve expense or delay out of proportion to the value to members. The Bill as drafted reflects a deliberate decision not to re-enact this. The seventh directive, Article 13.3(b), to which new Section 229(3) gives effect, uses the word "disproportionate" without restricting it in this way. To accept the amendment would mean that we had not given proper effect to the directive. As important, to follow this amendment would make it too easy for a parent company to leave a subsidiary undertaking out of account on grounds of expense. This is possible because the company need only take into account the value of the accounts to members.

This leads on to the second point. Can we use a word such as "disproportionate" without saying in relation to what the expense is disproportionate? Disproportionate" is an ordinary English word. It is not used here as part of a mathematical equation. In context it means, and can only mean, disproportionate having regard to the purposes for which the accounts are prepared. That is what we want. We have thought hard, in response to the pressure for a change on this, whether it might nevertheless give comfort were we to define completely what those purposes are. We can find no satisfactory formulation. An incomplete definition would be worse than useless, and therefore we believe the Bill should not be changed.

I hope that, in the light of what I have said, the noble Lord will withdraw his amendment. As he said, we are responding positively to many of the suggestions put forward in Committee. This is one where we have thought carefully and have concluded that the pressure for a change is misconceived.

Lord Williams of Elvel

My Lords, I am grateful to the noble Lord, Lord Strathclyde, and to the noble Lord, Lord Mottistone, whose sharp eye, as always, has picked out the mistake in the drafting. He is right, and is also right to draw our attention to it. This amendment was tabled with a certain amount of haste so that the Government would have plenty of time to consider their reply. In doing so, we missed out on the drafting.

I understand the reply with which the Government have come forward. The object of the amendment was to take up the discussion we had in Committee. I shall not press the matter further. I am glad that the Government have considered it carefully, and I accept their answer. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Strathclyde moved Amendment No. 14:

Page 10, leave out lines 30 to 46 and insert— ("230.— (1) The following provisions apply with respect to the individual profit and loss account of a parent company where—

1. (a) the company is required to prepare and does prepare group accounts in accordance with this Act, and
2. (b) the notes to the company's individual balance sheet show the company's profit or loss for the financial year determined in accordance with this Act.

(2) The profit and loss account need not contain the information specified in paragraphs 52 to 57 of Schedule 4 (information supplementing the profit and loss account). (3) The profit and loss account must be approved in accordance with section 233(1) (approval by board of directors) but may be omitted from the company's annual accounts for the purposes of the other provisions below in this Chapter. (4) The exemption conferred by this section is conditional upon its being disclosed in the company's annual accounts that the exemption applies.").

The noble Lord said: My Lords, this amendment replaces new Section 230 in its entirety but in fact makes only two small changes to the version in the existing Bill.

New Section 230 disapplies most of the requirements of the Companies Act in respect of the individual profit and loss account of a parent company where that company prepares group accounts. Such accounts are not subject to audit, and need not be circulated to members, laid before the company in general meeting or delivered to the Registrar of Companies. However, the account must be prepared in accordance with the Act and must be approved by the directors.

The amendment fine tunes this provision in two ways. First, on the existing text, it is unclear whether such an account is a statutory or a non-statutory account for the purposes of new Section 240. New Section 240 sets out rules in connection with the publication of accounts which differ according to whether the account in question is statutory or non-statutory. A profit or loss account prepared under new Section 230 should be treated as non-statutory for this purpose. The amendment has this effect by removing the express exclusion of new Section 240 in new Section 230(1).

Secondly, while such an account should have to be prepared in accordance with the basic rules laid down in Schedule 4, on reflection we think it is unnecessary to require compliance with the detailed disclosure set out in paragraphs 52 to 57 of Schedule 4. Subsection (2) of the revised new section therefore expressly excludes these requirements. I beg to move.

5 P.m.

Lord Lloyd of Kilgerran

My Lords, in general this amendment is an improvement on the whole of Section 230 of the Companies Act 1985. In particular, it removes the very large subsection (1) of that Act and divides it into paragraphs.

The noble Lord said that there were certain minor differences in his amendment and the original section of the Companies Act 1985, but he did not mention the removal of line 35 on page 10 of the Bill. There is a requirement that the accounts must be approved in accordance with Section 233(1). However, the proposed Section 230 to the Companies Act also goes on to say, in line 35: Subject to none of the other requirements of sections 234 to 245". This is a minor point and perhaps a matter of semantics but the government amendment, instead of mentioning the relevant Sections 234 to 245, states: For the purposes of other provisions below in this Chapter". Therefore, the words "below in this Chapter" will mean that the person reading the Bill will have to look at the chapter and endeavour to get the meaning right, whereas specific mention of the relevant clauses might clarify the Bill just that little bit further.

Lord Strathclyde

My Lords, perhaps I can give some further background. I think it is fair to say that the corresponding provision in the 1985 Act is flawed. Section 228(7) states that a company need not comply with Schedule 4 and need not show a true and fair view, but it does not say that the account need not be audited and delivered to the registrar. Having said that, in dealing with what the noble Lord, Lord Lloyd of Kilgerran, said I think he is perhaps confusing two issues. What we are proposing achieves exactly the same effect but in a slightly different way.

On Question, amendment agreed to.

Schedule 2 [Form and content of group accounts.]:

Lord Strathclyde moved Amendment No. 15:

Page 142, line 13, leave out ("time") and insert ("date").

The noble Lord said: My Lords, this is a minor improvement to the wording of paragraph 9 of Schedule 2. The paragraph sets out the acquisition method of accounting for a business combination. At two places reference is made to "date" of the acquisition but in a third to "time" of the acquisition. The amendment simply replaces the word "time" with "date" to avoid any argument that, since "date" is used elsewhere, the actual time of day must somehow be relevant. I beg to move.

Lord Young of Graffham moved Amendment No. 16:

Page 142, line 25, 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 per cent. 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 :o the arrangement by the parent company and its subsidiary undertakings did not exceed 10 per cent. 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: My Lords, this amendment is very similar to one which was moved in Committee and withdrawn. Paragraph 10 of Schedule 2 to the Bill sets out the minimum conditions which have to be met before a company can account for an acquisition using the merger method of accounting. As I explained to the Committee, the Government have reconsidered these conditions in the light of outside comment. This amendment has two principal effects: it follows more closely the minimum conditions for merger accounting set out in Article 20 of the directive and it provides a further test that the merger method of accounting is only available where it accords with generally accepted accounting principles or practice. This makes it possible, for example, for a revised accounting standard to set a tougher test but without giving that standard the force of law. The relevant standard is at present under review.

The noble Lord, Lord Williams, raised a number of detailed points on this subject in Committee. Your Lordships may find it helpful, therefore, if I spend a little time in spelling out the new conditions for merger accounting set out in this amendment.

The first condition reflects Article 20, paragraph 1(a) of the seventh directive. It requires that the parent company acquires at least 90 per cent. by nominal value of what the Bill terms "relevant" shares in the undertaking acquired. The noble Lord, Lord Williams, referred to "relevant shares" in the previous discussion and perhaps I should expand on this. The Bill defines "relevant shares" as those shares, carrying unrestricted rights to participate both in distributions and in the assets of the undertaking upon liquidation". I emphasise "unrestricted". In simple terms the term includes most ordinary shares and excludes other classes of shares, though it is necessary to consider the precise rights attached to any particular class of shares to determine whether such shares are "relevant" for this purpose.

The second condition requires that that 90 per cent. must be attained following an arrangement providing for the issue of shares by the acquiring company. This follows paragraph 1(b) of Article 20 of the directive. It is based on the premise that merger accounting is an appropriate method of accounting only where there is substantially a share for-share exchange. I should perhaps make clear that this condition does not require the whole of that 90 per cent. of the relevant shares to be acquired as a result of that arrangement. It is permissible to have a prior holding. However, while the Bill itself does not restrict the size of that prior holding, there is a restriction—at present 20 per cent.—in accounting standards and that can continue.

The third condition is a slight adaptation of paragraph 1(c) of Article 20 of the directive, adapted to make the provision effective. This is designed to ensure that, where merger accounting is to be used, the issue of equity shares is the predominant element in the consideration offered by the acquiring company for the relevant shares in the target company. The fair value of the consideration given, which is in the form other than equity shares, is restricted to 10 per cent. of the nominal value of the equity shares issued.

The noble Lord, Lord Williams, expressed surprise in Committee at the use of "nominal value" in this context. "Nominal value" is the term used in this context in the seventh directive and we cannot therefore substitute for it a term which would have the effect of making the conditions for merger accounting less onerous. Some other test—such as 10 per cent. of the market value of the shares issued—could have been included in the directive but it was not. Moreover, although I accept that it is possible to take differing views on the merits of basing such a test on nominal values, we believe that it is appropriate.

The effect, where a company wishes to use merger accounting, is to restrict the non-equity element in an offer more tightly than would a reference to the market value of the shares issued. Since merger accounting is considered to be an appropriate accounting treatment only where a business combination arises out of a purchase of equity by equity it seems right in principle that the non-equity element is restricted quite tightly.

The fourth condition is also important. It makes clear that merger accounting is not available, as of right, to companies where the other three conditions are met but only where its use also accords with generally accepted accounting principles or practice. This allows for the development of thinking on the circumstances in which merger accounting can be used. It also enables accounting standards, as appropriate, to set tighter conditions for the use of merger accounting as a part of generally accepted accounting principles or practice. The amendment to my amendment would change the reference to generally accepted accounting practice to a specific reference to the relevant accounting standards. But I should like to hear the case for the amendment before commenting further.

The noble Lord, Lord Williams, agreed at the Committee stage that the amendment was clearer than that in the Bill at present and that it followed the directive more closely. In the light of the explanation I have given, I hope that he and other noble Lords can now go further and agree to this amendment. I beg to move.

Lord Williams of Elvel moved, as an amendment to Amendment No. 16, Amendment No. 17:

Line 16, leave out ("generally accepted accounting principles or practice") and insert ("the relevant Statements of Standard Accounting Practice.").

The noble Lord said: My Lords, in moving this amendment it may be convenient if I speak also to the principal amendment, Amendment No. 16 moved by the noble Lord, Lord Young of Graffham. This is the third government attempt at defining merger accounting. We had one definition originally in the Bill and an amendment was produced in Committee and withdrawn. Therefore, we must look at this amendment very carefully because we hope that this time the Government have got it right.

I accept that the Government are bound by Article 20 of the directive. I accept that paragraph 10(1)(c) in the government amendment is exactly along the lines of Article 20(1)(c) in the directive, however odd that may be; and it is extremely odd. As I said at the Committee stage, I believe that there are countries such as Belgium which have no par value shares and where the accounting value can be used instead of the nominal value. That means that the value of the 10 per cent. that may be offered in cash may well be higher. Therefore merger accounting in Belgium or any other country that adopts no par value shares could be more favourable, if that is the right word, than in the United Kingdom as a result of the amendment the Government are proposing.

Having said that, I wonder whether the noble Lord can explain what is the position of a company domiciled in Belgium where there are no par value shares which makes an acquisition in the United Kingdom where there are nominal values of shares and where it is issuing its equity shares as specified in paragraph 10(1)(c). Those equity shares are valued by their accounting value in the country of origin — that is, Belgium—rather than in the nominal value because there is no nominal value in Belgium. There may be no nominal value because no par value shares are allowed. I personally would argue that in the United Kingdom we might look closely at adopting the principle of no par value shares. But leaving that argument aside for one moment, I shall be grateful to the noble Lord the Secretary of State when he comes to reply if he can clarify our minds on that point.

The other point that troubles me as regards this amendment is paragraph 10(1)(a). It is in the normal procedures in the accounting standards for merger accounting and I could understand if we were to say that at least 90 per cent. of the relevant shares in the undertaking were to be acquired. That would make sense. Ninety per cent. of the shares are acquired as a result of an equity issue of some kind that may be underwritten, or maybe not. The expression, 90 per cent. of the nominal value of the relevant shares", tracks the word in the directive. I understand that the Government have to track the word, but I cannot see why in United Kingdom law we cannot get round it so that we do not have this rather obscure expression.

Clearly, if we are to take partly-paid shares which have a nominal value they may not be relevant shares but they have unrestricted rights. If we take different kinds of shares they may have unrestricted rights to participate in distribution of the assets but do not have votes. There may be a different voting structure. There may be all kinds of things. When we talk about the nominal value we are fixing ourselves to a slightly arbitrary arithemetical value that to my mind slightly confuses the issue.

The point I have tried to amend is contained in paragraph 10(1)(d) where the expression, generally accepted accounting principles or practice", is used. That is a new expression that has come into this amendment but was not in the previous government efforts to define merger accounting. That expression would appear to permit any recognised method of merger accounting. In the United Kingdom it does not carry the same connotation that it carries in the United States, where such principles are the body of principles laid down by the various authorities there.

There is an obiter dictum in the 1975 case of Associated Portland Cement v. The Price Commission. I hasten to assure the Secretary of State, in case he gets the wrong idea, that this was before I became chairman of the Price Commission. His noble friend Lord Cockfield was Chairman at the time. The commission was taken to the courts by Associated Portland Cement. The expression "generally accepted accounting principles" was held to mean those principles that are approved as permissible or legitimate by the accountancy profession. The noble and learned Lord, Lord Denning, later added in the same judgment: by the accounting profession of the United Kingdom". I believe that he slightly rescued the situation from that judgment.

Nevertheless, it is clear that the expression "generally accepted accounting principles" is current in the United States and not in the United Kingdom. It is important to make sure that we are talking about accounting standards that are approved by the various bodies in the United Kingdom. That is the point of the amendment.

I do not wish to go on and on about merger accounting, though it is a favourite topic of mine. I understand that the Government have had problems in translating the directive into suitable language for the Bill. I believe that the directive is very curious in its language, but that is not the fault of the Government at the moment. One can argue that the matter should have been better negotiated when the directive was put in place. Nevertheless, given the directive that we have to obey, I believe that the Government have had a fair shot at it though it raises all kinds of problems. If my amendment is accepted I would prefer that it is firmly fixed in United Kingdom accounting standards rather than something that is much more vague. I beg to move.

5.15 p.m.

Lord Mottistone

My Lords, perhaps I may just make a few remarks as regards both these amendments. The CBI, which advises me, is particularly keen that I should enter the lists for putting forward its viewpoint on this matter. It definitely took the government side the last time this amendment came before us at the Committee stage. Having read over the subject again, I congratulate the noble Lord, Lord Williams, for getting the Government to withdraw their own rather lengthy amendment. They rarely do so. One can sometimes get them to say that they will think about it or even do something, but to get them to withdraw it was quite an achievement. However, I see that they have reintroduced an amendment which is identical in all but a couple of words.

It is worth making the point that the CBI felt most strongly that the Government were right and that the noble Lord, Lord Williams, was wrong in the previous exchange at the Committee stage. I will not go over the ground because some of it has already been covered, but some of it has not. However, there is no point in fighting that which has not been fought this time. I believe it is important that your Lordships should know that, taking industry's view, the CBI did not believe that the noble Lord, Lord Williams, was right. He himself has admitted that the problem is that the wording of the directive has to be followed fairly closely.

That is a little ironical when one considers that my Amendment No. 9 was rejected on the ground that the wording of the directive did not have to be followed precisely. So there is a great deal of varied thinking on this matter. I shall be grateful if my noble friend on the Front Bench takes note that the arguments in favour of their amendment now, as regards the wording, are contrary to those that they were advancing against my Amendment No. 9. When the Government come to think about my amendment later on—not now—they will have to make their own arguments consistent throughout this Bill. I feel that is rather important.

As regards the noble Lord, Lord Williams, and his amendment, it is worth making the point that this advice was given to me before his amendment was tabled. It was quite clear that the CBI was entirely happy with the Government's amendment at paragraph 10(d). The CBI says it believes that the Government have correctly taken the opportunity of sub-paragraph (d) to allow the use of statements of standard accountancy practice. This will allow flexibility to be used examining any restrictions which have to to be made in the operation of merger accounting. That means the CBI believes that the present wording covers the ground that the noble Lord, Lord Williams, is seeking to cover with his own amendment. I suggest that perhaps his amendment is not necessary.

Lord Young of Graffham

My Lords, I am grateful to my noble friend Lord Mottistone for recognising the Government's attempt to get this right. The noble Lord, Lord Williams, said that it was the third attempt. In fact, the second and the third attempts were almost identical. I hope the noble Lord will accept that we have taken this back, have thought about it again and have returned with it almost as it was. If I understood the noble Lord, Lord Williams, to be referring to Belgium, perhaps I may point out that merger accounting is a member state option. To my knowledge Belgium is not implementing this provision. Therefore in that case it does not apply. When it comes to be put into effect here companies and auditors will have to look upon what are generally accepted accounting principles.

Lord Williams of Elvel

My Lords, I understand what the noble Lord says about Belgium not implementing the provision. However, let us suppose that a United States company resident in Belgium has no par value shares, as is allowed in the United States, and the Belgium company has no par value shares.

Lord Young of Graffham

My Lords, no par value shares means that they have no value. In that instance one would interpret it as the stronger of the tests and would have to say "equity for equity". The noble Lord is going to extremes in this case. He is looking for obscure circumstances. In any event we would have to accept the tests of the seventh directive and follow its wording. We would have to see the generally accepted accounting principles. The noble Lord referred to the case of Associated Portland Cement. I would not wish to imply by my demeanour that that case occurred during his time as chairman of the Price Commission. I do not distinguish between different chairmanships of the Price Commission.

It is inconceivable that a United Kingdom court could pay regard to what would be generally accepted accounting principles in the United States. I am sure that the contribution of the noble and learned Lord, Lord Denning, to that case would be accepted today, but the court would look only at what would be generally accepted accounting principles here. I say that with one proviso. I suspect that in the future a European dimension may be added to that interpretation, a matter which we shall have to take increasingly into account.

We are agreed on what we are trying to achieve. The difference between us lies in how best to achieve this result. This has happened on not a few occasions this afternoon. It raises wider issues than conditions for merger accounting. There are three reasons why the amendment of the noble Lord, Lord Williams, should not be accepted. First, because the expression "accounting principles or practice", which I generally accepted, is already used in the Companies Act in relation to the definition of realised profits in paragraph 91 of Schedule 4. Secondly, our amendment has the effect we both want of allowing accounting standards to set tougher conditions without placing the standard in a straitjacket by making it an extension of the Companies Act. It is capable of dealing with market conditions or other conditions as they change in the future. Were the question of conditions to come before the court, it is likely on the wording of the Government amendment that the relevant accounting standards would be regarded as persuasive but not conclusive evidence of generally accepted accounting principles and practice. That is how we want the standard to have effect. Were part of it not to be generally accepted, then that part would not be persuasive before the court.

Thirdly, to incorporate into the Bill at this point a direct reference to accounting standards would in some measure be viewed as prejudging what is decided in response to the Dearing Report which was mentioned earlier this afternoon. We are waiting to evaluate a large number of responses. I hope that tomorrow my noble friend Lord Mottistone will read clearly what I said in regard to Amendment No. 9. I hope he will realise that in this instance at least the Government are being wholly consistent. For these reasons I ask the noble Lord not to press the amendment.

Lord Williams of Elvel

My Lords, I am grateful to the noble Lord. I shall not press the amendment but I should like to point out that in the Bill we are in danger of winding ourselves up in different definitions. We have had two definitions of "subsidiary" in different parts of the Bill. We have "generally accepted accounting principles", which I agree occurs in the Companies Act 1985, and we have "Statements of Standard Accounting Practice". We also have the statute. We are in danger of complicating life by having too many provisions trying to cover the same subject.

I accept what the noble Lord said about following the directive. I also accept what he said about waiting for the consultations on the Dearing Report before we see how this relationship between the statute and Statements of Standard Accounting Practice actually work out. For the moment I am prepared to live with the Government's interpretation of the directive, although if I wanted to I could continue the argument for quite a long time as to the interpretation of accounting values and nominal values in the words of the directive. I beg leave to withdraw the amendment.

Amendment to the amendment, by leave, withdrawn.

On Question, Amendment No. 16 agreed to.

Lord Strathclyde moved Amendment No. 18:

Page 143, line 21, leave out ("and fair values") and insert ("immediately prior to the acquisition, and the fair values at the date of acquisition,").

The noble Lord said: My Lords, sub-paragraph (5) of paragraph 12 to Schedule 2 is a new disclosure requirement in respect of significant acquisitions. It is part of a package designed to help the user of accounts to unravel the sometimes confusing accounting treatment used for mergers and acquisitions. Better statutory disclosure in this area was the principal point commanding widespread support to emerge from a careful consultation exercise carried out by the department last year.

This amendment clarifies the disclosure set out in sub-paragraph (5). This requires for major acquisitions a table showing the book values and the fair values of each class of assets and liabilities of the company which has been acquired. The present text, however, does not make clear the dates as at which those amounts must be calculated. This is important since the purpose of the disclosure is to provide a comparison between the values of the assets and liabilities in the books of the target company immediately prior to the acquisition and the fair values of those assets and liabilities as at the date of the acquisition. Requiring book values to be given immediately prior to the acquisition limits the scope for an acquiring company to rework the figures disclosed by making doubtful provisions in the books of the company it is acquiring. This amendment cures this defect. I beg to move.

On Question, amendment agreed to.

Lord Strathclyde moved Amendment No. 19:

Page 144, line 9, after ("amount") insert ("of capital and reserves").

The noble Lord said: My Lords, with the agreement of the House I shall speak also to Amendment No. 20. The Government tabled identical amendments in Committee but did not move them. The amendments make minor changes to the rules in Schedule 2 which govern the way in which "minority interests" are shown in a company's consolidated balance sheet and profit and loss account.

Amendment No. 19 merely improves the wording in line 9 on page 144 by making clear that it is the amount of capital and reserves attributable to shares which has to be shown. The noble Lord, Lord Bruce of Donington, in speaking to this amendment in Committee accepted that change but suggested a further one—that the reference should be to "equity" rather than "shares". I was not able at the time to satisfy him as to why his suggestion would create difficulties. I shall try to do so now. If "equity" rather than "shares" were to be used in line 9 then the minority interests in the subsidiary undertaking disclosed in the balance sheet would be restricted to outside shareholders' holdings of equity shares. This might not take account of all of the outside shareholders'interests—for example, there may be preference shares. Consequently, in order to ensure that all outside interests are covered, it. is necessary to refer to "shares". I hope that this explanation is adequate for the noble Lord, Lord Bruce of Donington.

Amendment No. 20 looks complicated though its effect is quite simple. It makes it clear that "minority interests" have to be shown in the face of the balance sheet, as the seventh directive requires, and may not be relegated to the notes to the accounts. The amendment provides that the item is treated as one to which a letter is assigned. Under paragraph 3(4) of Schedule 4 to the Companies Act 1985, only those items that have an Arabic number in the standard balance sheet formats can, in certain cases, be relegated to the notes to the accounts. It also makes clear that "minority interests" in the profit and loss account can in certain cases be relegated to the notes to the accounts. These presentations accord with current practice. I beg to move.

Lord Williams of Elvel

My Lords, we are quite happy with the amendments that the Government have now put forward and, indeed, with the explanation which the noble Lord, Lord Strathclyde, has given as to why my noble friend's arguments could not prevail. We are embarking here upon a discussion of the treatment of minority interests and potential consolidation. I should prefer to have that discussion when we reach Amendment No. 21. For the moment, therefore I do not oppose the amendments.

On Question, amendment agreed to.

5.30 p.m

Lord Strathclyde moved Amendment No. 20:

Page 144, line 34, leave out sub-paragraph (5) and insert— ("(5) For the purposes of paragraph 3(3) and (4) of Schedule 4 (power to adapt or combine items)—

1. (a) the additional item required by sub-paragraph (2) above shall be treated as one to which a letter is assigned, and
2. (b) the additional items required by sub-paragraphs (3) and (4) above shall be treated as ones to which an Arabic number is assigned.").

The noble Lord said: My Lords, I beg to move.

On Question, amendment agreed to.

The Deputy Speaker

My Lords, before calling Amendment No. 21, I should explain that if the amendment is agreed to I shall not be able to call Amendment No. 22.

Lord Young of Graffham moved Amendment No. 21:

Page 144, line 46, leave out from first ("undertaking") to end of line 2 on page 145 and insert "jointly with one or more undertakings not included in the consolidation, that other undertaking ("the joint venture") may, if it is not—

1. (a) a body corporate, or
2. (b) a subsidiary undertaking of the parent company,").

The noble Lord said: My Lords, it may be for the convenience of the House if I speak also to Amendments Nos. 22, 23 and 27. These amendments concern the use of the method of accounting for joint ventures known as proportional consolidation. In responding to the noble Lord, Lord Williams of Elvel, and to my noble friend Lord Mottistone at the Committee stage, we acknowledged that there were problems with the existing definition of a joint venture in paragraph 18 of Schedule 2 to the Bill. We undertook to return to the subject. I should like to explain why, following further consultation, we wish to make particular changes covered by this series of amendments. I believe that they go very much in the direction sought by those noble Lords.

It has been put to us that setting out a detailed and restricted definition of a joint venture in the Bill may prevent the use of proportional consolidation for the kind of joint venture quite commonly found in the oil industry, and some other industries, which takes the form of an unincorporated association—and for which proportional consolidation is an entirely appropriate accounting treatment.

We agree that proportional consolidation is an appropriate accounting treatment in such cases. The amendments are intended to allow this, without allowing proportional consolidation as a method of accounting for a much wider range of bodies for which we believe such treatment would be inappropriate. That is achieved by relaxing the definition of a joint venture in one way and tightening it in another. It is relaxed in that the amendments simply define a joint venture in terms of joint management. It is tightened in that the amendments restrict the use of proportional consolidation to unincorporated bodies.

I should explain why it is appropriate to draw a distinction between incorporated and unincorporated bodies in this respect. Proportional consolidation involves bringing into the consolidated balance sheet, line by line, a proportionate share in the assets and liabilities. That is particularly appropriate accounting for a stake in an unincorporated joint venture. The company's interest in that joint venture can be seen as akin to a direct interest in the assets and liabilities rather than an indirect holding through shares. The second reason is that the Companies Act in our view arguably already prohibits the use of proportional consolidation for incorporated joint ventures, although it does not say so in as many words. We are therefore simply maintaining the present position.

Thirdly, the amendments are in line with the existing accounting standard. Paragraph 18 of Statement of Standard Accounting Practice No. 1 says that the equity method of accounting—which would otherwise apply—and I now quote: need not be applied to interests in partnerships or non-corporate joint ventures where such arrangements have features which justify accounting for a proportionate share of individual assets and liabilities as well as profits or losses". Put another way, equity accounting is prescribed as the appropriate treatment for the incorporated joint venture. Fourthly, we are not aware that there is pressure from companies actually wanting to use proportional consolidation for incorporated joint ventures and to that extent the question is at the present time largely academic.

Finally, to permit proportional consolidation for the incorporated joint venture would give companies too much latitude in the way they account for certain associates. On this point it is only fair to add that some accounting bodies suggest that the Bill should not restrict proportional consolidation to unincorporated joint ventures but should leave this to be settled by accounting standards. We have considered that idea carefully. While we see accounting standards having an important role to play, for example, in giving guidance on what is meant by "managed jointly", once the law clearly envisages that possibility of proportional consolidation for an incorporated joint venture, we doubt that an accounting standard could be introduced which would limit the use of proportional consolidation to unincorporated joint ventures.

Moreover, agreeing to this amendment does not involve setting the position in stone until the next Companies Bill. We are willing to consider further reasoned argument as to why a further adjustment should be made to the law. That could be done while the Bill is still before Parliament, or subsequently. The Bill includes a power to amend the detailed accounting rules by statutory instrument to deal with precisely that kind of point. It allows for development in accounting thought and practice.

I apologise for speaking at some length on these amendments, but I believe that it is important to set out our thinking. The issue is of particular interest to certain companies and has aroused considerable interest recently within the accounting profession. The amendment to Schedule 3—Amendment No. 27—changes the disclosure provisions for joint ventures and is consequential on the amendments to Schedule 2.

I should also comment briefly on the amendment tabled by my noble friend Lord Mottistone. It would have the effect of removing the restrictions on what is to be considered a joint venture for this purpose, much as the government amendment, but would not restrict proportional consolidation to unincorporated joint ventures. I hope that my noble friend can accept that restriction for the reasons I have explained at some length, and that he also accepts that the amendment he has put forward is subsumed in the government amendments. I beg to move Amendment No. 21.

Lord Mottistone

My Lords, I am grateful to my noble friend for what he has said. I am also grateful to him for taking note of what I did not in fact say in Committee. That situation arose because my advice arrived too late. If one were to look in Hansard one would see that the advice arrived on the morning of the debate. At that time my noble friend Lord Strathclyde said that he was quite happy to receive such advice in written form. That was the course of action I took and therefore your Lordships will not know exactly what was said. However, I can tell the House that the amendments put forward by the Government more than cover what I, and the CBI, were seeking to achieve. Of course what is proposed encompassses Amendment No. 22 in my name. Indeed, it goes further in certain directions. I am advised that it is perfectly acceptable.

The main point was that the Bill as drafted did not appear to allow for more than three participants in a joint venture. Many industries, including the oil industry, the international construction industry and the engineering contractors, would have been adversely affected. Therefore it is a pleasure to see that that particular point has been taken care of. I shall not burden your Lordships with other examples to illustrate how the proposals are satisfactory. Suffice to say, I am pleased that Amendments Nos. 21 and 23 cover what we were seeking to achieve.

Lord Williams of Elvel

My Lords, we too welcome the amendments. In general, they follow the line we are taking in Committee. However, I should like to make one or two points. I hope that the Secretary of State will be able to clarify them when he comes to respond. So far as I can see, the expression "proportional consolidation" is new to the statute book and is not defined in the Bill. It could mean two things. It could mean that a company will show its proportionate share of assets and liabilities adjacent to, but separate from, its own balance sheet; in other words, one has two columns: one is the balance sheet of wholly owned or wholly consolidated assets and liabilities, and the other is the proportionately consolidated assets and liabilities, or it could be that there will be a combined total of assets and liabilities in the balance sheet, and the distinction between what is fully owned or fully consolidated and proportionately consolidated is not made, but merely translated down to the bottom as minority or joint venture interest.

Method number one—showing parallel to the main balance sheet the proportion of assets and liabilities which are owned—seems to be considered by members of the profession as more appropriate than method number two. I say "seems to be" because this is a new exercise through which people are going. Method number two, the full consolidation (the merging of the two columns) is appropriate where there is an element of control, and it is appropriate where there is control of a joint venture operation operating in the same industry or the same branch of industry as the parent—I will use the expression "parent" for the purpose of the argument—and it is probably also right when the venture is primarily a financing vehicle. It may not be right when there is a company operating in a different industry or a different branch of the industry, and therefore needs to be shown as — —

Lord Young of Graffham

My Lords, perhaps the noble Lord will allow me to intervene. As I understand the position, we are saying that one can have proportional consolidation for unincorporated bodies but not for incorporated bodies. Unincorporated bodies are essentially partnerships between companies in whatever proportion that partnership is owned by the company which is seeking to consolidate the assets. To that extent, is the test of minority share or the test of control the same as if it were an incorporated body? In other words, there may be a direct liability under the partnership.

Lord Williams of Elvel

My Lords, I suspect that it is. I suspect that the partnership can be controlled and an unincorporated association can be controlled in the same way as a subsidiary. I do not see that that point is relevant; nevertheless, 1 am prepared to listen to what the Secretary of State says in reply.

I accept that the Government are eliminating the possibility of a proportional consolidation of corporate industries and that the equity method of accounting (the one-line consolidation) is the one that they are going for. I have no particular problem with that where the venture is an unrelated business. But this is where I come to the amendment tabled by the noble Lord, Lord Mottistone. I wonder whether that is not going a little too far. I put the question, not because I have any persuaded view on it but merely because I wish to discuss the matter, whether there is not a case for something more than simple one-line consolidation of companies over which there is an element of control, even if it is only on a joint venture basis. The Government may have good reasons for excluding that possibility, but I should like to hear from the Minister what those reasons are.

I am trying to make two points. There are significant differences in presentation between what I regard as method number one, where there is a separate column, even on an unincorporated association which is joint ventured with the parent, and where the two balance sheets are rolled into one. Secondly, I wonder, and speculate, whether it is right to exclude altogether a proportional consolidation of corporate bodies.

5.45 p.m.

Lord Young of Graffham

My Lords, I shall deal with the second point made by the noble Lord, Lord Williams of Elvel. I suspect that it is right to exclude altogether proportional consolidation of unincorporated bodies, because they are separate legal entities. The corporate veil still applies and there is no legal liability unless it has been specifically entered into for the debts of the subsidiary of a parent company. If it were to be entered into and guarantees were to be given, that is surely a matter which, if it were of significance, would be noted on the accounts in some way.

Proportional consolidation as a statement is not defined as such within the statute. It is a well understood accounting term, and part of the generally accepted accounting principles and practice of which we have heard this afternoon. It means combining the totals. If we look at the proportional consolidation for unincorporated bodies, that esssentially means a share of the assets and liabilities which are directly attributable to that partner in the unincorporated body.

It may or may not involve joint and several liability. If it is several liability, then proportional consolidation should be suitable. I suspect that if it involves joint liability it is a matter which prudent accountants would note on the accounts. In terms of assets and liabilities, it would be proportional consolidation which would seem to be the most suitable, and therefore I hope that the noble Lord will accept it.

Lord Williams of Elvel

My Lords, presumably if it is joint and several responsibility, then it is joint and several responsibility for all liabilities and they become the liabilities of the organisation, and so there is still consolidation at that point.

Lord Young of Graffham

My Lords, whether it is full or partial consolidation, it would be joint responsibility for the liabilities but not necessarily the assets. Although I am not an accounting expert, and it is a long time since I dealt with such matters, I suspect that what would happen is that there would be proportional consolidation, and I suspect a note on the balance sheet or some note of the liabilities which would be covered by the joint liability. Those are matters upon which the accountants would determine a full and fair view of the accounts and would reflect that. We can see a good case to allow proportional consolidation for unincorporated bodies but not for incorporated bodies. I hope that the noble Lord will go along with that.

On Question, amendment agreed to.

[Amendment No. 22 not moved.]

Lord Young of Graffham moved Amendment No. 23:

Page 145, line 4, leave out sub-pararaphs (2) and (3).

On Question, amendment agreed to.

Lord Strathclyde moved Amendment No. 24:

Page 145, line 33, 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: My Lords, I moved an identical amendment to paragraph 19 of Schedule 2 in Committee. Those noble Lords who spoke said that they found it difficult to understand. This is a modest amendment which the Government brought forward, and are bringing forward again, in response to a point put to us that the existing wording of sub-paragraph (3) of paragraph 19 is ambiguous. In view of the difficulty that caused last time I shall speak slightly more fully than I would otherwise do.

Paragraph 19 of Schedule 2 defines an associated undertaking. There is a presumption in sub-paragraph (2) that one company is an associate of another when that other holds 20 per cent. or more of the voting rights. This follows the requirement of the seventh directive. Sub-paragraph (3), with which the amendment is concerned, is one of a number of provisions which help to interpret the term "voting rights" for this purpose. Sub-paragraph (3)(b) is concerned with a special case: at present it says that voting rights which the undertaking in question is entitled to require should not be exercised shall be left out of account. It has been put to us that that is not entirely clear. Does "left out of account", for example, mean that such voting rights are not to be treated as held by the undertaking in question? Or does it mean that the voting rights in question are to be treated as though they do not exist? The amendment makes clear that such voting rights are both to be regarded as not held by anyone and also to be disregarded in determining the total voting rights in the undertaking. With that full explanation, I beg to move.

Lord Williams of Elvel

My Lords, I am grateful to the noble Lord, Lord Strathclyde, for giving what he describes as "a full explanation" of the government amendment. It needs a full explanation because this is an exceedingly complicated part of the schedule. I am not sure even now whether I fully understand what the noble Lord said or the purport of the government amendment. Nevertheless, it is an issue which we shall examine carefully. If we have any major problems, we shall come back to the matter on Third Reading.

On Question, amendment agreed to.

Lord Strathclyde moved Amendment No. 25:

Page 146, line 6, leave out ("a subsidiary undertaking") and insert ("any of its subsidiary undertakings or a person acting on behalf of the undertaking or any of its subsidiary undertakings")

The noble Lord said: My Lords, with the agreement of the House I shall also speak to Amendment No 58. In Committee the Government accepted in principle that two amendments tabled by the noble Lord, Lord Williams, with the same purpose as these amendments corrected a defect in the Bill. I agreed to consider the detailed drafting and to bring forward equivalent amendments for Report. The purpose is to ensure that proper effect is given to Article 2.3 of the seventh directive. I beg to move.

On Question, amendment agreed to.

Lord Strathclyde moved Amendment No. 26:

Page 146, line 29, at end insert ("(after making any consolidation adjustments)").

The noble Lord said: My Lords, this corrects an ambiguity on a point of detail relating to the accounting treatment of associated undertakings. Paragraph 21(2) of Schedule 2 is concerned with the case where an associated undertaking is itself a parent undertaking. It prescribes in such a case that the net assets and profits or losses which provide the basis for the calculation on the equity basis of valuation are those of the associated undertaking itself and its subsidiary undertaking taken together. However, as presently drafted the provision gives no guidance as to whether the figures are to be calculated before or after the usual consolidation adjustments —for example, the elimination of transactions within the group. The figures should be those after making those adjustments and the amendment simply makes this clear. I beg to move.

Lord Williams of Elvel

My Lords, I am very surprised that this amendment is necessary. I should have thought that the expression, "the net assets and profits or losses to be taken into account" by itself eliminates all consolidation adjustments. I am baffled as to why the Government seek to introduce more wording into the Bill.

Lord Strathclyde

My Lords, with leave, the noble Lord suggests that the amendment is otiose. However, our advisers say that we need it, and therefore we put it forward.

On Question, amendment agreed to.

Schedule 3 [Disclosure of information: related undertakings]:

Lord Young of Graffham moved Amendment No. 27:

Page 153, leave out lines 29 to 46 and insert ("—

1. (a) the name of the undertaking;
2. (b) the address of the principal place of business of the undertaking;
3. (c) the factors on which joint management of the undertaking is based; and
4. (d) the proportion of the capital of the undertaking held by undertakings included in the consolidation.").

The noble Lord said: My Lords, this amendment has already been spoken to. I beg to move.

On Question, amendment agreed to.

Lord Strathclyde moved Amendment No. 28:

Page 155, line 11, leave out sub-paragraph (2).

The noble Lord said: My Lords, this is a minor amendment which tidies up Schedule 3 to the Bill relating to disclosure of information in company accounts of related undertakings. I beg to move.

On Question, amendment agreed to.

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

Lord Young of Graffham moved Amendments Nos. 29 to 37:

Page 158, line 36, leave out from beginning to ("the") in line 37 and insert— ("(3) There shall also be shown, separately, the aggregate amount within sub-paragraph (2)(a) and (b)(i) and").

Page 158, line 47, 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. (5) Emoluments shall be treated for the purposes of this paragraph as paid to or receivable by a person if they are paid to or receivable by a person connected with him or a body corporate controlled by him.").

Page 159, line 3, after "1" insert ("(1)").

Page 159, line 44, after "1" insert ("(1)").

Page 160, leave out lines 29 to 31 and insert— ("(3) References to compensation include benefits otherwise than in cash; and in relation to such compensation references to its amount are to the estimated money value of the benefit.").

Page 160, line 35, at end insert— ("Sums paid to third parties in respect of directors' services 8A. — (1) There shall be shown the aggregate amount of any consideration paid to or receivable by third parties for making available the services of any person—

1. (a) as a director of the company, or
2. (b) while director of the company—
1. (i) as director of any of its subsidiary undertakings, or
2. (ii) otherwise in connection with the affairs of the company or any of its subsidiary undertakings.

(2) The reference to consideration includes benefits otherwise than in cash; and in relation to such consideration the reference to its amount is to the estimated money value of the benefit. The nature of any such consideration shall be disclosed. (3) The reference to third parties is to persons other than—

1. (a) the director himself or a person connected with him or body corporate controlled by him, and
2. (b) the company or any of its subsidiary undertakings.").

Page 160, line 38, leave out ("and 8") and insert (", 8 and 8A").

Page 161, line 6, leave out ("and 8") and insert (", 8 and 8 A").

Page 162, line 3, at end insert— ("(4) References in this Part of this Schedule to a person being "connected" with a director, and to a director "controlling" a body corporate, shall be construed in accordance with section 346.").

The noble Lord said: My Lords, this series of amendments improves the information which the law already requires be given to shareholders about payments made in connection with the appointment and services of directors. The purpose: is to stop up loopholes in the existing disclosure requirements which limit the usefulness of the information. This follows the helpful discussion on this subject at the Committee stage. I believe that these changes to existing requirements will find favour with noble Lords who spoke at that earlier stage.

There are three principal changes from the existing requirements. The first concerns so-called "golden hellos" —a phenomenon that has arrived in the cloistered calm of government since I left the private sector. I hope the practice continues when the time comes for me to return. They are payments made in money or money's worth to a person to secure his services as a director. The first part of Amendment No. 30 addresses this point by extending the definition of emoluments. It is identical to a government amendment tabled for Committee. As I explained to the Committee, where a payment is made before a director joins the company and without any obligation to take up appointment, it is arguable that the payment falls outside the existing definition of emoluments and therefore does not need to be disclosed. We believe this is a weakness in the present disclosure arrangements.

The second change made by the second part of Amendment No. 30 also extends the meaning of emoluments. It arises out of discussion on amendments tabled at the Committee stage by the noble Lord, Lord Williams. It brings within a director's emoluments payments made to persons connected with him or to a body corporate controlled by him. "Connected" and "controlled" in this context are defined by reference to Section 346 of the 1985 Act. In essence they catch payments which, though made to someone other than the director, are in all likelihood for his benefit.

The third change would require separate disclosure of payments to third parties other than to those closely connected with the director. This is the purpose of Amendment No. 34. It is aimed at the case where, for example, a company loans one of its employees to another company as a director and receives payments in return, perhaps as compensation for loss of that person's services. There is nothing wrong with this practice but it is information which should be made available to shareholders. The amendment goes slightly further than the change proposed by the noble Lord, Lord Williams, in Committee which would have covered payments to third parties in connection with the appointment of a director but not payments in respect of his services as director.

The other amendments are either consequential or make minor improvements to the existing wording. I believe that this is a sensible package of improvements to the existing requirements. I beg to move Amendments Nos. 29 to 37 together.

Lord Williams of Elvel

My Lords, I am grateful to the noble Lord for setting out these amendments and to the Government for bringing them forward because they respond to the concerns that we showed in Committee. We therefore welcome them. As the noble Lord has said, they go slightly further than even we had asked for, and I think that is absolutely right.

I am sorry that the noble Lord was not in a position to benefit from golden hellos when he was in the private sector. I am sure that on his return—and I hope that the noble Lord will not misunderstand me if I suggest that his return will take place sooner rather than later—the golden hellos will be in order when the time comes. We are very grateful to the Government for doing what we requested in Committee. We do not oppose the amendments.

On Question, amendments agreed to.

Clause 7 [Approval and signing of accounts):

Lord Strathclyde moved Amendments Nos. 38 and 39:

Page 12, line 40, leave out ("or the secretary").

Page 13, line 3, leave out ("or the secretary").

The noble Lord said: My Lords, we bring forward these amendments in response to the discussion in Committee. The changes on the signing of accounts were included in the Bill as a minor and sensible piece of deregulation. I recognise that allowing the company secretary to sign the accounts has given rise to fears that the directors will take it as a signal that they can disown responsibility for the accounts. The noble Lords, Lord Benson and Lord Williams, represented those fears at the Committee stage with considerable eloquence and verve. We do not share those fears. Indeed we believe that in practice they would prove to be unfounded.

The signature is purely recognition that the accounts have been properly approved by the directors. That said, we recognise that perceptions are important on a subject such as this. There is no point of principle involved for the Government. We have no wish to see a change to the law interpreted—albeit, in our view, mistakenly—as a signal that the directors need not take seriously their responsibility for preparing proper accounts. I am happy therefore to bring forward these amendments which simply remove the references to the company secretary in Section 233. I beg to move Amendments Nos. 38 and 39 together.

Lord Mottistone

My Lords, I merely wish to mention that the CBI is aware of this matter. It made this point through one of its members and it is delighted to see it in the Bill. I endorse the thoughts of the CBI on this matter.

On Question, amendments agreed to.

6 p.m.

Clause 8 [Directors' report]:

Lord Williams of Elvel moved Amendment No. 40:

Page 14, line 16, at end insert ("save for any section relating to contributions for political purposes, which shall be left unsigned and shall be expressed in the form of a proposal for ordinary resolution to be approved by the company in general meeting").

The noble Lord said: My Lords, this amendment is identical to one I failed to move in Committee. Nevertheless, I spoke to it at that stage. I beg to move.

Lord Stevens of Ludgate

My Lords, I do not find myself in sympathy with the amendment proposed, although I appreciate that a related part of it has already been approved by your Lordships' House. Companies of which I am a director make political contributions. Dare I say that in the past contributions have been made to more than one political party? If we are not careful we may put ourselves in the position where numerous items have to be separately approved by shareholders before the accounts can be signed. The directors are elected by shareholders to manage the company, and the correct recourse surely is for shareholders to remove directors when they disapprove of the way the company is managed and not to approve numerous details in the company's accounts.

Lord Young of Graffham

My Lords, as the noble Lord, Lord Williams, has reminded us, this amendment was discussed in Committee on a paving amendment, and despite the Government's advice the Chamber showed that it supported the principle underlying it. Although the noble Lord omitted to move the amendment itself when it was reached, I do not feel that it would be in accordance with the tradition of the House to seek to take advantage from that. We also have a convention that we do not seek to reverse on Report amendments on which the Chamber has voted in Committee. This is a valuable convention, which greatly facilitates our business. I shall not therefore be inviting the House to oppose this amendment today.

I should make the Government's position quite clear to the House. For the reasons which my noble friends, Lord Strathclyde and Lord Boyd-Carpenter explained in Committee, we regard this amendment as being wholly wrong in principle, unnecessary, and significantly defective in practice. It is wrong in principle because there is no good reason for treating political donations differently from other payments by a company. It is unnecessary because there are already effective ways in which shareholders can secure discussion about political donations if they are concerned about them. And it is defective because it leaves unclear what the result would be if the shareholders refused to approve donations already made. Would they have to be repaid, and what would happen if they were not? This would be a most unsatisfactory position. I feel sure that these are all points which will have to be addressed when the Bill reaches another place.

Lord Williams of Elvel

My Lords, I am grateful to the noble Lord for his clear statement of the Government's position. He and his right honourable friends in another place will certainly have to argue this out. I hope they can advance rather stronger arguments than the noble Lord has advanced today. If they cannot, they will be in some trouble. No doubt the Government will consider the position in another place. If in another place a decision is taken to reverse what your Lordships have put in the Bill, no doubt your Lordships will have another opportunity to consider this matter. I am grateful to the noble Lord for not taking advantage of a technical slip on my part, for which I apologise.

On Question, amendment agreed to.

Lord Strathclyde moved Amendments Nos. 41 and 42:

Page 14, line 35, after ("report") insert("—(a)").

Page 14, line 36, at end insert ("and (b) in paragraph 6 (general information), for "subsidiaries" in each place where it occurs, substitute "subsidiary undertakings".").

The noble Lord said: My Lords, I beg to move Amendments Nos. 41 and 42 en bloc. The effect of these amendments is to make a very small change to Schedule 7 of the 1985 Act, which sets out what must be covered in the directors' report. There will be very little change in practice, but the change is right in principle and is necessary to give proper effect to Article 36.2 of the seventh directive.

On Question, amendments agreed to.

Lord Williams of Elvel moved Amendment No. 43:

Page 14, line 36, at end insert— ("(3) In paragraph 1(2) of Schedule 7 to that Act leave out the words from "balance sheet" to "the report".").

The noble Lord said: My Lords, it may be for the convenience of the House if I speak also to Amendment No. 44. These amendments try to amend the present disclosure requirement in the directors' report. Substantial differences between book and market values of land should be reported to shareholders if the directors consider them sufficiently significant to warrant being drawn to their attention. In many cases such differences exist but are not reported, so there is a problem.

This lack of disclosure has been confirmed in several surveys of large company procedure. The usual argument against disclosure is that directors have no intention of selling and therefore the change in value is not relevant. But that avoids the question of whether the alternative investment of the assets concerned would be in the shareholders' interest. By denying shareholders that information on which they can form a judgment, it could be argued that they are being denied an opportunity to question the effective management of the assets they own.

This is not a matter on which auditors are required to comment. Up-to-date information on value, particularly of property, is in our view of considerable importance. It is not at the moment very clear exactly what is being done. As I say , there has been a survey of large company practice. But we want to see something rather more definite put in the Bill.

Amendment No. 44 proposes that the Bill should include the words: if there are no such differences that fact shall be stated". These are somewhat minor amendments, but they address a point which needs to be addressed. Therefore, I look forward to hearing what the Secretary of State has to say. I beg to move.

Lord Young of Graffham

My Lords, I too shall speak to Amendments Nos. 43 and 44. I fear I am less attracted by the first of these amendments than the second. We have had only a relatively short time to study the implications, but I am willing to accept that they merit more careful consideration. I can give the noble Lord an assurance that we shall consider them more carefully between now and Third Reading but without commitment.

Amendment No. 43, by deleting part of the existing wording of paragraph 1 of Schedule 7, would simply require the disclosure in the directors' report whenever there was a significant difference between the market value of any land and the amount at which it is included in the company's books. There may be some merit in that idea where land is itself a substantial element in a company's overall assets. One difficulty with the noble Lord's amendment is that it would also require disclosure where land is not a substantial element in a company's assets, but where it is shown in the books at an amount significantly different from its fair value.

Amendment No. 44, on the other hand, would ensure that the directors make either a negative or a positive statement. My understanding is that the directors' report often includes such a disclosure even though there is no statutory requirement. I am happy to consider further whether that is acceptable.

I can give no undertaking that the Government will come back with their own amendments on this subject at a later stage. But, as I have said, we shall look at this carefully in the light of the noble Lord's explanation of the purpose of his amendments. I hope that on this basis he is willing to withdraw this amendment.

Lord Williams of Elvel

My Lords, I am most grateful to the Secretary of State for his comments. I understand that these amendments were tabled at a fairly late stage and the Government may not have had a chance to look at them in as much depth as they would like. I tabled the amendments in order to raise a point. I think the noble Lord has taken the point. As he has given us an undertaking that he will study the amendments without any commitment, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

(Amendment No. 44 not moved.)

Clause 9 [Auditors' report]:

Lord Strathclyde moved Amendment No. 45:

Page 14, line 47, at end insert("—

1. (a) in the case of an individual balance sheet, of the state of affairs of the company as at the end of the financial year,
2. (b) in the case of an individual profit and loss account, of the profit or loss of the company for the financial year,
515
3. (c) in the case of group accounts, of the state of affairs as at the end of the financial year, and the profit or loss for the financial year, of the undertakings included in the consolidation as a whole, so far as concerns members of the company.").

The noble Lord said: My Lords, this amendment does not, in our view, make a change of substance to the Bill. Rather, we bring it forward in response to the genuine concern felt by a number of people in the accountancy profession—concern which was eloquently reflected by the noble Lord, Lord Williams, and the noble Lord, Lord Benson, in Committee. That concern is that by re-enacting the substance of existing Section 236(2) in a different form we have affected the audit report fundamentally by seeming to weaken the references to the true and fair view. We believe that that is a question of perception. However, I recognise that the profession feels more at ease with something more familiar and more detailed than that included in the Bill. This amendment is intended to meet that concern. I accept that in practice the auditors' report tends to follow the wording of the Act and there is therefore some merit in spelling out the true and fair requirement—in effect, prescribing the form of the audit report. There is no point of principle involved for the Government. I beg to move.

Lord Williams of Elvel

My Lords, I am grateful to the noble Lord, Lord Strathclyde, for bringing forward this amendment. As I am sure noble Lords will agree, it is extremely important to be absolutely clear regarding the scope and content of the auditors' report. We emphasised that point when the Bill was before your Lordships in Committee.

The only problem I have with the amendment concerns paragraph (c). Let us consider the position of a subsidiary which is required to be excluded from consolidation under Section 229(4). That subsidiary will be incorporated in the consolidated accounts under the equity method, exactly as though it were an associate company, rather than consolidated in full like other subsidiaries. However, if it is not a UK company its accounts will also be attached to the group accounts, under Section 243(2). Does the auditors' report cover those additional accounts? The subsidiary has been included in the sense that it is incorporated in the accounts; but it is not included in the consolidation, unless that means some form of consolidation such as the equity method.

I hope very much that the noble Lord will be able to help me on that point. We want clarity and I think that a further explanation of precisely what the Government have in mind would be most welcome for those of us who wish to see an important clarification of the words of the Bill.

Lord Strathclyde

My Lords, after the fairly substantial debate in Committee and what I have just said I am sorry that I have not been able entirely to satisfy the noble Lord, Lord Williams, on this matter. Perhaps I should point out that the word "included" means included in the consolidation within the accounts. Therefore I believe that the problem raised by the noble Lord does not arise.

Lord Williams of Elvel

My Lords, I am grateful to the noble Lord for that explanation. I am not sure that I fully understood it. Perhaps he will be kind enough to write to me and let me know the full position.

On Question, amendment agreed to.

Lord Strathclyde moved Amendment No. 46:

Page 15, line 25, leave out from ("are") to end of line 27 and insert (", where the office of auditor is held by a body corporate or partnership, to signature in the name of the body corporate or partnership by a person authorised to sign on its behalf.").

The noble Lord said: My Lords, this amendment makes a small change to new Section 235A which concerns the signature of the auditor's report. Subsection (5), in its present form, requires, where the auditors are a partnership or a body corporate, that the report is signed in the name of an individual authorised to sign on behalf of that body or partnership. The provision was introduced as an aid to enforcement in cases of suspected fraud or malpractice. We are now persuaded, however, that there is no need for this—checks made with the regulatory bodies established under Part II of the Bill are likely to prove more effective. The amendment requires instead, where the auditor is a partnership or a body corporate, that the report is signed in the name of the body or partnership. This accords with usual practice and we believe that the amendment will be warmly welcomed by the profession. I beg to move.

On Question, amendment agreed to.

6.15 p.m.

Lord Williams of Elvel: moved Amendment No. 47:

Page 16, line 10, leave out ("information and explanations") and insert ("records, information and explanation whether oral or in legible form").

The noble Lord said: My Lords, in moving Amendment No. 47 I should also like to speak to Amendment No. 48. These two amendments are designed to probe the Government's intentions. We raised the points previously in Committee. In our view it is important to ensure that the auditor should have access to original records and that it should be stated precisely what that means. In our view the present wording allows directors to provide second hand information which could in certain cases be filtered by the directors . I hope very much that since the Committee stage of the Bill the Government have been able to reflect on the matter and respond. I beg to move.

Lord Strathclyde

My Lords, we have considered these amendments in the light of what the noble Lord said at the Committee stage and I have listened to him now. We have also taken preliminary soundings with one or two auditing practitioners. Our conclusion is that the words contained in the Bill as it stands are adequate, and that the changes in the wording proposed by the noble Lord would be unnecessary and very possibly confusing. We are not aware of any pressure from the auditing profession for changes of the law at this particular point, either on the lines proposed by the noble Lord or otherwise. In the light of that situation, I hope that the noble Lord will feel free to withdraw his amendment.

Lord Williams of Elvel

My Lords, I am grateful to the noble Lord. I am glad that the Government have consulted on this matter. I accept their word that no representations were made by any of the various bodies concerned with the profession. I confess to being slightly surprised by that, but if that is so then I believe that the matter should be left there. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 48 not moved.]

Clause 10 [Publication of accounts and reports]:

Lord Strathclyde moved Amendment No. 49:

Page 17, line 27, at end insert ("guilty of an offence and").

The noble Lord said: My Lords, Amendments Nos. 49 and 50 simply insert the words "guilty of an offence" in two places—in new Section 238(5) and in new Section 240(6)—where they are missing. That defect has been carried across from the corresponding provisions in the 1985 Act. We simply wish to take this opportunity to correct it. I beg to move.

On Question, amendment agreed to.

Lord Strathclyde moved Amendment No. 50:

Page 18, line 46, after second ("is") insert ("guilty of an offence and").

On Question, amendment agreed to.

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

Lord Williams of Elvel moved Amendment No. 51

Page 28, leave out lines 21 to 24 and insert— ("(5) No regulations under this section shall be made unless a draft of the instrument containing the regulations has been laid before and approved by a resolution of each House of Parliament.").

The noble Lord said: My Lords, we are dealing here with the contents of the proposed summary financial statement. Under Clause 14 of the Bill as at present drafted the regulations which spell out what is to be contained in the summary financial statement are subject to the negative procedure and your Lordships' House, unless noble Lords decide to pray against any such order, will not have an opportunity to discuss it.

This is a particularly important part of the Bill because it is an innovation. Having prompted the Government on an earlier occasion in Committee to accept a negative procedure rather than the affirmative procedure that was originally in the Bill, I very much hope that this time the Government will help me by accepting the affirmative procedure rather than the negative procedure that is present in the Bill. I beg to move.

Lord Young of Graffham

My Lords, one of the besetting sins of any of us who have the privilege of exercising power is a reluctance to delegate. It is so tempting to want to keep one's hands on every aspect of a project, but, as we all know, unless one delegates the less important matters it soon becomes impossible to find time to deal with those matters that are more important. I want to suggest to noble Lords who moved this amendment that it is perhaps disproportionate to require Parliament to set aside time on the Floor of the House to consider and approve in advance the detailed arrangements for summary financial statements.

The regulations to be made under new Section 252 will do three things. First, they wall specify the cases in which a listed plc may, if it wishes, avail itself of this new facility. We do not at present have any expectation of restricting the availability of the option, but no doubt the public consultation exercise to which we are committed will reveal whether there are any circumstances in which the option ought to be withheld. Secondly, the regulations will set out the procedure that companies must follow to ascertain whether a shareholder wishes to receive the full version of the annual report and accounts. Thirdly, the regulations will specify the form and contents of the summary financial statement.

Each of those three matters is simply the detailed application of the general principles set out in the Bill, and is therefore a field which Parliament has traditionally felt comfortable about delegating to the appropriate Secretary of State—subject of course to the ultimate power to annul the Secretary of State's regulations. Moreover, the provisions simply offer options and do not deprive anyone—certainly not shareholders—of any existing entitlement.

I ask the House to consider whether, given the nature of the matters that we are discussing and the long tradition of wide consultation on detailed company law matters, it is necessary to require the House to approve the detailed regulations in advance, and of course any subsequent changes that may be necessary, for example, to match minor changes in the form and content of company accounts. I therefore invite noble Lords to reconsider whether those matters are of such key importance as to require specific parliamentary approval each and every time. In our view, these are matters that Parliament can properly leave to administrative implementation. I hope that the noble Lord, Lord Williams of Elvel, will not press this amendment.

Lord Williams of Elvel

My Lords, I am grateful to the noble Lord for giving us some inkling of what the Secretary of State will produce in the regulations. I find it odd that we have spent a great deal of time discussing what should be in the directors' report and accounts —indeed, what is in the directors' report and accounts is on the face of the Bill —yet we shall not even have the possibility of looking in draft at the summary financial statement. There seems to me to be a disproportion in those two facts. Nevertheless, we shall consider the matter. I do not intend to press the amendment at this time of the evening and at this stage of the Bill. We shall certainly look at the matter again, but I cannot guarantee not to come back to it at a later stage. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 15 [Private companies: election to dispense with laying of accounts and reports before general meeting]:

Lord Strathclyde moved Amendments Nos. 52 and 53:

Page 29, line 28, leave out ("payable") and insert ("due or to become due").

Page 29, line 29, at end insert— ("() The directors shall be deemed not to have duly convened a meeting if they convene a meeting for a date more than 28 days after the date of the notice convening it.").

The noble Lord said: My Lords, these amendments make minor improvements to new Section 253(6). The first amendment replaces the word "payable" to make clear that, in the particular circumstances of the section, the company can retain its expenses out of fees payable now or in the future. The second amendment is consequential on a change to the Bill made in Committee to Section 368 of the 1985 Act. This provision is at paragraph 5 of Schedule 1 to the Bill. I beg to move.

On Question, amendments agreed to.

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

Lord Strathclyde moved Amendment No. 54:

Page 30, line 34, leave out from ("group") to ("where") in line 35.

The noble Lord said: My Lords, this amendment simply removes redundant words. I beg to move.

Lord Williams of Elvel

My Lords, are there more redundant words in the Bill that could be removed?

Lord Strathclyde

My Lords, there may well be. Such words have often been pointed out by the noble Lord, to whom we are grateful.

On Question, amendment agreed to.

Clause 19 [Parent and subsidiary undertakings]:

Lord Strathclyde moved Amendments Nos. 55 and 56:

Page 33, line 25, after ("undertaking") insert ("— (a)").

Page 33, line 27, at end insert (", or (b) if any shares in that other undertaking are held by a person acting on behalf of the undertaking or any of its subsidiary undertakings.").

The noble Lord said: My Lords, with agreement, I shall move these amendments together. The amendments make a small change to close a possible loophole in new Section 257 which has been drawn to our attention. I beg to move.

On Question, amendments agreed to.

Lord Strathclyde moved Amendment No. 57:

Page 34, leave out lines 30 to 39 and insert— ("(5) For the purposes of section 257(2)(c)— (a) an undertaking shall not be regarded as having the right to direct the operating and financial policies of another undertaking unless the directors of the other undertaking are obliged to comply with directions given whether or not they are for the benefit of that other undertaking; and").

The noble Lord said: My Lords, in our discussions with outside bodies we have identified a difficulty with the present wording of new Section 258 which this amendment is designed to remove.

New Section 257, subsection (2)(c), covers a special case of a parent-subsidiary relationship where one undertaking has the right, as a result either of a specific provision in the company's articles or by virtue of what the Bill terms a control contract, to direct the financial and operating policies of another undertaking. New Section 258, subsection (5)(a), sets out how this phrase is to be interpreted. At present it is in terms of, the right to give directions with respect to the operation and finances of the dependent undertaking which its directors are obliged to comply with". Following discussion with the Law Society, we agreed that this definition goes wider than the natural meaning of the right to direct the operating and financial policies", in that it would cover a right which can only be exercised in limited circumstances or on isolated occasions. It is wider than we want in that it might unwittingly bring within the definition of "subsidiary undertaking" bodies which should be outside.

The amendment follows a much simpler approach which avoids that problem. It makes clear that in this context the condition is met only where the directors of the dependent undertaking are obliged to comply with the directions, whether or not they are for the benefit of that undertaking. I beg to move.

On Question, amendment agreed to.

Lord Strathclyde moved Amendment No. 58:

Page 35, line 27, leave out ("a subsidiary undertaking of its") and insert ("any of its subsidiary undertakings or a person acting on behalf of the undertaking or any of its subsidiary undertakings").

On Question, amendment agreed to.

Clause 20 [Other interpretation provisions].

Lord Strathclyde moved Amendment No. 59:

Page 39, line 17, column 2, leave out ("paragraph 88") and insert ("paragraphs 88 and 89").

The noble Lord said: My Lords, with permission, I shall speak also to Amendment No. 60. Both amendments correct wrong references. The first is a minor correction to the index of terms in Clause 20. The second corrects a wrong reference in the 1985 Act which has been pointed out to us recently and which has been unwittingly carried across into the Bill. I beg to move.

On Question, amendment agreed to.

Schedule 7 [Amendments consequential on Part I]:

Lord Strathclyde moved Amendment No. 60:

Page 171, line 43, leave out ("265") and insert ("264").

On Question, amendment agreed to.

Clause 23 [Eligibility for appointment]:

Lord Strathclyde moved Amendment No. 61:

Page 40, line 7, leave out subsection (3).

The noble Lord said: My Lords, the purpose of these amendments is to improve the Bill's provisions on the effect of the appointment as auditor of a partnership that has been constituted under a jurisdiction in which a partnership is not a legal person. That includes England and Wales, but not Scotland.

One problem with such partnerships is that there is no perpetual succession, so that when there is a change in the composition of the partnership, and the consequent formation of a new partnership, the new partnership would not hold the offices of auditor to which the earlier partnership had been appointed. To prevent the disruption that might otherwise be the consequence, Clause 23(3) of the Bill provides that the appointment of a partnership which does not have separate legal personality is to be treated as the appointment of that partnership, any partnership which succeeds to the practice of that partnership and is eligible for the appointment and any other eligible person who succeeds to that practice having previously carried it on in partnership.

The Law Society has represented to us—and we accept its arguments—that, as the Bill is presently drafted, there can only be a successor to the practice of a partnership if the person in question succeeds to the whole of the practice. So the effect of the Bill as it stands is that when a partner leaves taking some business with him, or another joins adding other business, the partnership will no longer be the successor to the earlier partnership and consequently will no longer be the auditor of the companies to which the former partnership had been appointed. That is not a desirable result. Subsection (4) of the new clause solves the problem by providing that a partnership is to be regarded as succeeding to the practice of another partnership if the members of the successor partnership are substantially the same as those of the former partnership, and they have succeeded to the whole, or substantially the whole, of the business of the former partnership.

We have also thought it necessary to deal with the case of the break-up of a partnership and the division of its practice, which is not addressed at all by the present Clause 23(3). Here we think that the company ought to have some say in the matter. Subsection (5) of the new clause provides that an appointment may, with the consent of the company, be treated as extending to a partnership or other person eligible for the appointment who succeeds to the business of the former partnership, or to such part of it as is agreed shall be treated as comprising the appointment.

More generally, we have some concern that the present position under which the appointment of an English, Scottish or Irish partnership is treated as the appointment of all of its qualified members is not a very happy one. Subsection (2) of the new clause therefore provides that the appointment is, unless a contrary intention appears, an appointment of the partnership as such and not of t he partners.

In speaking to this amendment I wish also to speak, with permission, to Amendments Nos. 62 and 63. I beg to move.

6.30 p.m.

Lord Williams of Elvel

My Lords, these seem perfectly sensible amendments. Could the noble Lord clarify one point for me? Presumably if a partnership is a legal person, as is the case, for instance, in Scotland, the same conditions can apply. Partners can walk out and take the practice with them and set up their own partnership as a separate legal person. Presumably under those circumstances the original partnership would not be considered to have a continuing role as auditor of the company?

Lord Strathclyde

My Lords, on that point, perhaps I may clarify exactly the position of Scottish partnerships. These have a legal personality separate from that of their members and therefore the problem does not arise. Section 389(8) of the Companies Act specifically provides that a Scottish firm is eligible for appointment if all its partners are qualified.

Lord Williams of Elvel

My Lords, before the noble Lord sits down, perhaps he can answer the point on what happens in a Scottish partnership if, say, three-quarters of the partnership walk out of the partnership and form their own partnership, taking their own clients with them.

Lord Strathclyde

My Lords, in that case, it would obviously be a separate entity. But the old partnership and the new partnership would both be regarded as new partnerships.

On Question, amendment agreed to.

Lord Strathclyde moved Amendment No. 62:

After Clause 23, insert the following new clause:

("Effect of appointment of partnership. .— (1) The following provisions apply to the appointment as company auditor of a partnership constituted under the law of England and Wales or Northern Ireland, or under the law of any other country or territory in which a partnership is not a legal person. (2) The appointment is (unless a contrary intention appears) an appointment of the partnership as such and not of the partners. (3) Where the partnership ceases, the appointment shall be treated as extending to—

1. (a) any partnership which succeeds to the practice of that partnership and is eligible for the appointment, and
2. (b) any person who succeeds to that practice having previously carried it on in partnership and is eligible for the appointment.

(4) For this purpose a partnership shall be regarded as succeeding to the practice of another partnership only if the members of the successor partnership are substantially the same as those of the former partnership; and partnership or other person shall be regarded as succeeding 10 the practice of a partnership only if it or he succeeds to the whole or substantially the whole of the business of the former partnership. (5) Where the partnership ceases and no person succeeds to the appointment under subsection (3), the appointment may with the consent of the company be treated as extending to a partnership or other person eligible for the appointment who succeeds to the business of the former partnership or to such part of it as is agreed by the company shall be treated as comprising the appointment.").

On Question, amendment agreed to.

Clause 24 [Ineligibility on ground of lack of independence]:

Lord Strathclyde moved Amendment No. 63:

Page 40, line 20, leave out from ("if') to ("this") in line 25 and insert ("he is—

1. (a) an officer or employee of the company, or
2. (b) a partner or employee of such a person, or a partnership of which such a person is a partner,

or if he is ineligible by virtue of paragraph (a) or (b) for appointment as company auditor of any associated undertaking of the company.

For").

On Question, amendment agreed to.

Clause 26 [Power of Secretary of State to require second audit]:

Lord Strathclyde moved Amendment No. 64:

Page 41, line 21, leave out from ("concerned") to first ("to") in line 24 and insert ("to retain a person eligible for appointment as auditor of the company—

1. (a) to audit the relevant accounts again, or
2. (b)").

The noble Lord said: My Lords, this amendment clarifies the effect of Clause 26. As it stands, the clause appears to have the effect that when a company is required by the Secretary of State to have audited again accounts which have been audited by an ineligible person, the acounts must be re-audited within 28 days. That was not our intention. What we want, and what the amendment achieves, is to require the Company to retain a person within that period who will conduct the audit but will not have to complete it within 28 days. I beg to move.

On Question, amendment agreed to.

Schedule 8 [Recognition of supervisory body.]:

Lord Benson moved Amendment No. 65:

Page 180, line 4, leave out ("such as to secure") and insert ("which provide").p

The noble Lord said: My Lords, with the permission of the House, in addition to moving Amendment No.65, I shall speak to Amendments Nos. 69 to 72, and 77. They all raise the same point.

In speaking to any of the amendments in my name, I speak not only on behalf of myself but on behalf of the Institute of Chartered Accountants in England and Wales.

The point of this amendment is merely on the interpretation of the English language. In the Bill as drawn, the words "secure" and "ensure" are used when it is suggested that the correct English word to use is "provide". I am sorry to have to labour this point but it is a matter on which the profession feels strongly. We have been advised by our legal advisors that we should press for a change to be made. Discussions have taken place at official level to try to reach agreement but they have not reached any distance. The arguments against the amendment are that the word "secure" already appears in the Financial Services Act. Whether or not it does is irrelevant. If it is wrongly used in the Financial Services Act, there is no need to multiply the error by two. If that principle were to be observed it means that every time a wrong Act appears it must be copied year after year.

The second point that has been raised in discussion is that if there is a doubt as to the meaning of the word, the judges will be able to define it if it comes to the point. This is a not a satisfactory argument. It should not be left to the public to have to find out, or to go to the courts to obtain a definition from the judge. A Bill ought to be drawn so that it is perfectly clear as written.

We have had such an example very recently. In the Act which deals with insider trading the word "obtained" was used. Because it was not quite clear, the judge made a certain ruling. Everybody who knew anything about insider dealing felt that the judge had made a mistake; and so did the Government. Because the wording was sloppily inserted in the first place, elaborate machinery has to be installed either to take the matter to the Law Lords to have a clear definition or to bring in amending legislation. I therefore suggest that there is a strong case for making the language clear in the first place.

I am reluctant to continue to talk on this subject but I must do so because I must make the position clear. The words "secure" can normally mean one of two things. It can mean to obtain possession of, as, for example, in, "I secured possession of a manuscript". That clearly is not applicable here. The other meaning of secure is to make safe or certain. No written rule can make safe or certain. All that the rule can do is to provide what should or should not be done.

Perhaps I may give four simple examples. I believe that they will illustrate the point. A local authority may provide in a by-law that vehicles shall not exceed 30 m.p.h. in a built-up area. The making of that rule will not secure it. It can be secured only by the police and the yellow caps. The Civil Aviation Authority can make a rule providing that aircraft are not to be overloaded but it cannot secure that aircraft are not overloaded. That can be dealt with only by the appropriate machinery of inspection. A headmaster of a boys' school can make a rule providing that lights should be turned out at 9 p.m. But if the small boys do not want to do so, the rule will not secure it. The rule can only provide what should be done and, if it is not done, disciplinary proceedings must be taken against them. In this case the responsible body makes a rule that an auditor shall be a fit and proper person. The making of the rule cannot secure that; it can only provide that he shall be so. If he turns out not to be, it is necessary to take disciplinary action to expel him from membership—which is what we do in short order.

I should like to request the Government to be kind enough to take this clause away, and the other clauses to which I am speaking, in order to get the correct English language, which is "provide" in place of the words, where they are used, "secure" and "ensure". I beg to move.

Lord Roskill

I should like to support the amendment simply as a matter of drafting and the use of the English language. The noble Lord has pointed out the trouble that has been caused recently over careless drafting, to use a neutral expression, in relation to insider dealing. Without forecasting what the courts might do with this phraseology, I can see that the use of the word "secure" here could give rise to trouble. As the noble Lord has said, surely the right word to use is "provide", simply as a matter of the ordinary use of the English language.

The body cannot secure. It may endeavour to secure something, but that is not what the legislation says. It is to have rules and practices such as to provide. That is what should be done. I respectfully suggest to your Lordships that this amendment is well founded.

As to the argument that the same language has been used in the Financial Services Act, that, with respect, is a counsel of despair. If it has been used wrongly in one statute, there is no reason to perpetuate the error. I may be wrong in saying this, but I do not think that it is legitimate to construe this Bill, long as it is, by reference to another Act which is even longer.

Lord Mottistone

My Lords, I should also like to support the amendment that the noble Lord, Lord Benson, has moved. It seems to me that this is a straight matter of English. I hope that my noble friends on the Front Bench are not over-persuaded by the original drafter because it seems to me that the English requires it to be as the noble Lord would have it.

Lord Young of Graffham

My Lords, I find myself under a peculiar difficulty. I would be quite content to contest a matter of legal interpretation with the noble Lord, Lord Benson, but I would find myself somewhat inhibited in taking the same position with the noble and learned Lord, Lord Roskill. However, I am a member of the legal profession, albeit I have not practised for over a third of a century and I shall endeavour to try.

With permission, I shall speak also to Amendments Nos. 69, 70, 71, 72 and 77. I hope that I can allay the fears that have been expressed in your Lordships' House. The provisions in Schedule 8 do not place any obligations directly on recognised supervisory bodies and they certainly do not require recognised supervisory bodies to be perfect. We fully accept that no body can establish a system which prevents a person from breaking the rules. Indeed, that is evident if one looks at the schedule as a whole. Otherwise there would be no point to the requirements on monitoring and enforcement in paragraph 10, on disciplining members in paragraph 11 and on the investigation of complaints in paragraph 12.

The provisions to which the noble Lord's amendments are addressed must be assessed in the context of the role they play in the schedule as a whole. Under the schedule, the Secretary of State (I and my successor in title) have to look at an applicant's rules and practices and judge whether in all the circumstances it appears to him that they will secure the desired results. He is entitled to assume that there may be people who will be prepared to break the rules, but he will want to be satisfied that there are deterrents against people doing so and that on the whole the requirements will be achieved. In other words, the purpose of these provisions is to inform the Secretary of State as to the matters which are relevant to the question of whether a body should be or should continue to be recognised. They have no life of their own but are relevant only to the judgment to be made by the Secretary of State under paragraph 2(2) or 3(1). Analogous statutory provisions to those in this schedule adopt similar wording, and they are understood to have the meaning which I have given.

The noble Lord, Lord Benson, has said that we should use the word "provide" rather than "secure". In my view that does not go far enough. Let us take the example of paragraph 6. That provides that the rules and practices of a recognised supervisory body must be such as to secure that the persons eligible under its rules for appointment as a company auditor are fit and proper to be so appointed. If the rules and practices had simply to provide for fitness and properness, it might be taken as sufficient that the body had a rule referring to fitness and properness. Our intention is that the bodies play an active part in carrying out the requirement of the directive and that approval shall only be granted to persons of good repute. I believe that the word "secure" puts that positive requirement on the body and that the word "provide" does not go far enough.

Noble Lords have referred to the fitness of certain words that have been used in relation to insider dealing. As the noble and learned Lord, Lord Roskill, will be aware, that is a matter which m due course another part of your Lordships' House will decide.

6.45 p.m.

Lord Benson

My Lords, I am also in an embarrassing position because I have received very staunch support on my left and support from the noble Lord, Lord Mottistone. I am sure that the word "secure" is incorrectly used in the Bill because in paragraph 6 we see that in the first instance somebody who is admitted to the membership of the institute is fit and proper. However, there cannot be continuance surveillance to ensure that he is fit and proper every succeeding day in his life. If he subsequently proves to be not fit and proper, all that we can do is to get rid of him. We cannot ensure that he shall be, all his days, fit and proper. This is the point that troubles me. Having listened to the noble Lord I now find that there is an intention to impose requirements upon the governing bodies which they simply cannot meet because they cannot secure something of this kind.

Lord Young of Graffham

My Lords, of course they cannot secure that a person is fit and proper; but surely the noble Lord would agree that the body would have a duty to ensure that if it finds that he is not fit and proper, or if it does not check that he is fit and proper, it takes the appropriate steps. It cannot only have a rule referring to fitness and properness and no other test.

Lord Benson

My Lords, I have pointed out that if we discover that somebody is not a fit and proper person, we must take action. However, that requires a separate provision in the Bill. If he does not prove to be fit and proper, this can easily be covered by other wording if necessary. It is quite unsatisfactory to put in the blanket word "secure" in the hope that that is what it is intended to mean.

I am extremely reluctant to put this to a Division. I would not wish to waste the time of the House in doing so merely on a question of interpretation of the English language. However, I hope that the noble Lord will look at this more carefully. I think that the use of the word "provide" would be entirely suitable. I hope that it might be dealt with in another place.

Lord Young of Graffham

My Lords, I have listened with great care to what the noble Lord has said and to what the noble and learned Lord, Lord Roskill, said. If the noble and learned Lord advances that opinion, I will think again. If the noble Lord will withdraw the amendment, I will undertake to look at it.

Lord Benson

I am most grateful. On that basis, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Benson moved Amendment No. 66:

Page 180, line 7, after ("conditions") insert ("at least").

The noble Lord said: My Lords, with this I should like also to speak to Amendment No. 68, because both amendments deal with the same point of principle. Paragraph 4 of Schedule 8 is designed to meet the requirements of the eighth directive, which specifies minimum requirements. However, it is equally clear in its wording that more restrictive requirements may have to be imposed. For that reason, Article 2 of the directive contains the words "at least" and makes it clear that it may be necessary to have more restrictions than those set out in the directive. For that reason, we have used in the amendment the words "at least"; they highlight the point immediately.

It may be necessary to make more restrictive arrangements, especially in relation to Amendment No. 68, because if, for example, a firm of auditors is owned as to 49 per cent. by a bank, it would be unsutiable for that firm to audit the bank's accounts. That is an illustration of the way in which restrictive arrangements must be made in order to avoid the auditor being put in a position where his independence and integrity may easily be questioned.

As regards the need to introduce more restrictive practices, there is no dispute between the Government and the profession. The Government want us to be able to do so and hope that we shall do so in appropriate cases. The point of contention is that the lawyers on behalf of the Government take one view and our lawyers take another. From the discussions which have taken place at official level, we understand that the Government believe that the wording of the Bill enables more restrictive practices to be imposed and our lawyers say that it does not. It does not matter which set of lawyers is right because if there is a reasonable doubt about what they mean, it is better to make the wording clear. If one includes the words "at least", or similar wording, the point is covered specifically.

Amendment No. 68 merely elaborates that in a particular way. The wording may not be especially suitable but it brings out the point that there must be the right to do so and there must be no doubt as to whether it can be done.

This is not a light technical point. At this moment my profession is going to elaborate pains in order to discover, by consultation with is members and outside bodies, what additional restrictions should be imposed to preserve the auditors' independence and integrity. In a short time we shall wish to make more restrictive practices than the minimum laid down in the eighth directive. It would be extremely embarrassing if we found that we wished to do so but there was then a dispute as to whether the wording of the Bill allowed it.

I ask for this modest change, intended to remove doubt and to make the Bill read in the way required by both the Government and the profession. I beg to move.

Lord Young of Graffham

My Lords, the fears of the noble Lord, Lord Benson, about the effect of laying down minimum requirements in this paragraph are unfounded. If a recognised supervisory body were to impose more strict requirements on the ownership of firms, and that was acceptable to me, then a member firm would not be able to ignore those stricter requirements and claim that it must, nevertheless, be eligible for appointment as a company auditor as it fulfilled the statutory conditions.

Schedule 8 is not, in its nature, concerned with giving rights to firms of auditors. It is a list of requirements which the Secretary of State must satisfy himself are met before he can recognise a supervisory body. Each provision of Part II of the schedule must be read in that context. Paragraph 2(2) of the schedule says that a body cannot be recognised unless it appears to me that the body satisfies the requirements of Part II. In this context, the relevant requirement is that stated in paragraph 4(1)(b)—that is to say, that the body has rules and practices which are such as to secure that the firms which are eligible for appointment are firms with respect to which the conditions specified in paragraph 4(2) are satisfied. If a body has a rule which provides that only firms in which, say, 75 per cent. of the partners are approved persons are eligible for appointment, it will have a rule which secures that a majority of the partners are approved. Paragraph 4(1)(b) does not, therefore, stand on its own and does not confer any rights on firms of auditors.

The directive is addressed to member states and requires them to ensure that at least certain minimum requirements are met. The words in the directive make it clear that a member state may impose more stringent requirement if it wishes. We shall comply with the directive by laying down in law the minimum requirements.

It is apparent from the paragraph that a recognised supervisory body can meet that requirement by going beyond it. Paragraph 4 provides that: the body must have rules and practices such as to secure that the persons eligible under its rules for appointment as a company auditor are … (b) firms with respect to which the following conditions are satisfied". It is obvious that, for example, rules and practices which secure that, say, 75 per cent. of shares in a company auditor are held by qualified persons satisfy a requirement that 51 per cent. of the shares are held by such persons. What might prevent a recognised supervisory body from going that far is the competition regime in the Bill, but that remains to be seen and tested.

Why should we not include the words "at least"? If we did there might then be a suggestion that the rules should go beyond the minimum. Our intention is that we must be satisfied that any rules beyond the minimum are either not significantly anti-competitive or are no more so than is reasonably justifiable for the purpose of the part.

I hope that in those circumstances the noble Lord will withdraw his amendment.

Lord Benson

My Lords, there is no possibility of the risk of the enlarged provision being abused. If there was any such risk, the Secretary of State could step in under the provisions of Amendment No. 91, which is tabled in his name and which he will propose later this evening.

As regards the simple issue of interpretation, our legal advice is that if a supervisory body sought to impose additional qualifications under paragraph 4(1) and (2), a firm which met the requirements of paragraph 4(2) could argue that the statutory conditions were fulfilled and therefore that the rules must make it eligible.

It is unnecessary to weary the House with argumentation to and fro in respect of the meaning of the legal interpretations. The lawyers are in disagreement. I beg that they should be brought together and should reach agreement, or that the wording of the Bill should be amended so as to remove any doubt about the meaning of the words. We ought not to have on the statute book Acts of which the meaning is unclear. The issue should be raised openly beforehand so that one can know exactly what is likely to happen. It is so easy to put it right by the simplest possible use of wording—not necessarily the amendments which I have put forward—and the ambiguity can be removed beyond doubt.

For the reason which I gave earlier, I shall not press the matter to a Division. However, I believe that if it is a simple matter to remove any ambiguity which the lawyers have exposed, that should be done. I beg the Minister to be kind enough to look at the issue.

Lord Young of Graffham

My Lords, before the noble Lord sits down I should like to ask whether he moved Amendment No. 68. If so, I have a contribution to make.

Lord Williams of Elvel

My Lords, the noble Lord spoke to that amendment.

Lord Young of Graffham

My Lords, I should like to say a few words on Amendment No. 68.

Lord Benson

My Lords in the light of what I said, I withdraw Amendment No. 66, bat if the noble Lord wishes to speak to Amendment No. 68, then I shall let that amendment remain.

Amendment, by leave, withdrawn.

Lord Strathclyde

My Lords, I beg to move that further consideration on Report be adjourned until 8 p.m.

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