AS AN AMENDMENT TO COMMONS AMENDMENT NO. 12 (Hansard, 7 November 1989)

§ Lord Williams of Elvel
My Lords, I beg to move Amendment No. 12A. It seeks to leave out the second paragraph of Amendment No. 12. We basically approve of the action that the Government have taken as regards the Dearing Report. We argued in Committee that, broadly speaking, the conclusions should be supported. I am glad that the Government have taken action. We do not believe that the Government are right in saying that Dearing can be divorced from public responsibility. We believe that the Government have a responsibility to make sure that accounting standards are properly observed. Therefore the Financial Reporting Council which is to be set up should be funded and supported by the Department of Trade and Industry. That point has been argued in another place and I do not want to pursue it. As the noble Lord said, we welcome the appointment of Sir Ronald Dearing as chairman of the council and wish him every success.
The question that my amendment addresses itself to is the definition of a party to false accounts, if I may use a shorthand expression. Amendment No. 12 states: For this purpose every director of the company at the time the accounts are approved shall be taken to be a party to their approval unless he shows that he took all reasonable steps to prevent their being approved". This applies not only to public companies but to private companies as well. I speak with some feeling as I am a director of a number of private companies. There may easily be occasions when accounts are put forward and a director is told that there will be a meeting in Room 6 —it may be in a committee room of your Lordships' House—when the accounts will be approved.
The director may not be aware that something has been put into the accounts by the managing director or the chairman which he, as a director, should properly know about. It worries me that this proposal is too harsh. Normally I am in favour of having harsh penalties for directors, but I believe that we 591 are going a little too far on this occasion. When the noble Lord comes to reply to my amendment I hope that he will be able to convince me that this measure is not as harsh as I think it is. I beg to move.

§ Lord Lloyd of Kilgerran
My Lords, I also welcome the Government's attitude to the Dearing Committee, but, like the noble Lord, Lord Williams of Elvel, I am a little anxious that the clause goes too far. I declare an interest as a director of some private companies. The amendment says: For this purpose every director of the company at the time the accounts are approved shall be taken to be a party to their approval". I can understand that. But the amendment goes on to say: unless he shows that he took all reasonable steps to prevent their being approved". What reasonable steps in practice would a man be expected to take in those circumstances?
The director may have a number of clients—I am glad to see that one or two noble Lords opposite are nodding in agreement. How can somebody show that he took all reasonable steps to prevent their being approved? What facilities has he to try to see whether they are approved? Must he say, being a cautious fellow in a private company, "I do not like these accounts. I can't approve them". Must he then ask for an adjournment so that he can examine the papers in relation to the matter? This seems to be too harsh a load to be put onto a normal director.

§ Lord Peston
My Lords, as the noble Lord, Lord Lloyd of Kilgerran, has already raised the matter, I seek some clarification on the word "reasonable". If the director concerned were an accountant, I could see the word "reasonable" having some meaning apropos that qualification. However, the director may be an ordinary person. Frequently in a private company a director may have no knowledge of or interest in the accounts. He has some knowledge of and interest in what the company does, whether it be in publishing books or selling antiques. Would "reasonable" then be interpreted as "reasonable" for that person? That is the clarification we require. It must be borne in mind that while in many of these companies the people concerned certainly have no knowledge of accounting or of company law, they are anxious to be as honest as they possibly can. "Reasonable" would mean one thing to a fully qualified accountant but it would mean something quite different to somebody else. The clause does not seem to differentiate according to person.

§ Lord Trefgarne
My Lords, the amendment moved by the noble Lord, Lord Williams, would weaken substantially the provision proposed by the Commons in Amendment No. 12. The amendment strikes a careful balance between the need to preserve the rights of the director and to be effective.
592 The new offence is much more carefully targeted than that in existing Section 245 of the 1985 Act, which makes any person who is a director at the relevant time guilty of laying or delivering defective accounts unless he can prove that he took all reasonable steps for securing compliance. The wording which the noble Lord wishes to delete is an essential part of that targeting. I shall explain why. Two conditions will have to be met for a director to be guilty of the new offence. First, it must be proved against him that he either knew that the accounts were defective or was reckless as to whether they were defective.
Secondly, the director must be a party to the approval of those accounts. If no further explanation of that term is given for this purpose, a director could be fully aware that the accounts are defective, could take no action to bring this to the notice of the other directors, and yet escape responsibility simply by making sure that he was not present or did not vote when the time came for formal approval of the accounts. For without the additional words a director would not be taken to be a party to the approval unless he had positively voted for their approval. We think that a director who is aware that the accounts do not comply should be required to take his responsibilities more seriously than that.
Amendment No. 12 achieves this in a way which does not put directors in an impossible position. A director who is aware that the accounts are defective is not required to take every possible step to prevent the accounts being approved. He is required only to take reasonable steps. That is no more than the shareholders have a right to expect. Of course, in the end it will be for the courts to determine whether the director concerned had taken all reasonable steps in the circumstances. But I believe that the wording before us is right without the benefit of the noble Lord's amendment. I hope that noble Lords will agree.

§ Lord Williams of Elvel
My Lords, I am grateful to the noble Lord for explaining the amendment further. I cannot say that I am entirely satisfied with the explanation. The noble Lord has not responded to the question asked by the noble Lord, Lord Lloyd, about what "reasonable steps" can reasonably be said to be.

§ Lord Trefgarne
Yes, my Lords, I have.

§ Lord Williams of Elvel
My Lords, we have not had a satisfactory explanation. I do not think that every director of a company who is party to their approval is properly, if I construe the amendment correctly, followed through into the second half of the amendment. Does the noble Lord wish to correct me? I am happy for him to intervene. We have a procedural problem. I am allowed to speak only twice. If the noble Lord wishes to intervene, he is entitled to do so.
I am unhappy that the definition of "reasonable" is not clear. I am unhappy that it goes further than Dearing and others would have liked. Although I accept the point that the director of the company in question has to be aware that something is going on, 593 I find that the amendment leads me in a completely different direction. The direction is the one which I reflect in my amendment.
I do not want to divide the House. It is not a matter on which we should divide because it is a technical point more than a point of principle. If the noble Lord could respond to any of my points it would help me.

§ Lord Trefgarne
My Lords, with the permission of the House, I do not think there is much that I can add to what I have already said. The essence of the reasonableness is to be determined by a court in the event that it was challenged. If a director was held not to have acted reasonably, the courts would be able so to determine. Equally, it would be open to him to defend himself by persuading the court that he had acted reasonably in all the circumstances. Circumstances in every case will vary. The extent to which the director has acted reasonably or otherwise will vary according to the circumstances. It is therefore not possible, I fear, for me to define the circumstances further.

§ Lord Williams of Elvel
My Lords, in the circumstances I do not think that it is an issue on which I want to divide the House. If this is what the Commons have decided, they are entitled to decide it. I do not find it satisfactory, but I beg leave to withdraw my amendment.