HL Deb 07 November 1989 vol 512 cc683-8

133A At end insert ("but do not include limitations concerning the quorum of the board of directors").

Lord Wedderburn of Charlton

My Lords, I beg to move Amendment No. 133A. In many ways, we regard our amendment as raising the most important matter in this whole part. Our amendment is possible because there is the new subsection going some way to define, or indicate, what is meant by limitations on the directors' powers. We believe there is a central point which has caused uncertainty since the legislation of 1972, which this is an opportunity to put right. It is a nettle which no government previously have been prepared to grasp.

The main objective of the directive, on which the Government have centred very strongly, was to remove uncertainty from commercial transactions. We are now into the area not of ultra vires, but of the excess of authority by the directors or organs of a company. A special problem arose for Britain and Ireland in this respect, and it is necessary to indicate what it was because it is such an important matter.

The directive speaks in terms—I quote Article 9—of, the powers of the organs of the company". That language is quite specific. It is language known to many systems of company law in member states; certainly to all those which were member states in 1972. But it was not known to British or Irish company law. Those systems know of agents, at any rate in commercial transactions.

In some delictual situations, in torts and crimes, British company law knows of the directors as the alter ego of the company, but not in commercial transactions. There they are agents, and they are still agents and the concept of an organ is materially different from the concept of an agent. The organ operates for and as the organisation, without primary reference to authority and excess of authority, and the directive is drafted in terms of the organic concept of the company.

What the Republic of Ireland did in 1973 was to pass legislation which stated that the acts of the organs of the company should bind the company to third parties acting in good faith, and it defined the organs of the company as the board of directors and other persons registered under its regulations. We have always refused to have regulations under the first directive—and I have adverted to that matter previously—so we have no register on which to put the names of the other organs of the company as the Irish legislation envisages.

But what we have done since 1972 is to limp along pretending that you can treat agents in terms of organs of the company in the directive. Now we are doing it again, because the final version which comes to us now still speaks of the organs of the company being the board of directors.

In Committee, in your Lordships' recommitment of this matter to a Committee, we failed to convince the Government that they should take out those aspects of the new Section 35A that allow for the board of directors to act along with anyone ostensibly, impliedly or expressly authorised by it. But with this more limited amendment, we can also grasp a more central nettle.

The sheet anchor of the scheme is the board of directors; and the board of directors in our law, acting in excess of authority under the constitution, is a body which is not otherwise regulated at all. Unlike the company law in most member states, there is no definition in our legislation of the board of directors. Of course, most articles of association contain provision for meetings of the directors. But they are all limitations which must be ignored in deciding whether the company is bound to the third party acting in good faith. It is proposed that we merely enact that the power of the board of directors to bind the company should be free of any limitation. Our limitations are spelt out in the amendment.

However, as the Bill stands, it will be highly arguable—those with whom I have discussed the matter regard it as obvious—that all the limitations must be ignored. That includes the quorum of the board itself. Let us assume that there is a board with three members, two of whom favour one policy while the third favours another policy. A formal, proper board is called, but the first two members are injured on the way to it and the third member then executes a contract for the company—in the company's name on behalf of the company, acting as the board, when the quorum is two. How will it be possible to establish that the company is not bound? One must not look at the limitations in the articles. One must not look—I understand this point in the new subsection—at the limitations in any agreement between the members of the company or any class, as the noble and learned Lord explained.

We have the Government's word for it that that astonishing result is not what they intend. In Committee in another place Mr. Maude, the Parliamentary Under-Secretary of State for Corporate Affairs, was taxed on this very matter. When he was asked what was meant by a decision of the board of directors, he said: It means a decision by a quorate meeting of directors, and what a quorate meeting is will depend on the constitution of the company… the decision… by the directors… refers to a quorate meeting of the board of directors". —[Official Report, Commons Standing Committee; 20/6/89, col. 419.] That makes a great deal of sense. It is very sensible, but it is not what the Bill states. When I read what had been said in Committee in another place I was sure that, when we came to the Report stage with the amendments which were tabled and were never debated, I would find a provision just like our amendment but better drafted.

The Government should surely do that now and realise that there is no problem with this amendment about the first directive. I am sure that we agree on that. It is for the domestic law to define the organ of the company. We would define the primary organ of the company as a quorate meeting of the board of directors. That would seem to be common sense. But, if the Bill goes through in this form, any meeting—or at any rate any meeting called by those purporting in some way to be the board of directors—may act for the company irrespective of any limitations. That includes its quorum and a number of other matters. It may be arguable that the board of directors should be defined with rather more exactitude, with the proper notice and a proper quorum, but we have simply concentrated on the one simple core point; namely, that surely the board of directors must have a quorum and, therefore, that the notion of quorum must be taken out of the notion of limitation.

There is no problem with the directive. Surely it is something with which we can deal. It would not take a great deal of legislative time. It need only go down the Corridor. I hope that this deliberation on the modest uncertainty which is left in the Bill will be acceptable to the Government. I beg to move.

Moved, That Amendment No. 133A, as an amendment to Commons Amendment No. 133, be agreed to.—(Lord Wedderburn of Charlton.)

Lord Fraser of Carmyllie

My Lords, the noble Lord has built an elaborate edifice on what is a very small amendment. I do not entirely follow the reasoning behind it.

New Section 35A(1) provides that, in favour of a person dealing with a company in good faith, the power of the board of directors to bind the company or authorise others to do so is to be deemed to be free of any limitations under the company's constitution. Subsection (2), with which we are concerned here, is concerned with specifying certain limitations on the power of the board of directors to which subsection (1) is to extend. The rules as to how many directors are needed to form a quorate board are not limitations on the power of the board of directors. They deal with the logically prior question of what constitutes a board of directors. Subsection (1) has nothing to say in that respect. It was no slip by the Minister in another place. It is concerned with the limitations on the powers of a quorate board. As drafted, the noble Lord's amendment would lead to some confusion as to when an honest third party was protected, but, on a better view, it has little or no effect.

Lord Wedderburn of Charlton

My Lords, this matter becomes more and more serious. I am sorry that it has arisen now. We have already said—and I thought that the noble and learned Lord agreed—that this is the last time that Parliament will speak on the matter. It is also the first time that we speak on it except for what was said by the Minister in the other place as to the Government's intentions. He did not say what the noble and learned Lord said. He did not say that the quorum was not a limitation.

Let us take that proposition. Where does one find limitations? They are in the articles. The quorum provision is in the articles. Where does one find the other limitations on authority? They are in the articles. Why are they in the articles? The answer is because they are all part of the contract. Where does one find the requirement for notice of the board meeting? It is in the articles. Where does one find all the other procedures, if there are any, concerning the directors, shareholders and board meetings? They are in the articles. The articles contain all those limitations.

With the greatest respect to the noble and learned Lord I predict that a court will not take the noble and learned Lord's view unless it is an extremely novel interpretation. Of course we have novel statutory interpretation these days but in this instance it would have to be very novel.

I want to ask him some questions and I hope the noble and learned Lord will have the leave of the House to answer. A quorum is not limitation. Is, then, proper notice for the board meeting a limitation? Is the place where the board meeting must be held a limitation? Are any of the other requirements relating to the procedures of the board limitations? If they are not, when does a limitation start? There is of course excess of authority. If the board meets in the wrong place, presumably that is an excess of authority. I do not understand the division. The noble and learned Lord is doing what our law should do and I have the greatest respect for his agility in doing it. What he called this "elaborate edifice" which was in fact the shortened version of the case has pushed him to create an organ. He has created the organ of the company: the quorum board of directors.

I hope that he will intervene. I want to know the Government's view. I have given him a few moments' notice of the question. Are the proper notice for the board meeting, the proper place for the board meeting and other proper requirements for the board meeting proper requirements for limitations, or are they not? I shall willingly give way to him. I see that he does not wish to say anything. It is an astonishing thing to do to company law. We get to this point and we do not know whether or not the notice of the board meeting is a limitation.

What are we saying? What will my noble friend Lord Williams carry back to his banks in the City? Seriously, what will he say to them? They will say to him, "We understand that being a quorum is very important. But what about our articles which say that we have a meeting in Lloyds Bank's central headquarters—or whatever bank it is? Is that important?" He will say, "We do not know. They would not tell us". Yet they have had since November 1988. We have all had since 1972. Let us be serious. The noble and learned Lord knows perfectly well that we have had terrible difficulty with this area of the law. We have evaded doing what is necessary. The Government are edging up to it. Why cannot they accept a statement in our amendment which is apparently what is intended, namely that quorum is not a limitation?

The noble and learned Lord said so himself, and that is what our amendment says. So why cannot he accept it? If he does not wish to intervene we shall have to press the amendment. We must say something to the outside world to show that we are serious about this matter, and we are very serious indeed.

10.24 p.m.

On Question, Whether Amendment No. 133A, as an amendment to Amendment No. 133, shall be agreed to?

Their Lordships divided: Contents, 7; Not-Contents, 39.

Bonham-Carter, L. Ponsonby of Shulbrede, L. [Teller.]
Hacking, L.
Lockwood, B. Wedderburn of Charlton, L. [Teller.]
Peston, L.
Williams of Elvel, L.
Arran, E. Kimball, L.
Belstead, L. Long, V.
Borthwick, L. Lucas of Chilworth, L.
Brougham and Vaux, L. Mackay of Clashfern, L.
Caithness, E. Morris, L.
Cork and Orrery, E. Mountevans, L.
Davidson, V. [Teller.] Oppenheim-Barnes, B.
Denham, L. [Teller.] Oxfuird, V.
Dundee, E. Reay, L.
Ferrers, E. Skelmersdale, L.
Fraser of Carmyllie, L. Southborough, L.
Gisborough, L. Stodart of Leaston, L.
Hardinge of Penshurst, L. Strathclyde, L.
Harlech, L. Strathmore and Kinghorne, E
Harvington, L. Thomas of Gwydir, L.
Henley, L. Torrington, V.
Hives, L. Trefgarne, L.
Hooper, B. Ullswater, V.
Johnston of Rockport, L. Wynford, L.
Joseph, L.

Resolved in the negative, and Amendment No. 133A disagreed to accordingly.

10.32 p.m.

On Question, Amendment No. 133 agreed to.