COMMONS AMENDMENT (Hansard, 7 November 1989)

§ Lord Fraser of Carmyllie
My Lords, I beg to move that the House do agree with the Commons in their Amendment No. 139. It reworks the provisions in the Bill on transactions with directors or connected persons where the board has exceeded any limitation on their powers under the company's constitution.

§ Lord Wedderburn of Charlton
My Lords, again I put it to the Government that this is the first time that many of these matters have been debated. 690 Although the noble and learned Lord said that it is a reworked section—and that is true—it is an important matter. For example, it is not clear why the section is now formulated in terms of its being voidable at the instance of the company instead of void unless ratified. No explanation is given anywhere else so the point must be put. It may mean that the benefit of corporate inertia went to a deliquent director. I choose the most important points.
Secondly, where the parties to the transaction are a director and persons connected with a director, is it correct to say that the new section still permits the connected person and the director, if they are shareholders, to cast their votes at a general meeting on a resolution not to rescind the transaction to themselves? The Government have a model in the Companies Act, as in Section 174, and in two other areas where votes are not allowed by some shareholders who are interested.
Thirdly, does the section apply to shadow directors? It may be that I have missed the answer because the measure is complicated. However, I looked through the schedules and I could not find a provision applying the new Section 322A to shadow directors. That would be very odd since most of Part X of the 1985 Act does apply to shadow directors. If I am wrong on that, I should like the reassurance of the noble and learned Lord.
Again, where the directors decide to do anything—that is, where there is a transaction between the board of directors exceeding its authority and another director or connected person —to enforce the rights of indemnity for the company and that is accountability for gains to the company is it envisaged that the shareholder has the right to bring derivative proceedings? The Government never face up to those derivative actions. However, that is an important matter because a company may then only have as a refuge a shareholder of a derivative action. It would be more reassuring, if he has that right, for the right to be put into the section.
Is it really fair to the company what the intervention of a bona fide third party for value without actual notice always totally bars the right to avoid the transaction? I appreciate that this is a point to which the Government have given great thought. However, one wonders whether it would not have been right to give the court the power in that case, as it has in other cases under subsection (7), to determine the justice of the case. It has the power to make terms under subsection (7) protecting the interest of the third party but also severing the transaction if it thinks just. One wonders why that provision is not applied at all when the hypothesis is that the transaction against the company is so wrong on the part of the board of directors exceeding their authority and the other director. Those are some questions which arise and which I put to the noble and learned Lord for the record.

§ Lord Peston
My Lords, before the noble and learned Lord replies, in addition to what my noble friend Lord Wedderburn said, I slightly missed what the noble and learned Lord said in his opening 691 remarks. I heard his remark that "this amendment reworks" but missed what he then said. Did he say that it reworks the clause in the Bill as it left this House? If that is what he said, does "reworks" mean that this says the same thing but with improved wording? Or does it say something additional of a substantive nature? I do not believe we can let this go through without clarifying what is reworked and in what way it is reworked. I should like an answer that a layman—namely, not a lawyer—can understand.

§ Lord Fraser of Carmyllie
My Lords, perhaps I can respond briefly to the noble Lord, Lord Wedderburn. He says that this has not been considered elsewhere. In fact, we are at a stage when amendments have indeed been considered elsewhere. That is the very purpose of this part of the proceedings.
The Government's principal concern in putting forward this amendment has been to protect the position of innocent persons who have acquired an interest in an asset from a person who has himself acquired it in contravention of the new Section 322A. In doing so we are also safeguarding the position of the Land Registry and the registers in Scotland which indemnify the purchase of land for any defect in the title and where there is no way of ascertaining with complete accuracy whether a transaction has been rendered void by the new Section 322A. Rather than making the transactions covered by the new section void from inception unless ratified by the company, the transactions are to be voidable at the instance of the company.
I respond to the query of the noble Lord, Lord Peston, regarding the word "reworking" and whether that means merely putting the essential idea into different words. It is not. It moved from a concept of being void to voidable.

§ Lord Wedderburn of Charlton
My Lords, before the noble and learned Lord sits down, perhaps I may say this. I am sure he would not wish any formal point to be between us. What I said was—and I hope that he will accept it from me—that this new clause, which is now an amendment before us, had not been debated elsewhere. The intentions of the Government were expressed in Committee but the matter was not debated. It was put to the House of Commons on Report under a guillotine Motion and it was not debated at all.
If I am wrong, I shall apologise profusely to the noble and learned Lord. However, I believe I am right, as I look very carefully at the debates in another place. I hope that the noble and learned Lord will accept from me that that is so.