House of Fraser

HL Deb 07 March 1990 vol 516 cc1210-9

5.45 p.m.

Lord Trefgarne

My Lords, with your Lordships' permission I should like to repeat a Statement on the House of Fraser being made by my right honourable friend the Secretary of State for Trade and Industry in another place. The Statement is as follows: "I have today published the report of the inspectors appointed under Section 432(2) of the Companies Act 1985 to investigate the affairs of House of Fraser Holdings plc.

"I should explain to the House that in this matter I have three main responsibilities as Secretary of State:

"First, to decide whether to publish the report. This I have now done, as soon as possible after I was informed by the prosecution authorities that they had withdrawn their objection to publication.

"Secondly, I had to consider whether to apply to the court to disqualify any director under Section 8 of the Company Directors Disqualification Act 1986. I have concluded that it would not be in the public interest to do so. Anyone who reads the report can decide for themselves what they think of the conduct of those involved.

"Thirdly, I also have responsibility for decisions on whether to refer mergers to the Monopolies and Mergers Commission. That responsibility was fully discharged by my predecessor. He had six months from July 1988 in which to consider the finding of the inspectors' report and to decide whether to refer the matter. He concluded in December 1988 that a reference to the MMC would not be appropriate. The House of Lords held that that was a proper decision. I cannot reopen the decision taken at that time. We have since taken steps in the Companies Act 1989 to make it a specific criminal offence for anyone knowingly or recklessly to mislead the competition authorities.

"No other matters require action from me. I have passed the report to all those authorities concerned with enforcement and regulation so that they may consider whether to take action under their various powers."

My Lords, that concludes the Statement.

5.50 p.m.

Lord Williams of Elvel

My Lords, the House will be grateful to the Minister for repeating the Statement made by the Secretary of State for Trade and Industry in another place. The Statement is fairly extraordinary but it raises any number of questions of which I shall only be able to put a few.

I should first like to know whether the Minister has read the conclusions of the report. The first conclusion reads: The Fayeds dishonestly misrepresented their origins, their wealth, their business interests and their resources to the Secretary of State, the OFT, the press, the HOF Board and HOF shareholders, and their own advisers". Can we seriously think that if they had not so dishonestly misrepresented all this they would have been able to take over the House of Fraser? The answer to that question must be no. In which case, is it not the role of government to correct that situation? Further, why have the Government done nothing about it? Secondly, why did the competition authorities buy all the rubbish which was put out by the Fayeds. After all, according to the report, the DTI, the advisers, the Director General and everyone else bought the story put out by the Fayeds. Why was such a hurried timetable adopted by Mr. Norman Tebbit, who was Secretary of State for Trade and Industry at the time and who decided not to refer the matter? Why did the advisers buy the story? What have Kleinwort Benson and Herbert Smith to say? Have the Government any view on that? What was the Serious Fraud Office doing all this time?

We were told on 3rd April in this House by the noble Lord, Lord Young of Graffham, that the report could not be published because, the prosecution authorities have told me that their inquiries might have to stop if there were publication now". [Official Report, 3/4/89; col. 898.] It appears now that there was no case for prosecution. If that is the case, will the noble Lord agree that the unsatisfactory side of this affair is the inability of the Serious Fraud Office to obtain the evidence it was seeking? Is he aware that Mr. John Wood, the director of the Serious Fraud Office, has stated that the team's greatest problem was its inability to get witnesses from abroad to this country? Why then was the SFO team which was carrying out the inquiries reduced from five to two?

I turn to the Statement. What is the "public interest" that the Secretary of State has in mind when he concludes that it would not be in the public interest to apply to the court to disqualify any director under the Company Directors Disqualification Act? To which authorities concerned with enforcement and regulation has he passed the report? What action does he expect those authorities to take?

In order not to be one-sided—because we take no sides on this issue—I wish to ask a further question. Serious allegations have been made in the report about the conduct of private citizens. At the time of the Companies Bill, we discussed the whole question of investigations. I ask the noble Lord what redress these individuals have, about whom these remarks have been made—whether or not they are true I know not—to protect their reputation if this report is published? I believe that it is published under parliamentary privilege. If these individuals have no possibility of redress, is that not a gap in our law which should be corrected?

I could ask thousands more questions but, first, I have to read the report. I have no doubt that we shall come back to it. In the meantime I can only say that I am sad that the Government have treated this major issue which raises major points of interest and company law in a rather cavalier spirit.

Lord Ezra

My Lords, I too wish to say that I was extremely surprised at the brevity of the Statement. We have now received this report which was put in train on 9th April 1987. It has been with the Government since 1988; it has 752 pages and we are told practically nothing about what the Government wish to do about it.

In addition to the important questions raised by the noble Lord, Lord Williams, I wish to know whether the reference to the changes in the Companies Act 1989, with which we have recently been concerned in this House, fully deals with the points raised on pages 10 and 11 of the report. The inspectors specify there the weaknesses in the previous Companies Act to deal with the matters under review. They specify quite a large number of points. Obviously nobody has had time to read the report, let alone go to the legislation. I wish to ask the noble Lord whether all these points are fully covered by the short sentence in the Statement.

I turn to chapter 25 on page 503, which is an indication of the size of this monumental document. We see there a chapter of great interest headed, "Lessons from the Case". It sets out a number of important lessons which affect the financial authorities, the regulatory bodies, relations with the media and so on. That is referred to in the last sentence of the Statement which we have just heard: I have passed the report to all those authorities concerned with enforcement and regulation so that they may consider whether to take action …". That seems to be rather a cavalier way of dealing with these important issues. Do the Government care whether or not they take action? Important points are raised here. Is the Governor of the Bank of England to be asked to get these various bodies together? Will the regulatory bodies be asked to do anything about it, or will it be left entirely to them to decide whether or not they wish to take any not ice?

In conclusion, I am extremely disturbed that a case as unusual as this—which is how it is described in the report—and dealt with as extensively as this, raising so many consequential isues, should have been covered in such a short Statement which raises many large questions still to be answered. I very much hope, with the noble Lord, Lord Williams, that we shall have the opportunity of returning to this with more time at our disposal.

Lord Trefgarne

My Lords, the noble Lords, Lord Williams and Lord Ezra, asked me a number of questions. I shall reply to as many of them as I can.

First, on disqualification, under Section 8 of the Company Directors Disqualification Act 1986, the Secretary of State may apply to the court for a disqualification order if he considers: that it is expedient in the public interest for a disqualification order to be made. My right honourable friend has considered the matter most carefully and has concluded that it would not be in the public interest to seek such an order in this case. Those who read the report can make their own assessment of the conduct of those involved. The provisions of the Act are not intended as a punishment but as a protection for the public.

I should add that the mischiefs identified by the inspectors arose from the way in which the Fayeds acquired House of Fraser Holdings plc, not from the running of the company. Creditors and others can of course inspect the accounts and study the report.

I was asked to which other authorities the report had been passed. It was passed some time ago to the Serious Fraud Office and at about the same time to the Director of Public Prosecutions and also to the Bank of England, the Takeover Panel, the Inland Revenue, the Office of Fair Trading, the Monopolies and Mergers Commission, the Metropolitan Police and most recently to the Law Society, the SIB and the TSA. I have also been asked about the changes that we have implemented since the contents of this report became known to the Government. That was some time ago. Part III of the Companies Act 1989 introduces a number of changes to the investigative system, including some that are recommended by the inspectors.

I was asked about the protection that would be available to those criticised in the report, if that is the way in which they wish to proceed. As the noble Lord will be aware, both sides in the report—if I may describe them thus—were given, in accordance with an undertaking given by my noble friend the then Secretary of State, sight of the report three days in advance of its publication. That enabled them to take legal action to prevent publication if they thought fit. None of them thought fit to do so.

6 p.m.

Lord Harmar-Nicholls

My Lords, I must say that the Statement seems too relaxed, bearing in mind the nature of the report in front of us. Fortunately that can be rectified. This is a first reaction and I have no doubt that after comments have been made in both Houses actions can be taken and extra thought given to the matter.

I would not be altogether happy if my friend relies only on the extra safeguards that he says are likely to be put in the Companies Act. There must be something a little more definite than that. My noble friend may not have the authority to do so this afternoon but perhaps as early as possible the Government ought to indicate that they have other steps in mind that they intend to take.

The key paragraph is contained in chapter 2 on page 23. It states: We see no reason to find any fault with the conduct of the Director General of Fair Trading and his staff in connection with the inquiries they made into the Fayeds' offer for HOF in 1984–85. It is, we hope, rare for deception of regulatory authorities to be practised on such a grand scale. They relied on what the Fayeds and their advisers"— I emphasise the word "advisers"— were telling them which they tested to the extent which their resources permitted". I particularly draw the attention of my noble friend to chapter 25 of the report which raises issues which need to be considered by the Office of Fair Trading if it is to feel safe in relying on assurances by advisers on future occasions.

On my first reading of part of the report—that is as much as I have been able to do so far—it seems to me to state that government departments are given a reasonably clear bill of health; that the Office of Fair Trading has been given a completely clear bill of health, but that the advisers upon whom they relied, Kleinwort Benson and its solicitor, Mr. Herbert Smith, were presumed to have made the necessary investigations in depth in order to give a fair description of the company. I hope that at this early stage my noble friend can indicate that steps will be taken to ensure that in future it will be possible to strengthen the responsibilities of advisers, be they banks, solicitors or any other body.

Lord Trefgarne

My Lords, my noble friend makes an interesting point. However, I believe the responsibility for the conduct of professional advisers such as merchant banks and solicitors does not necessarily rest with the Government. It is the Law Society which governs the conduct of solicitors and it is the Bank of England which governs the conduct of banks. The Bank of England received a copy of the report some time ago and the Law Society received a copy today. It is for those bodies to decide what action they need to take in the light of the report's findings. My noble friend is also quite right to point out that the propositions that the Fayed brothers made about their wealth to the authorities were supported fully by their professional advisers.

Lord Stoddart of Swindon

My Lords, I have one or two quesions to ask. Would the report have been published but for the extreme pressure which was brought on the Government by Mr. Rowland and Lonrho? The impression is abroad that the Government would have liked to shove this report under the carpet. I hope the Minister can give me an assurance that that is not the case. Further, does not the Minister also agree that it was deplorable that a spokesman for the Al Fayeds should seek today in the media to cast doubt upon the findings of the report and therefore upon the integrity of the inspectors who conducted the investigation and issued the report?

Should it not now be understood—I know these are harsh words—and should the Government not make it understood—that anyone who shops at or does business with Harrods or any other House of Fraser establishment is dealing with proven liars and cheats? Under those circumstances would not the public interest be properly protected if the Secretary of State decided, as he may so decide, that the Al Fayeds were not fit and proper persons to remain directors of the House of Fraser? Why does the Secretary of State not do something along those lines? Will the Minister also inform the House about the position of Harrods' bank, as banking needs to be under the control of people of the utmost honesty and probity? Should not the Bank of England withdraw its authorisation from Harrods' bank under those circumstances?

I also wish to ask the Minister about Kleinwort Benson, whose name has been mentioned in the report and in the questions that have been asked so far. It seems that, to say the least, that company was lax in its inquiries about the Al Fayeds. Will the Government give an assurance that that firm will not in future be employed by them to give them advice on privatisation, or anything else for that matter?

Lord Trefgarne

My Lords, as regards publication of the report, the noble Lord may recall that my noble friend the former Secretary of State said in this House that he was most anxious to publish the report and was only prevented from doing so because the prosecuting authorities were still pursuing their inquiries. That was certainly the position of my right honourable friend the present Secretary of State. He published the report the moment it was possible to do so in the view of the prosecuting authorities. They withdrew their objection to publication during the course of last week and the report was published as soon as possible thereafter.

As regards the disqualification of the directors, I cannot usefully add to what I said in reply to the noble Lord, Lord Williams, earlier, that diqualification is designed as a protection for existing shareholders in particular and not as a punishment. Therefore my right honourable friend reached the conclusion that he did.

As regards Harrods' bank, that is an important matter but it is strictly a matter for the Bank of England and not for the Government. Similarly the position of Kleinwort Benson, the merchant bankers involved in the case, is not a matter for the Government but for the regulatory authorities in that case, which again is principally the Bank of England.

Lord Mackie of Benshie

My Lords, the Minister said that disqualification is designed for the protection of shareholders. But surely he must see that the shareholders of Harrods and of the House of Fraser are in grave danger from the kind of persons we have been discussing.

Lord Trefgarne

Yes, my Lords, but they are principally the Al Fayed brothers themselves.

Lord Mishcon

My Lords, before I say anything, I wish to emphasise what my noble friend Lord Williams said; namely, that no one, if that is the appropriate phrase, wishes to take sides in this rather sordid matter. Having said that, I should tell the House how mystified I am by these proceedings, the Statement and the report itself. My noble friend Lord Williams quoted paragraph 2.1.1 of the report. That paragraph, which comes under the heading "General Conclusions", states: The Fayeds dishonestly misrepresented their origins, their wealth, their business interests and their resources to the Secretary of State, the OFT, the Press, the HOF Board and HOF shareholders, and their own advisers". Paragraph 2.1.2 states: During the course of our investigations we received evidence from the Fayeds, under solemn affirmation and in written memoranda, which was false and which the Fayeds knew to be false. In addition, the Fayeds produced a set of documents they knew to be false. This false evidence related mainly, but not exclusively, to their background, their past business activities and the way in which they came to be in control of enormous funds in the autumn of 1984 and the spring of 1985". The Statement says that the public will be able to draw their own conclusions from the description of the conduct of these parties, as shown in the report. I am mystified for the following reason. If there is not absolutely conclusive evidence of the dreadful findings and accusations stated in paragraphs 2.1.1 and 2.1.2, it is a dreadful thing that inspectors should put them in the report in this way and in this damning fashion. That would be quite unforgivable if there was not conclusive evidence. As the Statement says, the public will draw their own conclusions from the conduct revealed in this report.

If, on the other hand, there is conclusive evidence, as there must be before responsible inspectors make this kind of conclusion without any qualification, where in the name of heaven is our criminal law? The report says that under solemn affirmation evidence was given which was false and which the Fayeds knew to be false. Where is our law of perjury? The report goes on to say that documents were presented which the Fayeds knew to be false and which we assume led to their taking over one of our national institutions. Is there no criminal law to deal with that?

If there is, I ask the Minister what is the state of our criminal law. If there is not conclusive evidence, how unfair that these remarks, comments and conclusions should be made in the report in such a definite way.

Lord Trefgarne

My Lords, the noble Lord rightly quoted from the summary of the report which appears in the opening pages. As he himself recognises, the report is 700 or so pages long and goes into great detail on some of the matters which the noble Lord mentioned.

Regarding the criminal law, as I have said, certain changes have been made in the Companies Act which the noble Lord, Lord Williams, and I discussed last year. They come into effect on 1st April. I agree that the report presents some very grave matters indeed. However, the question of prosecution is not a matter for Ministers, it is a matter for the prosecuting authorities.

Lord Denham

My Lords, before any noble Lord continues perhaps I may point out that we now have a firm limit of 20 minutes after my noble friend's first reply. Will noble Lords please keep their comments and questions as brief as is called for in the rules of order of this House?

Lord Marsh

Would the Minister be prepared to suggest to his noble friend the Leader of the House that it would be reasonable for this House to have an opportunity to debate this unique situation at greater length?

Lord Trefgarne

My Lords, that is not a matter for me but for the usual channels. I dare say that it will be discussed in those channels in due course.

Lord Hatch of Lusby

My Lords, I am concerned about the role of the Government in the issue. It has taken a long time for the report to be published, despite constant pressure. It is a very lame excuse that it has apparently taken 18 months for the prosecuting authorities to release the Department of Trade and Industry to publish it. As my noble friend Lord Mishcon has asked from the Front Bench—and the Minister has not answered him—what is happening to our prosecuting services if the matter takes so long?

I should like to return to the mystery story that my noble friend Lord Williams told us at the outset. How is it that all those people and organisations were taken in by the story of the Al Fayeds? Why were the Government and the DTI taken in? I should like to quote my noble friend, Lord Bruce of Donington, who, on 28th November last (at col. 401 of Hansard, gave what may be an explanation of the mystery story. He accused the Government of: running to the Sultan of Brunei in January and February 1985, as a result of which 5 billion dollars passed across the exchanges in support of the pound, followed in some mysterious circumstances by unusual permission to acquire Harrods being given to the person holding power of attorney for the Sultan of Brunei". That accusation has not been answered. It was not answered in that debate and it has not been answered since. My noble friend Lord Bruce pointed out that he was seeking an answer and if that answer was not forthcoming we should return to the matter. This is an opportunity for the noble Lord to answer that accusation.

Lord Trefgarne

My Lords, I am quite ready to say that that accusation is quite without foundation.

Lord Donoughue

My Lords, I should like to comment, as a full-time working director in the City and a former director of Kleinwort Benson, although not at the time when these events occurred. Does the Minister not accept that the Statement is totally inadequate and will be seen in the City as very depressing? In the City there is considerable confusion about what is now proper behaviour and what is not proper behaviour. The Government must give a firm lead and not leave it to others to draw their own conclusions. We want the Government to state their conclusions very firmly to the City in order to give a lead.

Perhaps I may make a second, more general, point about the circumstances in which this matter arose. These people were able to perpetrate the deception because of the circumstances which now exist in the City in which advisers take on clients they have not met before and, in particular, the present rules for takeovers enable a takeover to operate very rapidly, especially in the case of a cash takeover. That is what happened in this case. I do not wish to defend the advisers, but they certainly had very little time to discover a great deal about the individuals concerned. Should there not be a further review of the takeover rules and code with a view to tightening up the rules?

Lord Trefgarne

My Lords, if changes are to be made to the takeover rules that is a matter for the Takeover Panel, which has received a copy of the report and can make whatever changes it considers appropriate.

Concerning the noble Lord's first point, I believe that professional advisers, whether they be merchant bankers or solicitors, have a duty to ascertain that the undertakings that their clients give are properly substantiated. If they are not in a position to make the necessary verification they should find means to ensure that they do so.

Lord Morris

My Lords, it is quite clear from the report and from the Statement flowing from the report that

Lord Houghton of Sowerby

My Lords, on a point of order, is there no one who can protect the business of the day? This is not the business of the day. If we are to have a debate let us have a debate, but a Statement should not dislodge the business of the day.

Lord Denham

My Lords, the rule is 20 minutes. If my noble friend is very brief my noble friend the Minister will be able to reply. If he is less than brief the Minister will not be able to reply.

Lord Morris

My Lords, I am grateful to my noble friend. Does my noble friend the Minister agree that the report and the Statement flowing from the report make it absolutely plain that deceit was practised deliberately with the firm purpose of acquiring a controlling interest in a major British company? I fail to understand why it is not in the public interest that the holders of the shares should be compelled to divest themselves of the interest in those shares, just as the prosecuting authority ordered in another case.

Lord Denham

My Lords, if my noble friend will sit down now my noble friend the Minister will be able to give a very brief reply.

Lord Trefgarne

My Lords, I dealt with the question of the possible disqualification of the directors concerned in an earlier reply to the noble Lord, Lord Williams, and others and I have nothing to add.

Lord Hatch of Lusby

My Lords,—

Noble Lords

Next business!

Lord Hatch of Lusby

My Lords, perhaps I may ask the noble Lord the Government Chief Whip if he is interpreting the recommendations of the Procedure Committee as a firm rule rather than as a recommendation? Will he therefore in future always close down debate on a Statement at the end of 20 minutes after the reply has been made to the Front Benches?

Lord Denham

Yes, my Lords. That is the agreement of the Procedure Committee and the leaders and Whips.