Foreign Corporations Bill [H.L.] (Hansard, 22 April 1991)

§ The Lord Advocate (Lord Fraser of Carmyllie)
My Lords, I beg to move that this Bill be now read a second time.
This is a short, straightforward Bill which seeks to deal with a problem in the international commercial field. The matters at issue are ones of private international law, which deals with ordinary legal relationships involving different legal systems. The problem is that these matters have, quite unnecessarily, been linked with public international law, which deals with relationships between states. In particular, this has affected the law relating to foreign corporations. The object of the Bill is to sever those two matters and to give primacy to commercial reality where the question at issue is one of commercial law.
There are indications that the courts are prepared to adopt a realistic attitude and to look not at whether a territory is a recognised state but at what actually 68 happens in the territory and at the law that is in fact applied there. As an example I might mention the comments of the noble and learned Lord, Lord Wilberforce, in a case involving the optical instrument manufacturers Carl Zeiss. The opposing view has been that a foreign corporation has no legal personality under our laws unless it is incorporated under the laws of a territory which the United Kingdom recognises as a state. If the Government do not recognise the state, it is argued, the law should not recognise the corporation. That is not a view that the Government share.
Whichever view is the better as a matter of policy the law cannot be said to be certain, and some doubts and problems have recently been raised on behalf of City interests and institutions. This Bill will dispel the aura of doubt that has appeared. The Bill will enable the legal capacity of foreign corporations incorporated under the laws of territories which the United Kingdom does not recognise as states to be accepted in this country. The question which the courts and others will have to consider is whether there is a corporation established by laws which are recognised by the courts of a settled legal system in the territory in question.
I stress that the Bill does not affect by one iota the Government's policy on the recognition of states, still less their policies in relation to particular cases. It is a Bill dealing with private international law, not with foreign relations. We shall continue to recognise states in accordance with common international doctrine; at the same time, like many other countries, we do not accord recognition to governments. We believe that where questions arise as to the law governing the incorporation of commercial bodies, they should be for the courts to answer, looking at any relevant evidence as to that law. They should not be treated as matters which are to be decided by reference to the Government's foreign policy. The Bill leaves commercial law to the courts and to businessmen and their legal advisers.
As I have said, this is a straightforward Bill. It provides a pointer for the courts and others to follow and enables them to work out the consequences of adopting this approach. Clause 1(1) applies where a question arises whether a corporation incorporated under the laws of a territory which is not a recognised state should be regarded as having legal personality in the United Kingdom. It provides that if the laws of that territory are applied by a settled court system there, that question, together with other material questions, is to be determined without regard to whether the territory is or is not a recognised state. That does not of course accord any sort of recognition to the non-state; all that the clause does is to ask the courts to approach questions relating to the status of corporations from non-states in the same way, whether or not the corporation comes from a recognised state.
It is a requirement of the Bill that there must be a settled court system in the non-state concerned. The corollary of that requirement is that there may be transitional situations in which the law cannot provide a simple solution. There may be a case, for example, 69 where part of a state is seeking to break away from the rest of the state; until it has clearly succeeded and, as a sign of its stability, has a settled court system, or has clearly failed, so that the structures of the original state are re-established, one cannot be sure what laws apply. The Bill does not attempt to solve that problem. Nor does it attempt to deal with the case of two factions fighting for power within a state.
Because subsection (1) uses the case of a recognised state as a point of reference, subsection (2) defines that phrase. It also deals with the territories of recognised federal states which would fall within subsection (1) if no other provision were made. However, our existing law on the recognition of companies incorporated under the laws of, say, California, is settled and needs no amendment, and it is unnecessary for subsection (1) to include federal states.
Subsection (2) also defines the material questions referred to in subsection (1) so as to include questions such as the capacity of a company to enter into a particular transaction and the powers of its directors, which are governed in whole or in part by the law of the territory of its incorporation. The Bill will enable our courts to answer such questions, as well as the basic question of the corporation's existence, in the same way as they would have done had the corporation come from a recognised state.
Subsection (3) validates acts, including acts of registration, which have been undertaken on the basis that a corporation from a non-state had legal personality under our law. To that extent the Bill has retrospective effect. We always take great care whenever the matter of retrospection arises to ensure that retrospectivity can be justified and goes no further than is needed. I believe that your Lordships can be so satisfied in this case. The retrospective element is directed, first, at those corporate bodies which may have entered into or incurred legal obligations and may subsequently seek to maintain that those obligations do not bind them because at the time they had no legal personality as corporations under the laws or the United Kingdom. Secondly, it will remove the risk that those who have dealt with such corporate bodies in apparent good faith may claim that such bodies had no legal personality in the eyes of our law and that therefore obligations entered into with them need not be honoured.
There is no significant difference between the laws of the various parts of the United Kingdom in this area, a id the Bill is to apply to Scotland and Northern Ireland as well as to England and Wales.
Your Lordships may wish to know that we are not the only country in which the question of corporations from non-states has arisen. The Australians have also felt the need recently to enact legislation similar to this Bill.
The Bill clarifies the law on the status of foreign corporations and does so in such a way as to reflect commercial realities. The Bill does not affect our policy on the recognition of states. What it will do, I believe, is reassure and encourage companies in the commercial and financial world. I commend the Bill to the House.

§ Lord Mishcon
My Lords, the House will be grateful to the noble and learned Lord the Lord Advocate for explaining the purpose of this little Bill. As he said very clearly, there is a difficulty at the moment. The difficulty concerns the recognition of the legal personality of foreign corporations incorporated under the laws of territories which are not recognised as states by the United Kingdom.
The noble and learned Lord is correct in saying that at present the law is flexible and doubtful. He said that, at the request of some of our corporations and institutions, he aims to see that there is certainty and that when they enter into a contract with a foreign state not recognised as such by us those corporations know which court has jurisdiction if anything goes wrong and that our courts would have jurisdiction. That is very acceptable. From these Benches I recognise that. We should all like to know, only so that it is on the record, what type of corporations and institutions have made representations to the Government in that respect.
My only complaint about the Bill is that as I see it, and until the noble and learned Lord convinces me otherwise, we are not giving that certainty which those corporations are seeking and which our own High Court, and especially our commercial court, which is a forum that is respected in the world for deciding commercial disputes, would want.
I turn immediately to the wording of the Bill. I have given notice to the noble and learned Lord of the points that I shall raise. One finds in Clause 1(1) (b) of the Bill that the pertinent point is that: it appears that the laws of the territory in question are at that time applied by a settled court system in that territory". I looked for a definition of a settled court system. One can have a settled court system in the sense that the court system has been in existence for a great many years. However, particularly in the case of a state not recognised as such by this country, there is a risk that a settled court system which has been in existence for many years may be a most unacceptable, cruel and unjust court system. Where is the certainty that our commercial corporations will receive? Where is the certainty in regard to what the court would have to decide in the light of the Bill? Would the court have jurisdiction under the Bill? Would it have the duty to decide not just that it is a settled court system, but that it is a just, proper and honourable court system in regard to its laws relating to corporation and commercial matters generally?
As I see it at the moment from the wording of the Bill, the court and corporations will not know. Therefore, the question of certainty seems to me at first sight not to be dealt with. We have retained the flexibility and uncertainty which, at the outset of his remarks, the noble and learned Lord said was the one thing that he wanted to avoid.
My next point is almost the same one that I raised in regard to the rest of the wording in Clause 1(1) (b). The Bill states that the 71 question and any other material question relating to the body shall be determined (and account shall be taken of those laws) as if that territory were a recognised State". Where is the certainty about that? It is not that we shall be guided by what those laws say about a corporation, its formation, identity or nature. The Bill states—I use the words again—in a rather unclear and flexible manner that our courts will have to take account of those laws which exist in the unrecognised state, not that they will be bound by them. To what extent has the court to take that into account? What points must guide our courts in taking those matters into account?
It may be thought that these are Committee rather than Second Reading points, but it is always advisable to give the Government notice at Second Reading of what essential Committee points there may be. My questions go further than that. They hit at the purpose of the Bill. I hope that our Foreign Office will not have difficulty in regard to those matters; namely, that it will be thought that, if our courts recognise a foreign state which our Foreign Office does not, we are placing the Foreign Office in some difficulty. However, assuming that that does not cause our Foreign Office and Parliament any difficulty in the future, I see merit in the purpose of the Bill. But there is not merit in it if it does not cure the very malady that it is meant to cure, as was outlined by the noble and learned Lord.

§ Lord Fraser of Carmyllie
My Lords, I am grateful to the noble Lord for a number of points. I am grateful for the agreement that he has signalled from the Opposition Front Bench as to the purpose of the Bill. Perhaps I may also thank him for giving me notice, in his customary way, of the points that he mentioned.
The noble Lord started by asking me by whom was request made for some change in the law here. It is essentially a matter of general concern to a number of leading commercial firms of solicitors in the City who have the responsibility on behalf of their clients to conclude contracts with a wide range of corporations from different parts of the world. It was in that context that there had been some doubt—I do not want to overstate it—that such corporations were not properly to be recognised. The doubt therefore came from the legal world rather than from any corporation indicating that it was uncertain of its status.
The noble Lord is correct in saying that the Bill cannot wholly eliminate the uncertainty that exists at the moment. We are concerned with those territories which are not recognised as a state in themselves. We have taken the view that the way that the matter requires to be approached is to look at a territory and see whether it has a settled legal system which can and does apply laws. It seems to me—I do not see that there is any way out of this—that that will have to be a matter for the British court dealing with the matter to decide whether there is such a settled court system in that territory. The matter can be approached only on that basis.
However, once the court has determined that a territory has a settled court system applying laws, it then treats the law of that territory as though it was 72 dealing with a recognised state. As I know the noble Lord will appreciate, there is a well-developed body of private international law set out in a number of textbooks, often in the form of rules, that tells you which laws from the country where the corporation is incorporated are to be applied by a domestic court in the United Kingdom and which laws of the domestic court of the United Kingdom are to be applied, one in preference to the other. I have listened carefully to the noble Lord, but that is what I understand lies at least in part behind the phrase, and account shall be taken of those laws". Having determined that there is a corporation established in a territory with a settled court system, it does not follow that every law of that territory has to be applied in relation to the dispute before the British court. It takes into account those laws which it is bound to do by the well-established rules of private international law.
I hope that that explanation has been helpful to the noble Lord. If he is still not satisfied, we shall no doubt return to the matter in Committee. However, I am grateful to him for the general welcome that he gave to the Bill.