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Companies Bill Lords

Volume 438: debated on Friday 6 June 1947

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Order for Second reading read.

11.5 a.m.

I beg to move, "That the Bill be now read a Second time."

This large and rather complicated-looking piece of legislation can, I think, quite fairly be considered as a non-contentious Bill, certainly from the party point of view. As the House knows, it had its origin in the Report of, the Committee presided over by Lord Justice Cohen. It is nearly 20 years since the last Companies Act was passed by this House. That Act was passed on the basis of the report of what was then known as the Greene Committee, but, since then, there have been a great many developments and some significant changes both in company organisation and in accountancy practice. It should be remembered that practically the whole of our industry and commerce today is carried on by limited liability companies, and the state of the company law is therefore of basic importance to the whole economic life of the nation. Today, the paid-up capital of companies registered under the Companies Acts amounts to some £6,000 million, which is a measure of the importance that attaches to company law. Indeed, in these times of reconversion of industry, and with the stresses and strains that are imposed upon companies in the economic field as the result of war, it is essential that our company law should be brought right up to date, and that is why, in this somewhat overcrowded time of legislation, the Government considered it necessary to introduce this Bill to amend the company law.

Perhaps the main reason why amendment is now so urgently necessary is that the relationship between management and ownership in limited liability companies has tended progressively to be more and more shadowy. Even before the war, apprehension was expressed on this point, and remedies were then suggested, and, with the great growth in the size of companies, the old relationship, which really grew out of the idea of partnership, where individual owners were closely concerned themselves with the management, has largely disappeared in modern company structure. The growth of groups or chains of companies, which make the true economic entity rather than the company itself, where we get a whole complex of companies operating together—that factor has still further divorced management from ownership. This now well-developed tendency is, in fact, practically ignored by the company law as it exists today, and that is another reason why amendment is required.

It was in 1943 that the then Government considered it necessary that the whole matter of company law should be inquired into by a high-powered Committee with a view to introducing amendments of the law before we entered into the difficult period of postwar transition in which we now find ourselves. They were fortunate enough to obtain the services of Mr. Justice Cohen, as he then was, as chairman. Perhaps I might remind the House of the terms of reference of that Committee. They were:
"To consider and report what major amendments are desirable in the Companies Act, 1929, and, in particular, to review the requirements prescribed in regard to the formation and affairs of companies and the safeguards afforded for investors and for the public interest."
The Committee presented a unanimous report in July, 1945, and I should like to take this opportunity of expressing the deep gratitude of the Government, and, I am sure also of my predecessors in office, to both Lord Justice Cohen and all his colleagues for the very excellent work which they accomplished in, I may say, conditions of difficulty and discomfort during those last two years of war, and at the cost of no little.personal inconvenience.

This Bill has as its intention to incorporate the main recommendations of that Committee, and its two principal objects are, first, to restore or to strengthen the relationship between ownership and management; and, second, to bring fully within the ambit of the company law the modern system of holding and subsidiary companies. Those are the prime purposes of the Bill, though certain other topics which have been included, such as, for instance, the retiring age for directors and the problem of nominee shareholders, have tended to run away with the publicity as far as the Bill is concerned. Advantage has also been taken of the Bill to introduce a number of minor Amendments with which I do not think it will be necessary to deal in this opening statement.

Before coming to the main content of the Bill, I should remind the House that it was introduced in another place, where it has received a most careful and meticulous examination from many very distinguished lawyers and industrialists, and, thanks to the skill and knowledge of my noble Friend the Lord Chancellor, and the co-operation 'of all those interested on all sides, it has emerged from that careful and critical examination certainly a better Bill. In the course of the proceedings I think there were some 360 Amendments made without a single Division, and this has led to the modification of some of the original proposals of the Cohen Committee. I believe that those modifications will be found to be improvements, but the fundamental recommendations of the Committee very largely remain in the Bill as it now is.

The first problem, that of relationship between ownership and management, is set out very clearly on page 9 of the Committee's report, if I may quote:
"The illusory nature of the control theoretically exercised by shareholders over directors has been accentuated by the dispersal of capital among an increasing number of small shareholders who pay little attention to their investments so long as satisfactory dividends are forthcoming, who lack sufficient time, money and experience to make full use of their rights as occasion arises and who are, in many cases, too numerous and too widely dispersed to be able to organise themselves."
That is a problem which the Committee had to face. The individual shareholders may not, of course, always appreciate the significance of the facts which are submitted to them, but if the facts are presented fully and accurately, then the informed opinion of experts such as accountants and others, like lawyers and even of the financial Press, will be available in order to make public criticism, and this applies, I think, specially to the accounts of companies. To meet this problem the following principle is laid down in Clause 13 of the Bill:
"Every balance sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of its financial year, and every profit and loss account of a company shall give a true and fair view of the profit or loss of the company for the financial year."
That is obviously of fundamental interest if the shareholder is ever to understand his position, and with that understanding it should be possible to bring to bear the informed opinion of which I have spoken upon managements of companies.

There are other Clauses which lay down specific measures to enable shareholders to play a more real part as owners. For instance, to cite one or two cases, in Clause 2, provision is made for increasing the length of notice for meetings; in Clause 3 for allowing members to circulate notices and submit resolutions; in Clause 4 for extending the right to demand a poll; and in Clause 5 for facilitating voting by proxy. All those tend to enlarge the capacity of the shareholder to play a full part in the company's procedure. Following the Committee's report, the Bill brings fully within the ambit of the company law the modern system of holding and subsidiary companies. The provisions of the Bill are somewhat complicated, as indeed is the whole subject matter. Clauses 14 and 16 enable the general principle that control must be by informed opinion to apply to such groups of companies, just as the earlier Clauses that I cited apply that principle to the single company. The accounts must be presented to the group as a whole.

The standard mode of presenting those accounts is through the consolidated balance sheet and the consolidated profit and loss account and, just as with the accounts of a single company, these group accounts must give a true and fair view of the state of the group of companies' affairs. Then there are elaborate requirements both as to accounts and group accounts, which are contained in the First Schedule to the Bill, which is again based on the Committee's report, and which has been worked out in detail with leading accountants in the company field. These requirements are in accord with the accountancy standards of the best companies, and, therefore, are not unduly elaborate or onerous; in fact, they are what are used today. I should like at this point to thank all those companies who have at the Government's request given effect as far as possible to the Committee's recommendations in advance of legislation. That has been a very helpful step indeed.

On one point the requirements of the Bill go beyond the practice of most companies, and that is in the disclosure as far as practicable of inner or hidden reserves. That matter is discussed in paragraph 101 of the Committee's report, where they recommend exceptions to that disclosure only in favour of banking and assurance companies. The power is, however, taken in the Bill to give a corresponding exemption to other classes of companies if it is in the national interest, and subject also to special safeguards to be applied. The relevant provision will be found in Paragraph 3 of Part III of the First Schedule, and one obvious class that we have in mind is the shipping companies. It has been represented—and I think that there is obvious force in the representation—that our national, competitive interest might be jeopardised by this required disclosure in particular cases, and it is for that reason that power has been taken to make exceptions. Those exceptions will, as I have already stated, be subject to stringent conditions to be laid down by the Board of Trade. Apart from those, there will be the necessity for complete disclosure.

As these requirements as to accounts are to some extent experimental, particularly so far as group accounts are concerned, it is desirable that there should be power to vary the provisions without the need for fresh legislation. Therefore, under Clause 116, power is given to the Board of Trade to amend the requirements of the Schedule by regulation. If the Amendment makes the regulations more onerous, then an affirmative Resolution will be required; that is to say, the House will have to approve it before it comes into operation; but if the regulations make them less onerous, then they will only be subject to the usual negative Resolution, and an Address can be presented against the order if it is thought wise. It is a somewhat usual procedure to apply two different methods of dealing with regulations about the same subject matter, but it seems to us and to those in another place that it was a sensible thing to do because nobody should have to await an affirmative Resolution for removing onerous regulations which were no longer required

Clauses 21 and 22 extend the powers and duties of auditors and provide that only a properly qualified person shall act as auditor to any company which is not an exempt private company. Under the Bill every company which is not an exempt private company will have, in future, to file its balance sheet and profit and loss account with the Registrar of Companies, and that will also apply to group accounts. Under the existing law, only a public company need file its balance sheet, which commonly includes the profit and loss account, with the filed return. Private companies are, however, wholly exempt from this requirement at the present time, even though many of them are not private in anything except name, and public companies are able to form subsidiaries as private companies which are in reality their own branches, and so can mask the true and actual position of the parent company. The Bill, therefore, on the recommendation of the Cohen Committee, seeks to restrict this privilege of secrecy to family and other purely private concerns for whom, I may say, it was intended under the original legislation.

The relevant provisions on that will he found in Clause 52 and the Third Schedule. They, again, are necessarily complex in appearance but their general effect is that a private company will in future have to publish its accounts unless it really is a private company, that is, a company whose shares are beneficially owned—not merely legally owned—by a limited number of private individuals. If another company, not itself an exempt private company, holds shares in a private company, then that private company automatically loses its exemption because the persons interested will, of course, be all the shareholders of the first company. The number of private individuals who may hold shares in an exempt private company is limited to 50 as a maximum—the maximum number of members in a private company under the existing law.

Now I will turn to the question of investigation. The power of the Board of Trade to appoint inspectors on request by shareholders has existed, as the House knows, for many years, but the existing provisions have been found to be too much hedged round by limitation to be of any great practical value. If flagrant abuses are to be dealt with, and fortunately there are not many of them, it is desirable in the interests of the business community itself that departmental action should be swift and effective if it is taken at all, and it will be possible in future for 200 members of a company, even though they do not hold one-tenth of the issued shares, to apply for an investigation. Investigations can be ordered by the court, and the Board of Trade can themselves initiate an investigation if it appears to them that there are circumstances of maladministration or of oppression of the members or if information is unreasonably withheld from the members and the matter is one of public concern.

The Cohen Committee dealt at some length with the position of directors, and their recommendations are directed to ensure that the conduct of business by directors should not only be above reproach but should also appear to be above reproach, and provisions to this effect have therefore been included in the Bill. Clause 36 provides that there should be shown in the accounts the aggregate amount of directors' emoluments, of pensions paid to directors, and of any compensation paid for the loss of office. That applies to managing directors as well as to other directors. So far as directors dealing in shares are concerned, Clause 35 provides for a register of directors' dealings and this, combined with the Board of Trade's powers of investigation into share ownership—to which I will come in a moment or two—should.prevent any undesirable action by directors in the matter of dealings in shares.

There has been a good deal of publicity, as I mentioned, about the provisions as to the age of directors, which is an important but not an absolutely vital matter. It is desirable that senile directors should not impair the efficiency of a company. So the Bill lays down a retiring age of 70 for all directors of public companies, but any company can, if it wishes, alter its articles to provide any retiring age it likes, whether it be 40 or 100. Also, any director over 70 can be continued in office by ordinary resolution, subject to the special notice which is required by the Bill. This provision follows the Committee's recommendation and is to be found in Clause 29 of the Bill.

I now come to the difficult subject of nominee shareholders. It has been the law ever since 1862 that every company has to keep a register of shareholders, and include a copy of that with its annual return to the Registrar, and the persons so registered are alone entitled to take any part in the proceedings of the company and vote at its meetings, but such a person may, of course, be a mere nominee for the real owner. Now the practice of placing shares in the names of nominees has grown very greatly of recent years; so much so, indeed, that at the present time the register of members of a great many companies cannot be regarded as disclosing the true ownership of the shares. Though there was no evidence before the Cohen Committee showing any widespread abuse of this system, or, indeed, urging its abolition, it is clear that it is easy to conceal by this means both the ultimate control of the company and the dealings of directors in the shares of the company. After very careful consideration, the Cohen Committee made recommendations for dealing with this matter which, on their own statement, they did not regard as entirely satisfactory. The difficulty lies in devising an effective check without at the same time imposing quite an undue burden upon the secretarial staffs of companies.

The recommendations of the Committee were threefold: first, that every shareholder should be required to state whether he is himself the beneficial holder of the shares or holds them as a nominee; second, that every person who is directly or indirectly the beneficial owner of r per cent. or more of the issued capital of the company, or of the issued shares of any class, should be required to make a declaration of that fact to the company, and a register of such beneficial ownership should be maintained; and, third, that the Board of Trade should have power to investigate the ownership of shares in any company where they consider it necessary to do so in the public interest.

Of these three recommendations the first was not included in the Bill as introduced in another place, because Lord Justice Cohen and some of his colleagues, who had reconsidered the matter, advised me that the recommendation was likely to be of such small practical value, and to cause so much inconvenience to business, that it ought not to be proceeded with. Consequently, it was dropped. I may say that I agreed with them entirely that it had little, if any, practical value. The second recommendation was embodied in the Bill as introduced, but it met with very severe criticism on the ground that it would cause a great deal of trouble to very many innocent persons, but would not catch the persons at whom the Clause was aimed. In fact it could easily have been evaded, and those who evaded it would have been the very ones about whom one desired to know. After most careful reconsideration of the whole matter with my noble Friend the Lord Chancellor, I came to the conclusion that it was not possible to devise any watertight system which could not easily be defeated by evasion, and yet any such system that was devised would be bound to entail a great volume of work which would, in the end, be rendered ineffective by the evasion. I, therefore, came to the conclusion that reliance must be placed—as, indeed, in any method it would have to be placed—in the last resort upon the third of the Committee's recommendations, and that alone, therefore, survives in the Bill.

The Bill, however, goes much farther on investigation by the Board of Trade than the Committee contemplated. In particular, the Board of Trade are given power to investigate nominee ownership not merely, as suggested by the Committee, where it appears necessary in the public interest, but whenever it seems to them—the Board of Trade—that there is good reason so to do. That is in Clause 44 They also have wide powers given of requiring information without inspection by Clause 45; and Clause 46 gives the Board drastic powers to deal with any obstruction. They may direct that particular shares shall be subject to any of the following restrictions: prohibition of transfer, prohibition of exercising of voting rights, prohibition of the issue of further shares in right of the shares in question, prohibition of the payment of dividend. I believe that these sanctions, which are additional to those in Clause 45, should be effective. Those in Clause 45 render a person who fails to give the information liable to imprisonment for a term not exceeding six months or to a fine not exceeding £500, or to both. I am convinced, therefore, after careful investigation of this question, that we have adopted in the Bill what will prove to be the most effective method of dealing with this problem of nominee shareholders. If, however, in the light of experience gained under this system of investigation, it is found that further powers are required, we shall have no hesitation in coming to the House to ask it to give us those powers.

I have, I think, so far dealt with the principal points contained in the Bill, but there are some others which, I think, I should mention. First, as regards prospectuses. Clauses 57 to 66 considerably strengthen the law in regard to prospectuses, offers for sale, and placings; and in particular, the provision in Clause 57 that no allotment may be made until the third day after the issue of the prospectus is intended to give a longer time to the public to digest the information contained in the prospectus. Second, a check is placed on "stagging" by the provision under Subsection (5) of Clause 57 that an application for shares is not revocable until after the expiration of the third day after the time of the opening of the subscription lists. Third, where a prospectus states that application has been or will be made for permission to deal on a stock exchange, then, unless that provision has been complied with before the third day after the first issue of the prospectus, or if permission has been definitely refused within three weeks or such longer period up to six weeks as may be notified by the stock exchange concerned, the allotment is void, and the money is to be returned to the applicants. That is to prevent the public from being led to think that they will receive a marketable security, when, in fact, they will not. Fourth, in the past there has been a great deal of misconception about the responsibility of experts in relation to prospectuses. A definite liability is now placed on the expert by Clause 61, which should, we hope, tend to make him exercise proper care in making statements upon which the public are intended to rely.

Fifthly, there are important provisions as regards placings. The difference, of course, between placings and what are technically known as offers for sale is often a very narrow one indeed. Every offer to the public is subject to the prospectus provisions of the Act, but shares may be placed with a broker or issuing house, and the broker or issuing house may then offer them to their own particular clients. Clause 66 interprets an offer to the public as including an offer to a section of the public, whether selected as members of the company concerned or as clients of the persons issuing the prospectus; but as this would have, perhaps, placed undue retrictions on a good deal of legitimate business, a modified procedure is made available where, having regard to the size and other circumstances of the issue, and any limitations on the number or class of persons to whom the offer is to be made, strict compliance with the prospectus provisions would not be appropriate. In this case a prescribed stock exchange can give a certificate of exemption, and if the requirements of the stock exchange are complied with, then they serve in lieu of prospectus.

The remaining provisions of the Bill embody amendments, mostly of a minor character, which have, however, been recommended by the Cohen Committee, or have been inserted as the result of departmental experience since 1929—as, indeed, was envisaged by the Committee in the second paragraph of their Report. Attention, I think, need be drawn only to these. First, as regards alterations to the memorandum, the Cohen Committee recommended that it should be permissible to alter the objects clauses of the memorandum without going to the court. This is, in effect, done by Clause 73 which enables the clauses of the memorandum to be modified by special resolution, subject, however, to the right of minorities to appeal to the court against the alteration. Second, as regards company names, the provisions of the 1929 Act relating to the names by which companies can be registered have given rise to a good deal of difficulty, and the present powers are extended by Clause 74, by enabling the Board of Trade to forbid the registration of companies by names which in their opinion are undesirable. I have had two or three cases where I would gladly have prohibited what were very undesirable and misleading names of companies, but I have had no power whatsoever to do it in the past. This provision follows the recommendations in Paragraphs 13 to 16 of the report. The opportunity is also taken of bringing the provisions of the Registration of Business Names Act into line with those of the Companies Acts in this matter.

The third matter is the declaration of solvency. Under the 1929 Act there was a provision that where the directors and shareholders of the company wanted to retain control of the liquidation—or in other words, to ensure that a winding up was a members' voluntary winding up—the directors could make a statutory declaration of solvency. That provision has proved to be useful in practice, but it has given rise to a certain amount of abuse in that directors have tended to make that declaration carelessly, if not, indeed, in some cases, recklessly. Therefore, Clause 90 contains provision for remedying those defects as far as possible, by placing greater responsibility on the directors making the declaration.

Then, the matter of chartered and other companies is dealt with. Certain of the provisions of the Companies Acts—particularly those relating "to prospectuses and accounts—are now to be extended to companies whether incorporated by Royal Charter, by Statute, or otherwise. It was, of course, anomalous that companies incorporated before the modern system of company law should be exempt from these provisions, which ought to apply equally to all well-managed public concerns; although there is no suggestion that the concerns in question are not of high repute, as indeed they are, and already adopt high standards in most of these matters. But to omit them from the present Bill would leave a serious gap in the administration. The relevant provisions dealing with that matter are contained in Clause 104 and in the Sixth Schedule. Opportunity has also been taken to remedy one or two defects in the Prevention of Fraud (Investments) Act 1939, in relation to unit trusts, and those will be found in Clause 113.

I think I have given the House as much information about the Bill as is necessary for its consideration at this stage. It has, as I have stated, received prolonged and critical consideration, not only by the Cohen Committee and by those many persons who assisted greatly during the preliminary consultations, to whom I am most grateful—including, I may say, the most experienced members of my Department—but also from the noble Lords in another place. Therefore, I venture to suggest to the House that it is, now in a form which makes it suitable for rapid passage into law. The Government regard it, as I have said, as an important Measure. It will enable a better control to be exerted over limited liability companies by their shareholders; and though it cannot of itself prevent failures, it can, and does, provide means whereby shareholders can exercise a more constant and intelligent control, which should go a long way to forestall failures arising from rash and unwise acts of directors. This tightening up of the company law in no way reflects upon the high standard of British enterprise, now so largely carried on under the aegis of the Companies Acts. It is rather intended to confirm that standard, and to prevent, or to reduce to a minimum, the exceptions which fall away from it. I cannot better sum up the reason for and the effect of this Bill than by quoting one further paragraph from the Cohen Committee Report. They say in paragraph 5:
"We are satisfied by the evidence that the great 'majority of limited companies, both public and private, are honestly and conscientiously managed. We believe that the system of limited liability companies has been and is beneficial to the trade and industry of the country and essential to the prosperity of the nation as a whole. The Companies Acts have been amended from time to time to bring them into accord with changing conditions, but if there is to be any flexibility opportunities for abuse will inevitably exist. We consider that the fullest practicable disclosure of information concerning the activities of companies will lessen such opportunities and accord with a wakening social consciousness."
I, therefore, commend this Bill to the House as one which will be of great benefit to the future of the business community of this country, and which will still further enhance the high reputation for honesty and fair dealing which British commerce holds and has held throughout the world.

11.47 a.m.

On an occasion when Edmund Burke was Member for Bristol, one of his political friends was billed to appear on the hustings with him. Burke's speech was so overwhelming that his unfortunate colleague could only bring himself to utter:

"I say: 'ditto to Mr. Burke'."
Today, having listened to the admirable speech of the President of the Board of Trade on this very complicated Bill, I say: "Ditto to the right hon. and learned Member for East Bristol (Sir S. Cripps)." Alas! I am obliged to say a little more, as there are one or two matters which I should like to discuss today. Before speaking on this Bill, perhaps I ought to say that I have an interest. I am chairman of several companies and, as the Chancellor of the Exchequer has so often and agreeably reminded the House, I have some responsibility for the production of newspapers, including the "Financial Times," which the right hon. Gentleman declares to be his favourite morning reading.

On many grounds I welcome this Bill. As the President of the Board of Trade has said, the public is greatly indebted to Lord Justice Cohen and his colleagues for their strenuous labours. They were, indeed, very strenuous, conducted during the blitz in very difficult circumstances, on many occasions with a lack of professional help, and with all sorts of disturbances which might perhaps have been expected to create some lack of clarity in the minds of the Members of the Committee. I am sure we all agree that their report is a most remarkable document. I am sure, too, that the Cohen Committee recognise that much credit is due to the Institute of Chartered Accountants for their pioneer work in pressing for the publication of consolidated accounts, which is, of course, one of the most important recommendations of the Cohen Committee's Report. I must say, this report is a most refreshing document, written in clear and forceful English. It will, I hope, serve as a model for all future committees and commissions which may be set up under the authority of this House.

As the President of the Board of Trade has said, this Bill is of great consequence.

The limited liability system is the framework of our industrial and commercial life, and like many other good things, it has been copied in all parts of the world. Although it has often shown glaring abuses and defects, it has led to a colossal expansion of British industrial production. This ever-growing limited liability system, and the great increase in holding companies, requires a periodical revision of the law, and it is singularly appropriate that we should be dealing with a Bill like this at a time when, by reason of the nationalisation of industry, and for other reasons, many thousands of persons are turning away from fixed-interest securities to the purchase of ordinary shares. I hope this Bill may diminish some of the risks they must take in buying equities at the very high prices which rule today. The two most important passages in the Cohen Report are on pages 7 and 8. Hon. Members will be relieved to hear that the President of the Board of Trade has already given one quotation which I intended to read, but there is another which I should like to give. The report, speaking of the good reputation of British companies, states:
"We must emphasise, however, that this objective will be attained more by the selection by the shareholders of the right governing body of each company than by the provisions of any Statute."
That is a point of immense importance. This question of finding the right governing bodies for companies is, perhaps, the most important thing in the report and the Bill, and I wish to take up a little time in dealing with it. One must be a great optimist to hope that this Bill will remedy one of the worst defects of the limited liability system—the appalling apathy of shareholders. I am told by trade union friends that so much apathy is shown by the unions, that lodges are almost as ill-attended as company meetings. I hope this information is not accurate, but I can certainly say from experience that most of the meetings of shareholders are ill-attended. Unless a company gets into a mess, shareholders take little interest in the doings of their governing bodies, and rarely encourage the directors and managers who have served them faithfully. This is a great pity. Directors and managers, being human, like a little praise for good work. After all, most of them devote a great part of their lives to the development of the businesses they serve, and like all men with pride in their work, they like to feel that they have created something and that their achievements are appreciated. Directors are generally in the unfortunate position of knowing that if they take risks in developing their companies —and if they are good directors they must take risks—they get nothing but criticism if they are unsuccessful, and that if this risk-taking has good results a word of praise is rarely given them.

Another odd feature of the limited liability system is that directors are often criticised for the things they have done, but hardly ever criticised for the things they have left undone. Believe me, the things they have left undone are often more important than the things they have done. Lethargy in company management, and especially in the exploitation of new ideas or processes, is often more harmful to shareholders than the doings of greedy or shady directors. So long as shareholders take little interest in the companies they own, they are disabled from criticising managerial methods, and particularly the lack of new ideas in manufacturing or selling. It may be said that the shareholders are not in a position to do this because they have no time. That is not a sufficient excuse. Many large companies have shareholders in all parts of the country who can help the directors and managers to find new business, or suggest fresh ideas to prosper the company they own. New ideas in enterprise are the best guarantee of continuous earnings, and shareholders lose much by neglecting the businesses they own. They deprive directors of the bracing benefits of informed criticism, which is so beneficial and so abundantly available to the President of the Board of Trade and his ministerial colleagues. As legislation cannot shake shareholders out of their apathy, Parliament at least can see to it that the maximum publicity is given to company affairs, according to the Cohen Report. Taking it all in all, publicity is democracy's best watchdog, and the greatest merit of this Bill is that it will ensure in the future that the limited liability system will be operated in the light of most of the facts shareholders need to know.

This Bill will certainly bring about great improvements in the presentation of company accounts, and ought, therefore, to enable the intelligent investor to form a better judgment of the value of the shares he owns, or the shares he may wish to purchase. The Bill will effect a great and beneficial change in the practices of our best companies; it will also place great new responsibilities upon them. Hitherto, with comparatively few exceptions, it may be said that the better the business the bigger the reserves, particularly the inner reserves. Good directors have been very proud of their wisdom in building up large inner reserves, and such a policy has enabled them to ride the worst of depressions and back bold plans for expansion.

There is another reason, not particularly flattering to shareholders, which impelled directors to build up big inner reserves, and that was to protect the shareholders against themselves. This may seem to be a grandmotherly policy, but these old ladies are not always unwise. The argument for building up big inner reserves given by conservative directors—perhaps "prudent" is the more acceptable word—is that if they published large profits, shareholders would press for higher dividends. Some certainly would, and particularly the foolish. If this Bill rightly requires much of directors, it contains an implied requirement upon shareholders to show restraint in calling for dividends. Speaking as one who has been in business for a great part of his life, I should like to make a little digression about this question of a company holding large cash reserves. I have known many a good business damaged by having too little cash, but I have never known a company ruined by having too much. I hope, therefore, that directors will realise the paramount importance of building up reserves, and that they will be supported in their decision by the trade unions; indeed, all who represent the workers know that it is one of the most stabilising elements against unemployment when a company has a big reserve with which to finance itself through times of depression.

The Cohen Committee have told us that most directors are honest and conscientious, and this has been reinforced by a fine tribute to the directorial class by the President of the Board of Trade today. In view of that tribute, perhaps I may be allowed to say that there is too much silly abuse of directors today. In the past, there were too many gilded incompetents sitting on boards. At one time, almost anyone felt qualified to be a director. Even Cabinet Ministers were directors when holding office. But times have changed, and I think they have changed for the better. [HON. MEMBERS: "Hear, hear."] I hope Members opposite are not reflecting on the present Cabinet. Among thousands of present-day directors, there are, of course, some incompetents and guinea pigs. But people assert that there are incompetents in Harley Street; some are brave enough to suggest that there are incompetents in the Temple, and that both these quarters reward their "duds" better than corn-companies do. I think it would be a safe generalisation to assert that directors are a relatively poor, but honest, class.

Some people, anxious to improve this Bill, but inexperienced in company administration, favour boards of full-time working directors. They say that if the director is put on the board to do the work, the company must obviously prosper. That is a too sweeping generalisation. Boards consisting entirely of full-time directors are not always successful or suitable. The Government certainly do not believe in appointing full-time working directors, as is shown by their nominations to the Court of the Bank of England, the Anglo-Iranian Oil Company, Cable and Wireless, the London Passenger Transport Board, and a litter of nationalised aviation companies, to mention but a few of the companies under the Government's enormous patronage. It is probably a safe generalisation to assert that a proper blend of working directors and men of affairs makes up the best board.

The President of the Board of Trade touched rather gingerly on a much publicised passage from the Cohen Report. It is, I think, about the only contentious thing in their report and in the Bill—the proper age 'for a director to retire. In 1905, Sir William Osler, a great physician, declared the uselessness of a man above 60 years of age, and the incalculable benefit which would result if, in commercial, political, and professional life, a man stopped working at that age. For a decade after he had passed his both year, and while he was still holding the office of Regius Professor of Medicine at Oxford, he was busily engaged in explaining away this rash generalisation about age. Forgetting his repentance, and unmindful of the eminent services of so many judges over 70, Lord Justice Cohen, who is as bold in peace as he was in war, holds that directors should retire at 70. He certainly stirred up a hornet's nest, but I am told that his ageing friends in the City have forgiven him. They say that for every flaw in this report there are so many blessings that they really feel that they must speak to him again. I do not think that any hard-and-fast age rule is wise. Would anyone in his senses have retired Mr. Ford from.his companies when he reached the age of 70?

The President of the Board of Trade says "Yes," but I think that is due more to political prejudice than to lack of admiration for a great industrialist. Would anyone have retired that great octogenarian, Sir Miles Mattison from the boards of the many companies he directed with rare wisdom, or, turning to affairs more strenuous, M. Clemenceau, who was over 70 when he was called upon to lead his country in one of the blackest hours in its history? Few people, with the possible exception of the Minister of Fuel and Power and the Minister of Health, would have suggested that my right hon. Friend the Member for Woodford (Mr. Churchill) should have retired from the conduct of the war on attaining his 70th year. Age is not a good test of administrative quality. I do not wish to labour the point, as the President dealt with it fairly, but shareholders are given the right to retain directors over 70 if they care to do so, as, I hope, they often will.

Perhaps I have said enough about the importance of providing the right governing body for each company. There are a few other recommendations, or omissions, from the Cohen Report that should be mentioned in discussing this Bill. I, personally, greatly regret the inability of the lawyers to find words that would fulfil the Committee's recommendation regarding nominee shareholdings. Anyone who reads the Debates which were held in another place must recognise that Lord Justice Cohen and his colleagues provided too hard a nut for the most ingenious of Parliamentary draftsmen. If anyone cares to read the speech made by Lord Simon, he will see that it is absolutely impossible to translate into law the desires of the Committee regarding nominee shareholdings. It is much better not to have a law requiring disclosure of nominee shareholdings than to have one that is easily evaded. Parliament should not give approbation to a law that is capable of evasion. I am satisfied that it is quite impossible to find a form of words which would produce the results recommended by the Cohen Committee.

As the President said, they showed a little doubt themselves about the practicability of their recommendation. We must, therefore, put our trust in the Board of Trade to exercise the powers contained in this Bill—and they are very considerable —to investigate nominee shareholdings if the public interest requires they should do so. I am certain that the Board of Trade will exercise these powers if the public interest requires them to do so. We have withheld adequate powers from the right hon. and learned Gentleman's Department for many years to deal with all sorts of matters connected with companies. It is often said, "Why does not the Board of Trade take a strong line against share-pushers and other evil beings?" We must remember that we have not given the Board of Trade the powers they require. Great new powers are granted by 'this Bill, and I am certain that the Companies Department of the Board of Trade —an excellent body—will do everything in their power to see that if the public interest requires the disclosure of the nominee shareholdings of any company, it will not be for the want of effort of the Board of Trade that the information is withheld from this House or the public.

Legislation requiring consolidated accounts from holding companies is long overdue. Those responsible for the last Companies Act—and I think that Lord Greene, Master of the Rolls, was Chairman of the Committee—did a little to insist on the disclosure of essential information about subsidiaries. During the last 20 years, a great number of companies have formed subsidiaries to operate departments of their business. This is often a wise and necessary arrangement. Many of these subsidiaries are private companies. A great gulf often exists between a holding company's disclosed profits and the profits of the whole group. Shareholders often know nothing of the tangible assets behind the investments in subsidiaries; nor need they know the debts of the subsidiaries, or if they are greatly indebted to the bank. This tendency to operate the departments of a business through subsidiaries, although entirely legitimate, is capable of very great abuses, which can best be checked by this Bill's insistence that holding companies must publish group balance sheets and group profit and loss accounts.

Another excellent reform which will be achieved by this Bill is the strengthening of the position of auditors. That is a matter of the highest possible consequence to all investors. I have a fairly long experience of business, and I must say that no sensible director would ever refuse the request made by an auditor to include something in his report or in the balance sheet. He would not do so because he would recognise that the suggestion would be given in the interests of the company, and I feel strongly that the authority of auditors should be reinforced. I am not suggesting that auditors should take any responsibility for policy or set themselves up as dictators, but it is desirable to give them the authority contained in this Bill. It is a protection for the shareholders, and it is a long overdue reform.

I am also glad of the recognition this Bill gives to the important office of company secretaries. Company secretaries are the foundation of administration in many businesses, and I am very glad indeed that they are given a wider recognition in this Bill. I am also delighted that the Bill increases the responsibilities of experts whose reports garnish so many prospectuses. Investors have sometimes discovered, to their great cost, that the reports of some of these gentlemen are no better than the evidence of some of the tribe of expert witnesses who are occasionally recruited to baffle judges and juries. It is worth while to remember what has been done for the better ordering of the limited liability system during the last 20 years. It is not well known that it was not until the Companies Act, 1928, that the keeping of accounts was specifically laid upon companies as a statutory duty. The 1928 Act left the important matter of profits in a very unsatisfactory condition. For instance, no auditor was required to certify the profit and loss account. Nothing in the Act prescribed how profits should be defined or set out. In the case of a holding company, there was no requirement that the amount of the subsidiary company's profits should be disclosed. Under the present Companies Bill, auditors must certify the profit and loss account. The way profits must be disclosed, and deductions from them, item by item, is laid down specifically in Schedules to the Bill. In the case of holding companies, aggregate group profits must be revealed. Who can doubt that we are making good the omissions of Victorian and Edwardian legislators?

There is another point I feel bound to make: I hope the Government will, when a proper opportunity occurs, take notice of the Cohen Committee's comments on our oppressive and antiquated law of libel. No one wants to increase opportunities for defamation, but it is no exaggeration to say that our present law of libel greatly advantages financial sharks and their underworld lawyers. Though we must remember, as Lord Swinton has aptly said, that no Act of Parliament can turn a foolish investor into a wise one, or a bad business into a good one, we may be sure that by passing this Bill we shall achieve many wise reforms. In due course, my right hon. and hon. Friends will put down some comparatively uncontentious Amendments in Committee, which we think may further improve this Bill.

May I say, in conclusion, that we are all deeply grateful to a heavily overworked President of the Board of Trade for finding time to bring in this Bill? Perhaps he will give me leave to say that we shall redouble our congratulations to him if he can give us an assurance that the benefits of this Bill—and they are very considerable benefits—will be extended to the corporate bodies created, or in process of creation, as a result of the Government's nationalisation policies. May I also express the hope that a Consolidating Bill will be introduced at the earliest possible opportunity? It is not necessary to remind such an eminent lawyer as the President of the Board of Trade of the need for such a Bill. I hope that when the President of the Board of Trade, or the learned Solicitor-General, winds up this Debate, he will give us an assurance that at the first opportunity a Consolidating Bill will be introduced

12.17 p.m.

I would like to add my voice in welcome to the main provisions of the Bill. It is, indeed, perhaps a little curious that it should fall to a Socialist Government to introduce a far-reaching reform in the conduct of private enterprise. But, after all, the Government depend on private enterprise for the efficiency of 80 per cent. of the nation's business, and, therefore, it is most important that they should address themselves to the problem that lies at the root of the whole of company legislation—how to restrict rogues without unduly hampering honest men. I wish to confine my remarks within a very narrow compass. In my humble opinion, by far the most important provisions of the Bill are those in Clauses 40 to 47 for the inspection by the Board of Trade of companies, where they have any reason to suppose that there is anything gravely unsatisfactory in the conduct of their business. Clause 44 is perhaps the most important of these very important Clauses.

I would like to echo the whole of the passage in the speech of the right hon. Member for Bournemouth (Mr. Bracken) in which he spoke about the question of nominees. I suppose that nearly all of us on both sides of the House will regret that, after the obviously exhaustive researches before this Bill was introduced, and after its most thorough examination in another place, it was found impracticable to carry out the recommendations of the Cohen Committee's report with regard to nominee shareholders. Personally, I cannot believe that any grave loss will be incurred by the business community if Clause 44, giving the Companies Department of the Board of Trade power to examine the ownership of shares, is rigorously and vigorously carried out. I believe, therefore, in this respect the most important point of the Bill is whether Clause 44 is carried out vigorously or not. It is a question of good administration by the Board of Trade. I feel sure that while the Board of Trade is in its present hands, all will be well. What will happen later, none can say, but if it should fall to the right hon. Member for Bournemouth to be a member at, for us, some unhappy future date, of the Government, we should welcome, after his pronouncement today, his appointment to the Board of Trade. The right hon. Gentleman will no doubt be too old when that time comes, but I suspect that in the event of the party opposite forming a Government, large concessions will be made to the principle of raising the age limit of Members of the Government.

I do, however, seriously welcome the remarks made by the right hon. Member for Bournemouth on the question of the retiring age for directors. I think it is absolute nonsense to suppose that many men of 70 are not capable of giving most useful advice in the conduct of companies. It is a matter of common experience that some men at 80 are as well preserved, active and capable of giving opinions on practical affairs as many men of 60, sometimes better, because if they have preserved their faculties, obviously the longer they have lived the more experience they have. On the other hand I believe it is important in the interests of removing the dead hand of inactive ownership from the conduct of the affairs of many companies that some general provisions should be made of the kind contained in this Bill, and I welcome the provisions in that respect.

Another most important set of Clauses are Clauses 14 to 18, dealing with group accounts. I am not an accountant, and I shall leave to my hon. Friends who will speak later the detailed examination of these Clauses, but one fundamental question poses itself, namely, do they go far enough in regulating the relations between parent and subsidiary companies in the interests of the shareholders? I have heard the suggestion made—it actually came privately from a right hon. Gentleman on the other side, not in the House at the moment—that it should be made illegal for subsidiary companies to borrow money except from their parents. I do not know whether that is a feasible proposition or not; I do not speak as one experienced in the practical side of the conduct of businesses; but I should hope that in the course of the proceedings in this House these Clauses will be looked at very narrowly by those who are competent to examine them in order to see whether they can be usefully tightened up.

I have only one query to put on the major provisions of the Bill, and that is in relation to Clause 73. If I may refer to paragraph 12 of the Cohen Committee's Report on the doctrine of ultra vires, the report there gives a positive recommendation that the doctrine of ultra vires shall be removed from our law. I think it is really worth while, if the House will bear with me, to read the whole of this paragraph:
"Had memoranda of association closely followed the forms, in the first Schedule to the Act, this protection"—
that is, the protection given by the memoranda of association—
"might have been real, but, partly with a view to obviating the necessity of applying to the Court for confirmation of an alteration of objects, a practice has grown up of drafting memoranda of association very widely and at great length, so as to enable the company to engage in any form of activity in which it might conceivably at some later date wish to engage and so as to confer on it all ancillary powers which it might conceivably require in connection with such activities. In consequence the doctrine of ultra vires is an illusory protection for the shareholders and yet may be a pitfall for third parties dealing with the company. For example, if a company which has not taken powers to carry on a taxi-cab service, nevertheless does so, third persons who have sold the taxi-cabs to the company or who have been employed to drive them, may have no legal right to recover payment from the company. We consider that, as now applied to companies, the ultra vires doctrine serves no positive purpose but is, on the other hand, a cause of unneccesary prolixity and vexation. We think that every company, whether incorporated before or after a passing of a new Companies Act, should notwithstanding anything omitted from its memoranda of association, have as regards third parties the same powers as an individual. Existing provisions in memoranda as regards the powers of companies and any like provisions introduced into memoranda in future should operate solely as a contract between a company and its shareholders as to the powers exercisable by the directors. In our view it would then be a sufficient safeguard if such provision were alterable by special resolution without the necessity of obtaining the sanction of the Court."
I will not read the rest of the paragraph. It is perfectly clear that Clause 73 does meet the recommendation of the Cohen Committee's Report in so far as it deals with the internal management of the companies, but it does not alter it in its relation to third parties. There still remains this distinction between the powers that a limited company has to carry on its affairs and those which a private individual or a partnership possesses. I do not think any serious argument has been advanced anywhere for retaining this doctrine, except that there is something rather sacrosanct about the memoranda of association of a company and it would be rather a pity to do anything to alter its character. That is a conservative argument in the worse sense of the term, and I hope the matter will be looked at again. With that one query, I wish to add my welcome to the provisions of this most useful Bill.

12.28 p.m.

Like the right hon. Gentleman the Member for Bournemouth (Mr. Bracken), I too rise to say "ditto to Mr. Burke." The right hon. and learned Gentleman the President of the Board of Trade has explained, with his customary clarity, the provisions of this Bill. Its object is quite clear; the complaints by shareholders referred to by the right hon. Member for Bournemouth are no doubt due to the very fact that the President of the Board of Trade emphasised, namely, that very often they have not the information upon which to act. The main object of the Bill is to make available to the shareholders all necessary information and to bring ownership and management closer together, at the same time making clear the relationship of the whole thing to subsidiary companies. The whole thing is a question of information, and that is not an easy matter even for the experts.

There is an interesting illustration, not quite germane to the Bill, but bearing upon it, in a book that was written by a very distinguished banker at the end of the first world war. Mr. Walter Leek, during the first world war, was chairman of the Westminster Bank, and when the bank return came into his hands one week during the war, he looked at it and did not understand what it meant. He made up his mind to go and see the Governor of the Bank of England, Lord Cunliffe, I think it was, and inquire what it meant. When he saw Lord Cunliffe, he said to him, "I have looked at this return, I have examined it, and as far as I can see there is only one item ice it that I understand." The reply of Lord Cunliffe was, "Do you think you understand that one?" If great authorities like that cannot understand what it means, how is the shareholder, especially with the limited information now vouchsafed to him, intelligent though he may be, to understand the-return? Therefore, any attempt to make the matter clear will surely meet the wishes of the right hon. Member for Bournemouth in dismissing the apathy of the shareholders.

The other matter that interests me very much in the Bill is the modern, new departure. In olden days, in the Middle Ages, and later, the Church was the arbiter of morality in business and commerce, as it was in everything else. That is no longer the case. The real arbiter of morality in business today is the auditor or the accountant. He is the man who determines what the code of ethics shall be. It is good to see that, in this Bill, the position of the auditor is being changed, and that with regard to all companies, except exempted companies, the auditor shall be a qualified auditor. If he is to determine what the code of ethics shall be, it is important that he should be a qualified person. He needs to be a responsible and competent person, not merely with regard to the actual accounts, but in order to know what to inquire about and what information he needs so as to make the position of the company perfectly clear to the shareholders. That is an important step forward, and I hope that a further step will be taken later with regard to auditors. The qualification of auditors is not, I think, sufficiently guarded at the present moment. There may not be an adequate number of competent auditors to deal with the volume of business, but it seems to me that, at some future stage, another Bill will be necessary to deal with the qualification of auditors and accountants.

In saying "ditto to Mr. Burke," it is not necessary for me to detain the House at very great length. I welcome the general provisions of this Bill as a step towards enabling the general public to know more about the position of the companies in which they are interested. I would like also to join in the tribute that has been paid to the two Committees which have examined these very complicated affairs, and to emphasise one other important factor. There was a good deal of discussion in the Committee stage in another place about frauds committed by directors or by those responsible for companies. It is true that there have been frauds, but the essential factor that has emerged is the great integrity of British commercial life. The consideration of fraud and the necessity for legislating to deal with fraud, reminds me of a Debate which took place in this House many years ago when the first Education Bill was introduced. During that Debate, a speech was made objecting to teaching people to read and write. It was said that if they were taught to 5 read, they would only read trash, and if they wore taught to write, they would only commit forgery. To a certain extent, of course, that is right, but the overwhelming mass of the population would not do either of those things. That has been the position with regard to British business. This Bill is not being brought in merely to check fraud, but to enable British business to work more fully and freely

12.34 p.m.

I hope I shall not be creating a precedent if I do not preface my remarks by saying "ditto" to the President of the Board of Trade, like hon. Gentlemen opposite. I wish to confine myself to one or two observations on this Bill. I think that one of its most remarkable features is that, although it has, amongst others, the most important function of protecting the interests of investors, it has been able to do this without putting any irksome restrictions on legitimate business practice. The same object might have been achieved in a much different way, and it might have created many more difficulties for those engaged in commercial activity had it not been so well framed by those responsible for its introduction.

Before going on to one or two points I have in mind, I would like to comment on one suggestion which was made by my hon. Friend the Member for Walsall (Mr. W. Wells) in his excellent speech. He suggested that subsidiary companies should not be permitted to borrow other than from the parent company. I hope that the Solicitor-General who is to reply, will not take that suggestion very seriously, because it seems to me to impose a great deal of unnecessary restriction on the subsidiary company which will not help anybody. In the first place, a subsidiary company may have its premises and may conduct its business a long way from the holding company. Secondly, it may be in a position to borrow on better terms than the holding company, and, as the policy of the subsidiary must be directed by the holding company, I do not feel that such a provision would be necessary. The main point I wish to make is in respect of Clause 17, which provides that the principal company of a group shall secure, as far as practicable, that the financial year of its subsidiary companies shall coincide with its own financial year. The Clause itself, reads as follows:
"A holding company's directors shall secure that, except where in their opinion there are good reasons against it, the financial year of each of its subsidiaries shall coincide with the company's own financial year."
I have been trying to considers this Clause in terms of its practical application, and I can see that there will be certain difficulties. First, it will be difficult to get the accounts out early if there are a large number of subsidiaries. Secondly, there may be foreign-owned subsidiaries on whom it would be quite impossible for the holding company to impose conditions. I am sure it would be generally agreed that it would be desirable that the accounting periods should coincide. But there is one reason, I think, why directors may come to the conclusion that, in their opinion, there are good reasons against it, and that is in respect of the Income Tax disadvantage that might result. I should like to refer the House to Section 14 of the Finance Act, 1940, which was an Amendment to Section 34 of the Finance Act, 1926. In subsection (1, b) it says:
"in any case to which the provisions of paragraph (a) do not apply the Commissioners of Inland Revenue shall decide what period of twelve months ending on a date within the year preceding the year of assessment shall be deemed to be the year the profits or gains of which are to be taken to be the profits or gains of the year preceding the year of assessment."
That seems to me to mean that the Inland Revenue authorities can decide which assessment they wish to make, and they might assess on the basis of what would be best in their own interest. In the case of a seasonal trade, where a subsidiary might make more money in one part of the year than in another, when the accounting days have been brought together tax disadvantages might result to the group as a whole. In that connection, may I suggest that, as the Finance Bill for this year is before the House now, it might be possible to introduce some provision whereby any company which changes its financial year in order to meet the requirements of this Clause is relieved from any increase in its liability to Income Tax which otherwise might result from such a change?

The only other point I wish to make on the Bill is in respect of Clause 36. In his opening remarks, the President of the Board of Trade made some reference to the tendency which has grown up in the last few years for management and ownership to draw apart. I think it is a very good thing that directors should be called upon to disclose what they receive from a company. In the past, directors have got away with quite a lot. It has been quite legitimate, but there is no doubt that shareholders have been kept completely in ignorance as to what exactly the directors were receiving. As the right hon. Gentleman pointed out, providing they are receiving a dividend and providing that nothing is manifestly wrong which would place their equity in danger, they are quite satisfied to sit back and draw their dividends and not to concern themselves too intimately with the affairs of the company. Clause 36 of this Bill provides that there shall be a disclosure of the aggregate amount of directors' remunerations in the accounts of the company. What I fear is that this will retard a very interesting development of the last few years where firms have been giving appropriate status to their senior executives and technicians by appointing them to the board of directors. I am afraid that it may have that effect because it may well be that those primarily responsible for management who, in the normal way, over a period of years, might be offered a seat on the board, will not now want to accept the appointment because if they did so they would be bound to disclose their drawing which could be calculated from the aggregate figures disclosed. They will feel that they would much rather not have this disclosed and would really prefer to control the company in a managerial capacity and not in the proper functional capacity of a director. I hope the Solicitor-General will consider this point and, perhaps, say something about it when he replies.

One point about which I feel some doubt is the position of organisations which seem to me not to be covered by this Bill. What is the position of institutions and organisations such as the British Boxing Board of Control? Why should they not be affected by. the terms of this Bill? I understand that for many years they have failed to publish their accounts, that they are a self-appointed body, and that they draw five per cent. from every sporting function with which they are concerned, and which they license. They obviously turn over a large sum of money ever; year and as I have said, they do not publish their accounts. I am quite certain that there must be other similar institutions in the same category. I hope the Solicitor-General will also say something about that, because in such cases there may be possibilities of very great abuse, particularly where a whole industry or form of entertainment—as exampled by the case I have cited—is controlled by a licensing body which is under no obligation to publish accounts. I think this matter is worthy of consideration by my right hon. and learned Friend.

I conclude my remarks by saying that I am very pleased that the President of the Board of Trade has made it quite clear that we on this side of the House do not hold the view that all directors are sharks and that all workers are angels. Since the right hon. Member for Bournemouth (Mr. Bracken) disclosed that he was chairman of many companies, it might be appropriate for me to say that I, too, am chairman of a public company and a director of several companies. In my experience, I have always found that in the main people try to conduct their business affairs in accordance with the highest business ethics. In this connection we on this side are happy to recognise that fact. I think this is a good Bill, and a singular one in the sense that the President of the Board of Trade and the right hon. Gentleman the Member for Bournemouth, possibly for the first time in their lives and possibly for the last, have inadvertently paid tributes to each other.

12.45 p.m.

I will not follow the hon. Gentleman the Junior Member for Bolton (Mr. J. Lewis), except to congratulate him on the uncontroversial manner in which he has dealt with this Measure. The Bill as it stands is not controversial at this stage, but at a later stage it may become so, and I think it worth while to draw attention to the very first paragraph of the Cohen Committee's Report, which states:

"We have regarded the question of general economic policy which embraces such matters as monopolies as outside our terms of reference. The company law should, in our view, deal with companies irrespective of their particular activities; the questions of economic policy should be dealt with by legislation directed to that subject, and kept distinct from the general law governing companies"
I think that that has been very much the note struck in this Debate today and I hope that our discussions throughout the Bill will remain on those lines. The purpose of this Bill should be twofold, and in a sense the two aims which it should have are mutually conflicting. First, we must try to give, greater efficiency—nowadays, I think, the word commonly used is "flexibility"—to the administration of companies. Secondly, we must try to prevent fraud upon those who subscribe to companies and the public at large. In fraud I include wilful lethargy and known incompetence. Those two aims are to some extent in conflict, because in so far as the machine is flexible and the company's administration can be readily turned to the use for which it is intended, there is an increase in the power of those in control to inflict injustice, or perhaps worse, upon the members of the company.

Our desire to prevent anything of this nature must not lead us to undue restriction of the activities of companies. That has been emphasised in all parts of the House today, and I think it cannot be emphasised too strongly. Neither this nor any other Bill will abolish dishonesty or human inefficiency. Our task must be simply to render dishonesty dangerous and incompetence easily and quickly perceived. In doing so, we must not lay on the man of normal morals and energy such fetters as will prevent him from performing his ordinary activities. In a sense I think that if this Bill were to succeed in suppressing all dishonesty it would defeat its own purpose. If the net is drawn so fine as to catch all those whom we would wish not to succeed in their activities, I think this would have the unfortunate effect of preventing a great deal of useful activity which would ultimately result in damage to the economy of the country.

Quite apart from the question of preventing dishonesty and fraud, I think that in considering a Measure of this kind it is important that we should make up our minds clearly on the question of where we wish the actual control of a company to reside. In his opening speech, the President of the Board of Trade made it plain that he regarded one of the main purposes of the Bill as being to bring more closely together the relationships of managements and the owners of limited companies. We should make up our own minds where exactly we desire that the actual control of limited companies should be. Originally, of course, most undertakings were owned and controlled by the same men. Ownership and control were, in fact as well as in theory, identical, but the increasing need for large-scale undertakings with greater capital has not only encouraged the formation of limited companies, but has enlarged their size and has multiplied the number of their shareholders. Not only have the economic needs of the country produced larger and larger units, but the general social and fiscal policy which we have been pursuing for many years have had the same tendency. The policy of heavy Death Duties and high taxation, and of attempting to distribute wealth more widely, has inevitably led to the wider diffusion of the ownership of shares in companies. The result has been that the actual control of many concerns has passed virtually completely into the hands of the directors and the managements of the companies. I need not refer again to the paragraph of the Cohen Committee's Report which dealt with that aspect of the matter so fully.

From the point of view of business, the dispersal of capital seems to be partly good and partly bad. It is good in that the larger body of owners of shares in a company is a better cross-section of the community. The larger the number of owners of shares, the less they are likely to wish to pursue a policy which runs counter to the general policy and desires which the country is pursuing. It is unthinkable, for example, that owners of shares in one of the railway companies would attempt as a body to run counter to the general policy of the country as a whole. To that extent the wide diffusion of ownership of shares seems to be good. On the other hand, it has bad effects in that it means that the administration of the company loses a great deal of flexibility. There is a loss of what has been described today as the personal touch between directors and owners and in the responsibility which the directors feel to the proprietors of the company. When directors and proprietors are virtually the same, there is obviously and immediately a very real responsibility, but when there is divorce between them, that responsibility is in a sense reduced or lessened. In so far as it forges a connecting link between managers and owners, the Bill is entirely good and proceeds on the right lines.

In this connection there is an interesting parallel in the case of the boards of great nationalised undertakings. So far as one can see at the present time, the general form which is taking shape with the nationalised boards is that the Minister of the appropriate Department, on behalf of the shareholders, that is to say, of the public at large, is put into a position to give general directions to the boards and to exercise a general control over them, in the sense that he can appoint or dismiss their members more or less at will. Apart from that general control by the ownership element, the boards apparently are to be independent. At any rate where Questions are put to the Ministers as to the more detailed activities, the tendency is to refuse to answer on the ground that that is a matter for the boards and not for the Government. That seems to be the general direction in the constitution of these boards At the moment, I cannot see whether that development is good or bad on the whole, but it seems to be the general line on which we should proceed in the case of publicly-owned companies.

I wish to see the proprietors of privately owned companies, the shareholders, exercising a general control over appointment and general direction of the company. The managements and the boards should be in a position not to be interfered with too much in the normal conduct of their business. On the whole, the Bill does carry out that idea. The information which is to be supplied by the management in the shape of accounts and reports must be full and clear. It must not be so full as to be a burden on the management who have to prepare it, or so clear as to be damaging to the company in their conduct of business. The Bill strikes a very happy mean in that respect.

I do not place much reliance upon the publication of consolidated accounts for enabling the ordinary run of shareholders to see what the concerns into which they have put their money are doing. I have taken the trouble to obtain a number of consolidated accounts of the larger concerns, and I am bound to say that unless one has a considerable experience of accounts it is impossible in the case of many of the larger concerns to say precisely the state of affairs disclosed, I do not think that the ordinary investor in such a company will gain much information from the introduction of consolidated accounts. I am disposed to think that a rather simpler solution might be more helpful. It might well be that it there were an obligation upon the management to produce regularly a simplified report for circulation to the shareholders of the company, setting out without great detail any substantial changes in the policy of the company or in regard to major new developments which have taken place, it might serve a much more useful purpose than the rather elaborate accounts to be provided under the Bill. I do not suggest that accounts do not serve a useful purpose, but I am not certain that they will serve the purpose which it has been suggested they can serve.

As regards the appointment and removal of officers of companies, here again a careful line has to be drawn. That is a matter which should be within the control of the owners of the company, but such appointment and removal should not be either perfunctory, on the one hand, or arbitrary on the other, and hitherto I think the tendency has been for the appointment of directors and other officers of major companies to be much too perfunctory. There may be parts of this Bill which would enable action of too arbitrary a character to be taken by a strongminded minority, and it may be necessary to make some Amendment of the Bill to see that recalcitrant and rebellious minorities are not able to interfere too much with the proper conduct of the companies' business by threatening arbitrary resolutions for the removal of the, companies' officers.

There is another question in this connection which I would like to put to the Solicitor-General, who I understand is to reply. I think that an important aspect of the control which shareholders have over the management is the fullest disclosure which is provided for of the emoluments of the directors in the company's acounts, and I am not certain whether, under Clause 36 as is now stands the only emoluments which will have to be disclosed are those on which Income Tax is paid, or whether it will be necessary to disclose allowances which are not taxed but are nevertheless of a personal kind. It is very common to give directors and other servants of a company very substantial benefits in kind, and I am not sure how far the Income Tax authorities require tax to be charged upon the provision of motorcars, and so on. It is not clear how far such emoluments will have to be disclosed, and I ask the Government to give the House some indication of what is intended before we discuss the matter in detail on the Committee stage.

On the whole, I think the provisions of the Bill requiring the board to give more information to the owners, and more power generally to the owners who control the board, are good provisions, and will increase the responsibility of the proprietors and tend to strengthen their control of the affairs of the company. That is a matter concerned with the relationship between the shareholders, on the one hand, and the management of the company, on the other. It is a domestic matter for the company. When we come to look at the relations between the company and third parties, however, there may be some need to make some modifications in the Bill. With regard to the powers of investigation by the Board of Trade, in the case of any question arising requiring investigation of the ownership of the shares in the company, the words used in the Bill are that the Board of Trade may exercise such powers—
"where is appears to the Board of Trade that there is good reason so to do."
I ask the Solicitor-General how wide these words are intended to be. It seems to me that they are words without any limit at all. They would enable the Board of Trade, in any circumstances and for any reason whatever, to start an investigation, and there might be cases in which the Board of Trade would start an investigation for bad reasons. It might be that they would have received an anonymous letter or there might be strong political pressure brought to bear, for instance, to investigate the ownership of a company publishing a newspaper or something else which was attacking the Government of the day, and the result of that sort of investigation might be to show that there was no cause for investigation at all. On the other hand, the particular concern, or its owners, would obviously tend to suffer great damage as a result of the investigation ever having taken place, and I think there should be some sanction restricting the Board of Trade from exercising their powers of investigation in such a case.

There is only one other matter to which I would like to refer, and it is in regard to the capital structure of companies. It is not a matter which is dealt with in the Bill as it now stands. Under the law, a trading company is bound to have a definite capital divided into shares, and these shares may be of one or more classes, but each share must have a definite financial value. The shares, of course, need not all be issued, or, if issued, need not be fully paid-up at the time of issue, but, on the other hand, a trading company must have a definite capital in terms of pounds, shillings and pence. It seems to me that that provision of the law is already becoming something of an anachronism, because, in the case of very many companies, the nominal value of either particular shares in the company or of the whole of the company's share capital bears no relation whatsoever to the real value of the shares or of the assets belonging to the company.

In the case of very many companies, the market value of the share is either a small fraction of, or enormously greater than, the par value of the share. In the old days, the tendency was that, when the market value and the par value got seriously out of line, the company either reduced its capital or issued bonus shares so as to bring them into line again. The general tendency of policy, over the last few years at any rate, has been in a sense to prevent that movement, and I think it is true to say now that the nominal value of a company's capital is very often a matter of meaningless symbols. I do not desire now to consider whether or not it should be essential to have a certain definite financial value of the shares, or whether we should not enable companies to deal in rather more realistic terms with particular shares by calling them fractions of the company's assets. I think in any event it will be necessary to reconsider the provisions of the Companies Acts enabling a reorganisation of a company's capital to be made.

Quite clearly in the future it will make an enormous difference to a company how the various classes of its shares are divided up. If two companies are carrying on exactly similar business with, say,£100,000 issued capital, one being of ordinary shares and the other consisting of, say, one-third debentures, one-third preference and one-third ordinary shares the incidence of the new form of taxation, which is included in the Finance Bill now passing through the House, will affect the owners of ordinary shares in those companies in a very different way. In the case of the company that has nothing but ordinary shares the Profits Tax will be divided between all those owning the shares in the company. On the other hand, in the case of the company with issued capital divided into debenture, preference and ordinary shares, whatever the final outcome of the legislation now before the House will be, ultimately a very much higher proportion of the new taxes must fall on the holders of the ordinary shares. Presumably, as the Finance Bill now stands, the holders of the ordinary shares in one company will be mulcted three times as much as the holders of the ordinary shares in the other company.

Obviously, that is an anomaly, and it will be an intolerable burden on company directors to make up their minds about the policy which they are pursuing in the distribution of profits if in the one case Profits Tax is to fall with an enormously greater incidence than in another case. I think there will be a great demand from all companies to reorganise their capital in such a way as to avoid placing directors in that difficulty. There will be a tendency to simplify capital in order to avoid having different classes of shares and, as far as possible, to have a single uniform class as large as possible. I think on the whole that that is a good and wise tendency, but we should have available the machinery to enable it to be carried out. Section 153 of the Companies Act deals with the reorganisation of capital, and it is, on the whole, a somewhat cumbersome Section, and it may need some simplification and some addition. I should like the Government to say whether they have considered that aspect of the matter before we come to discuss it in Committee upstairs. I apologise for having spoken at greater length than I intended. I regard the Bill as a good Bill on the whole, and I hope it may be improved in those directions to which I have referred before it passes from this House.

1.15 p.m.

May I begin with one comparatively simple proposition. I believe that this Bill directly or indirectly affects a considerably larger number of persons than may be imagined. This country, as a result of what happened in the General Election of 1945, is today on the road to becoming a real industrial democracy. That means there is going to be more money for people to put by. I know most of that money should go and will go into Government securities, defence bonds, savings certificates, the Post Office or the tap issues of the Government of the day. However, I believe a certain and increasing amount of money will go into the shares of the joint stock companies. My point is that this type of new investor will know little or nothing about financial markets, and whereas in the past it was necessary to take care of investors as far as possible, it will be even more necessary to take care of them in the future. Therefore, we have to see what can be done about it.

I should like very briefly to make reference to four points, the first of which will be very brief indeed. I do not propose to go over the ground which has been covered by other speakers with regard to information regarding shares. We all realise the necessity for that. One point which I should like to refer to does not appear in the Bill nor does it appear that it could be appropriately dealt with by legislation. It is that the joint stock companies should continue the admirable practice, largely started during the war, of enclosing together with the companies accounts, a copy of the speech that is going to be delivered by the chairman at the public meeting. The right hon. Member for Bournemouth (Mr. Bracken) has already pointed out that shareholders do not attend meetings. It is, therefore, necessary to put under the nose of the shareholders, the maximum amount of information possible, and I believe that this is one of right ways of doing it.

I come now to the second point, and that is the, standard of conduct of company directors. In this connection I welcome Clause 35 which lays down that a register of share dealing on the part of the directors shall be prepared by public companies. I speak now as one with some personal knowledge. At one time I was employed by a firm of East Indian merchants. I should begin by saying that the standard of conduct applied both to assistants and to managing directors of that firm was of the highest order. There was absolutely no question of dealing in the shares of one's own company. Nevertheless—and I do not want to mention names or say anything that is contentious —that was; lot the case in certain other companies and I can say—and it will be within the knowledge of hon. Members who are conversant with such matters—that the same applies in this country. I do not say that there are a large number; indeed, the majority of directors are most conscientious and able men of the highest integrity. However, there are other individuals who have a laxer standard of morality. I believe that there are far too many men who say "There are others who are doing it; why should we not be at it too"? It is a terribly dangerous thing for a man to use his specialised knowledge, which should be wholly at the service of the company, to make his own individual profits. Indeed, I go so far as to say that where it can be shown that the director of a public company regularly indulges in the practice of dealing in shares of his own company, I believe he should be required to resign his directorship.

I come now to the question of public issues which I think is Clause 57. I welcome very much the laying down of the principle that no allotment should be made until three days after the issue of the prospectus. I agree with what the President of the Board of Trade said about "stags," and I should like to have heard more sympathetic cheers from the other side of the House. I regard the "stag" as a most unsatisfactory person, who fulfils no useful function whatever. Indeed he is harmful occasionally, because when an issue is coming out, "stags" pile in for the shares and then something untoward happens, the "stag" runs away and leaves the general investor to "carry the baby." Anything that is a deterrent to "stags" is most desirable, and I would only qualify what I have said about them by one thing: there is only one kind of "stag" I believe to be useful, and that is that novel animal which my right hon. Friend the Chancellor of the Exchequer has recently discovered—the public "stag"—though I will not enter into that because it may be a subject of controversy on the other side of the House.

I want now to talk about nominee holdings. I would have said that this was a wholly uncontentious Bill as introduced into another place. Indeed, the hon. Member for South Hendon (Sir H. Lucas-Tooth) has already shown by his remarks, if I interpret him rightly, that the reason why he thinks the Bill to be a better Bill today than it was when introduced into another place is because this question about the beneficial ownership of shares has now been taken out of the Bill. I speak as one who has no a priori objection to nominee shareholdings. I think they are probably perfectly useful, and, indeed, they help people in different parts of the country who may be shareholders together to save transfers going round unnecessarily. However, there is one qualification I make to that, namely, that the beneficial nature of the shareholding should be disclosed. I want to go a little further than the right hon. Member for Bournemouth. There are certain dangers in this matter. In the first place, it might very well be possible for foreign ownership of a company to arise without anybody knowing what was being done, by reason of nominee shareholdings. I shall be interested to hear what my hon. and learned Friend the Solicitor-General has to say on that point when he is winding up the Debate. Moreover, I believe it also may be possible for a director with definitely nefarious intent to try to get round the provisions of Clause 35 and, by means of nominee dealings, to go on dealing in the shares of the company which he would not otherwise do. Those two points want to be examined seriously.

I will not go over the recommendations of the Cohen Committee. My right hon. Friend has explained carefully what were the three recommendations. The first was not in the Bill at all; the second was in the Bill as introduced into another place and, as a result of the discussions that took place in that other place, it has now been put out; the third provision remains in the Bill, and it is the only safeguard—that the Board of Trade shall have power to investigate the ownership of shares when they have reason to believe that it is in the public interest. That in my view is not sufficient. It should be possible to require those who have a beneficial holding of one per cent. or more in the issued shares of a company to make a statement of that to the company so that it can be put on the company's records. I know the argument that can be used against it, namely, that if one makes a law or an order and it is widely evaded, it brings laws and orders into public contempt. What I question is whether it would be evaded. I do not believe that it would. I do not know whether I shall be in Order in giving an analogy on a different matter. I speak as one who served for five years diving the war on headquarters staff of the Ministry of Labour. We made a large number of orders and it will be within the knowledge of hon. Members that a certain number of individuals disobeyed those orders, but the bulk of people obeyed them because they were loyal and dutiful citizens. I think the same would apply with regard to this provision. If it were made, I believe that the bulk of beneficial holders would be perfectly willing to make known their position to the company, and that the whole thing would be above board.

Does the hon. Member agree that those who would evade the order would be exactly those we wish to catch? In other words, the order would be wholly inoperative and it would not matter twopence to those who evaded it.

I thought something like that might be said, but I do not agree with the hon. Gentleman, with great respect. I believe there might be a small set of genuine crooks who might try to evade it but in a large number of marginal cases, those who otherwise might do some undesirable things, would act as loyal and dutiful citizens and would notify their beneficial ownership to the companies.

I wonder whether this has not been a case—perhaps only to a small extent—of appeasement by the Government. I do not in any way indict my right hon. and learned Friend, but perhaps I have become unduly suspicious owing to a shocking case of appeasement which this House knew of recently in connection with the National Service Bill. I do not think I speak entirely on my own. I believe I am supported by a large number of hon. Members on this side of the House when I say that. I do not like appeasement, whether it is of the Tory Party or of my hon. Friend the Member for East Coventry (Mr. Crossman), who I am sorry is not in his place. Therefore, I am rather suspicious of this, and I shall pay great regard to what my hon. and learned Friend says in winding up. With the exceptions that I have given, I am convinced that this is a good Bill, a Bill which I am perfectly convinced I can support on the Second Reading, though I want to hear more precisely what the Government have to say in view of the points that I have raised this afternoon.

1.26 p.m.

It I do not follow the hon. Member for Accrington (Mr. Scott-Elliot) in his observations on what he describes as "genuine crooks," it is because I want to bring the Debate back to the more general aspect of this Bill. I would like to join in the general tributes that have been paid to Lord Justice Cohen and, indeed, to the work that has been done in another place on this Bill. We are particularly indebted today not only to the President of the Board of Trade for his lucid explanation of the Bill, but also to my right hon. Friend the Member for Bournemouth (Mr. Bracken) on the sensible and robust comments he made in regard to limited liability companies, and directors in particular. Like my right hon. Friend, I have spent many years as a director of companies and there are one or two general observations I would like to make. So far I do not think there has been any comment on Clause 5, but there is some general objection to proxies as such. They give rise to an opportunity for a professional agitator to come along and himself a nuisance at company meetings, and it might be as well if we gave further consideration to that point.

Would the hon. and gallant Member allow me to interrupt? If the right to speak at a meeting of a public company given to a proxy is taken away—personally I do not agree with that—would he not agree that the professional agitator to whom he has referred is, and always has been able to come to the meeting by the purchase of one share in his name, while the genuine representative would be debarred from putting important and constructive proposals on behalf of those who entrusted them to him?

No doubt there is substance in what the hon. Member has said. I mentioned this matter because it was a point which required further consideration. In regard to the somewhat contentious matter of the age of directors, there is one point which likewise might receive further consideration. There must be a great many men who would deprecate seeing their ages in print, as will now occur, and to the uninitiated shareholder obviously there will occur the immediate comment, "Oh, here is a doddering old fool," which in many cases would be unjust and completely incorrect.

In regard to Clause 36, here again there may be some disadvantage in aggregating past remuneration of directors, as may occur under the Clause, and then in placing this item out of relation to the general finances of the company. No one can object to directors' remunerations, in whatever form, appearing and being given publicity, but as the Clause is at present drafted, it would be possible to do this over a period, and to produce a statement which would be out of relation to what has, in fact, occurred.

Would the hon. and gallant Gentleman give the portion of the Clause under which that is possible?

As I read it, the words "the aggregate amount of directors' or past directors' pensions" covers that point. It is in paragraph (b) of Subsection (1).

No. As I read it, it could be over a past period. I may be wrong on the matter, but it appears to me to cover a past period.

I should like to deal with Clause 73, to which the President of the Board made reference. This Clause, of course, becomes all the more important in the light of the circumstances in which companies find themselves, and will increasingly find themselves, as a result of schemes of nationalisation. The Cohen Committee did intend that companies should have the power by resolution of a three quarters majority of their shareholders to alter their memoranda in such manner as to enable them to vary the scope of their activities. But as the Clause is now in the Bill it is, of course, subject to the effects of the Act of 1929, and that Act itself does limit the activities of an undertaking to the scope of what was the substratum of that undertaking previously. It would seem more in accordance with democratic control of companies that where a large majority, a three quarters majority, of a company do decide that it is in their interests to widen their activities or, to vary their activities—and, indeed, that may be made necessary by schemes of nationalisation—and that thereby alone can they continue usefully to function, it should be possible for them, without recourse to the courts, to do so I hope that when the learned Solicitor-General replies he will deal with that general matter, as to whether or not it is desirable, by special resolution of the company, to widen those activities which at present, by the effect of the 1929 Act, are severely restricted. These are the particular points to which I wanted to refer. I do not want to take up the time of the House much longer, other than to join with those who have already paid tribute to the Bill. It is one which I am sure, is welcomed on this side of the House as much as on the other.

But I should like, in conclusion, to say a word in regard to directors. I have for the last year or year and a half sat upstairs on Committees dealing with schemes of nationalisation, and, although I do not see any of the hon. Members here today who have shared in it, there has been a tendency on the part 'of hon. Members to look on directors—anyhow, of those industries which fall to be nationalised—as being people apart, and subject to suspicion, and wholly unworthy of the jobs they have held. I think it is essentially foolish to assume that all bad directors, are those who have been connected with industries which fall to be nationalised. Indeed, it creates a situation which does not, in fact, make it any easier for the Government of the day, when they come to consider the nominations to, boards of control which they themselves have to set up. I hope that, with added experience, the Government will find it desirable to ensure that the national boards which they do set up do increasingly tend to have among their members a proportion of the men who, although in no sense full-time directors, will bring to the benefit of those boards or commissions the general benefits of wide experience of a general nature; rather than perpetuate a system whereby boards are wholly, or in great part, composed of specialists, or men who have purely technical abilities in connection with particular industries. I believe that that is most important. The whole conception of directors' functions, and the part that directors can play, is not limited today to private industry, but comes very vividly within the scope of the Government's own responsibilities. It is in that connection that I believe that we should be wise to view the part played by directors, having regard to the industries which have been nationalised, and in general, as continuing to be one of importance, and one which, as the President of the Board of Trade has rightly said, has, in the vast majority of cases, reflected nothing but credit on the individuals who have undertaken those directorial duties, These are my general comments on the Bill. I think it is a good Bill, and I join with those who welcome it.

1.39 p.m.

When I first thought of trying to catch your eye, Sir, in this Debate, I had intended to offer some comments and criticism on the question whether legislation of this magnitude on this subject was really necessary at this time. Having listened to the speeches of my right hon. and learned Friend the President of the Board of Trade and the right hon. Member for Bournemouth (Mr. Bracken) I feel quite convinced that remarks of that kind would not meet with appreciation. If I may say so respectfully, in my short experience I have never heard, or ever hope to hear, better speeches than those to which I have referred. It would be almost impossible to think of any respect in which they could have been improved.

However, I should like to point out that these 128 pages of legislation will not do quite as much as that volume would suggest. There are two examples, not by any means typical of the whole, but they are pertinent. Let us look at the Clauses dealing with the extended power to be given to the Board of Trade in regard to investigation. If we read Clause 40 and then read Clause 41 we may come to the conclusion that Clause 40. and the amendment which it makes to the principal Act, is quite unnecessary, in view of the power given in Clause 41. Again, in the very long Clause 29, occupying a whole page, dealing with age limit—on the merits of which I shall comment later—Subsection (7) really makes the effect of the whole Clause to leave things very much what it is at the moment. Following those preliminary remarks, I will deal with certain specific Clauses and make, I hope, one or two constructive proposals, on which the learned Solicitor-General might like to comment when he replies.

First, Clause 18, which is a most important Clause giving the definition of a holding and subsidiary company. I must say, when I first looked at the Clause I thought that the operative part of the definition in Subsection (1) was capable of easy evasion by the device of an associated company, with the holding company having two wholly owned subsidiaries, or any two subsidiaries, according to the definition, and those two subsidiaries themselves controlling a fourth company, each having 50 per cent. of the shares and 50 per cent. of the control of directors' appointments in the fourth company. However, on looking at It again I think that matter is covered adequately in Subsection (3), and that device, which I believe has been employed in certain circumstances already in anticipation of this, is in fact prohibited. I should be grateful if the learned Solicitor-General would confirm that.

I should like to join in the welcome, which has been accorded by every hon. Member who has spoken, to Clause 22, which deals with auditors. In my experience—considerable if perhaps a short one relative to that of other hon. and hon. and learned Members—I have always been forced to the conclusion that accountants, at any rate in relation to the accounts of public companies, had the same function which I think Voltaire once ascribed to language—namely, the concealment of the truth rather than its expression and exposition. I think that these Clauses which are now to be found in the Bill—and which probably should have been in previous legislation—go a long way towards remedying that state of affairs. I noticed that my hon. and gallant Friend the Member for North Portsmouth (Major Bruce) seemed to demur to that proposition. It will be interesting to hear—if he has the opportunity of speaking later —his professional experience in relation to that proposition. Another thing that has always struck me about this matter—with which I am sure my hon. and gallant Friend will agree —is that even under this new Clause, which provides that auditors must have certain qualifications to be approved and laid down by the Board of Trade, the profession—if it can be called a profession in its present state of organisation—consists of so many different bodies, ranging from the Institute of Chartered Accountants at the top down to all sorts of other organisations and associations. It can hardly be regarded as a profession, as I suggest it ought to be, comparable at least with the legal profession, especially having regard to the enormous extension in recent years of the importance, power and influence of accountants, not only as auditors but in businesses and companies in which they are permanently employed. When I say "at least comparable," I am referring to the junior branch of the legal profession, which has to deal with so many other matters—

The junior branch of the profession, as I understand it, is the branch to which I do not belong. I was just about to say something with which I am sure my hon. Friend will agree, namely, that this Clause might well have provided that in the present state of the accountants' profession audits by solicitors, in addition to accountants, might be approved. [HON. MEMBERS: "No."] The fact is, many solicitors who have specialised or who have experience in this type of work might be much more capable of auditing a company's accounts than a great many accountants who may be approved—I do not know—as auditors under this Clause. Perhaps that would not be a practicable proposition. I only put that forward as a suggestion, for I felt sure it would receive the support of my hon. Friend the Member for Oldham (Mr. Hale).

I now come to Clause 29. I am not quite sure to what extent the right hon. Member for Bournemouth was criticising Clause 29, which deals with the age limit. I should like to criticise it wholeheartedly, rapidly approaching, as I am, that time of life. I think that is something which practically every hon. and right hon. Member of this House shares in common. We are nearly all of us steadily, but relentlessly, approaching that age; a few, certainly have passed it. An hon. Member has already described this as ridiculous; and it really is ridiculous to apply this provision to company directors. If it has any merit at all it should be made of universal application. Mention has already been made of His Majesty's judges and how absurd it would be to apply it to them. Comments have also been made on Lord Justice Cohen, and his temerity in signing this report containing that recommendation, having regard to his position on the Bench. There are all sorts of other functions to which it would be more appropriate; for example, Cabinet Ministers. One might go even further and say Members of Parliament. Indeed, the strenuous physical life which the Member of Parliament is forced to live now might make it necessary, if one really thought about the matter, to lower the age limit to about 50. I hope that Clause will be reconsidered, especially in view of the fact that it amounts to little more than a pious recommendation, when one looks at Subsection (7); it hardly alters the present position at all, and has already been anticipated by a great many companies.

I have already referred to Clauses 40 and 41, which deals with investigations. In view of Clause 41 it is difficult to see that Clause 40 is any longer of value. It might well be—and perhaps the learned Solicitor-General would deal with this in his reply—that the provisions empowering the Board of Trade to take action in certain circumstances—I do not want to go into details—should be obligatory instead of permissive, as at present drafted. Why should not the Board of Trade have complete liberty to take action? In the past the powers of that Department have been rarely exercised, partly because of the inertia of Government Departments. I am not referring to any particular Department, but that is what happened in practice. No doubt this inertia was encouraged by the provision that it had to be decided whether such an investigation was in the public interest. These wide terms are reproduced in one of these Clauses, although in another Clause they were struck out in another place, and a phrase such as "and is desirable' or "is deemed to be necessary" was as substituted. I suggest that something of this sort might be substituted here also, so that there is no restriction upon the exercise of these powers by the Board of Trade where the circumstances laid down in this Clause justify it.

Another point I wish to raise is in regard to the number of members now specified as 200. I suggest that this is too great a number, and that in practice it will be difficult to collect such a large number. I suggest that the number should be reduced to 50, perhaps with the qualification that these 50 must represent at least a certain proportion—possibly five per cent. or ten per cent.—of the share capital.

There are two further points worthy of consideration because of their omission. They are neither in the Cohen report nor in this Bill. They are certainly most important in relation to the principle referred to by my right hon. Friend the President in his opening, namely, the importance of improving the relationship between the management and the owners. I am referring to the position of minority shareholders in relation to the boards of directors. The position is that a company owning 51 per cent. of the shares, with power to appoint directors—the holding company might be owned by one man—can appoint all the directors and the ordinary individual shareholders have no power to make an appointment. It is worth considering whether a specified substantial minority of shareholders, maybe 20 or 30 per cent., should not 'pave the right to appoint one director to look after their interests. Much of what has been said on the necessity of shareholders taking greater interest and the desirability of their criticism will be illusory, if it is impossible for a substantial minority to have power to appoint a representative on the board.

There is also the question of directors taking advantage of their knowledge as directors for their private purposes. This point was referred to in the Report but I do not think it went further than to say that this kind of thing only took place occasionally. It is nowhere laid down that it is wrong, and no punishment or sanction is provided against it. There is no general provision which forbids this kind of thing or even says that it is morally wrong.

Having said that, I join in what has been said that there is no indication of widespread abuse on the part of individual directors in regard to the present law. This Bill, introduced as it is by a Socialist Government, is an effective if not a final answer to the criticisms made recently in certain organs of the Conservative Press, designed to make people believe that this Government and its supporters care only for one section of the community.

If the Minister of Fuel and Power said anything like that—and I do not believe it for one moment—I would be the first to repudiate it. This is a proof, that, relying as we do on. private enterprise to the extent of 80 per cent. of the country's economy, this Government are determined to do everything to facilitate the working of private enterprise, and to help the middle class and other investors, and that they can introduce, when necessary, a Bill of this kind which receives the wholehearted approval of the Opposition.

1.57 p.m.

I thought that the hon. Member for Widnes (Mr. Shawcross) was suggesting at the beginning of his speech that more controversial legislation was to be brought into this House. If he changed his mind as he proceeded, I welcome that fact. I welcome the principle of this Bill, but I do not think its principle has yet been brought out very strongly. It makes the financial position of a company clear, not so much for the shareholder, but for the creditor, the customer, the business associate and the debenture holder. As business becomes more complicated, it is more difficult, when doing business with a company, to know its true position merely by looking at the balance-sheet. I do not think, as has been suggested, that directors want to withhold information from shareholders, or that they try to withhold information to the detriment of the shareholders; indeed, it may be to the advantage of the shareholders that certain information should not be given. If I may borrow a phrase, the principle I welcome is that we are having the "cards upon the table," when dealing with a company where one is not certain of its financial position. I am not so much impressed with the argument regarding the relationship between shareholders and directors. There is a free personal contract between shareholders and directors, and it is dangerous to interfere too much with that contract between the two. I agree that there must be general legislation, but I think it is for the shareholders to choose their own boards of directors. If they do not like their directors they can sell their shares and get out. I agree with the principle whereby shareholders, buying their shares, cannot ask for special protection between themselves and their nominators.

I want, first, to refer to the question of disclosure of the salaries and emoluments of officers. It was said by the President of the Board of Trade today, and it was said in another place, that these officers must be above reproach. That was the phrase used in both Houses, and I agree with it. But the Bill goes further than that. It says that disclosure should come down to private companies as well as public companies. If that is so, I want to take up the point made by my right hon. Friend the Member for Bournemouth (Mr. Bracken) with regard to the public corporations now being set up under present legislation. I suggest that on the Committee stage the Government might accept an Amendment which would bring within the ambit of this sort of business members of boards and executive officers down to a certain level. Just as we want directors to be above reproach, so do we want officers—I will not call them "civil servants," as the Government do not—to he above reproach, and have the confidence of the country. I hope the House will forgive me if I give the example of the National Coal Board. My hon. Friend the Member for Oxford (Mr. Hogg) asked the Minister of. Fuel and Power before Christmas, whether he would publish the total emoluments of members of the National Coal Board, in line with the recommendations of the Cohen Committee. The Minister replied that fuller information had already been given about these emoluments than was recommended by that Committee. That shows that even from the Ministerial side this point is recognised.

There are boards for electricity, transport, civil aviation, and so on, on which executive officers are doing the very job which directors have been doing in the past. I know of certain men who were directors in a small colliery concern, and who are now area and sub-area officers, doing practically the same work. If it is necessary that the emoluments of directors of private collieries should be shown, surely the principle should apply when people are doing the same sort of work for the nation. I hope the Government will look with a kindly eye on an Amendment to provide that the emoluments of these officers—executive officers down to a certain salary—should be shown.

I would like briefly to touch on the age limit of 70 at which directors should retire. This has come in for criticism from both sides of the House, I am glad to say. Many directors over 70 are useful. They have a positive value, but it is also fair to say that other directors over 70, who have no positive value, usually have a negative value. They sit on the board and do not say anything. It is not often found that a man over 70 is a nuisance. If he is bad he sits still and says nothing, so from that point of view I do not think his presence is very dangerous. In any case, it is the responsibility of the shareholders to decide what type of directors they will have. If they wish to have people of that type on the boards I am certain that the majority of reasonable people would very likely resign if a minority criticised a director about his age. I do not think we need to put legislation of this kind on the Statute Book, and I hope the Government will consider, in Committee, altering or withdrawing this provision. I also hope that a Consolidating Bill will soon be brought in, because it is difficult enough for lawyers and company secretaries to follow all these matters. I welcome the evidence that this Bill will lead to better business relations, and it the Government will accept an Amendment with regard to officers of public corporations, I believe the Bill will do a great deal of good.

2.6 p.m.

My reason for attempting to catch your eye, Sir, is that in the course of my professional career I have had some experience in considering the provisions of company law, for the purpose of advising, sometimes directors and sometimes shareholders, and thereby have had an opportunity of considering how company law can be improved in the public interest. May I, first, join with other hon. Members in paying a tribute to my right hon. and learned Friend the President of the Board of Trade for the very clear and lucid way in which he introduced this difficult and technical Bill to the House today? It was suggested in a recent speech from these Benches that the Bill is a measure of appeasement of the Tory Party. I do not share that view, but as my hon. Friend the Member for Widnes (Mr. Shawcross) pointed out quite rightly, we are desirous of encouraging private enterprise within its legitimate sphere. The Bill recognises that the machinery of the limited liability companies is the chosen machinery of private enterprise for conducting the trade and business in this country. This Bill is an attempt to improve that machinery in order that private enterprise may be carried on more efficiently, and enhance its prestige and reputation with all classes of the community.

Apart from other matters with which the Bill deals, it seeks to fulfil its objects by strengthening the control of the shareholders, by recognising that the principles of democracy are deserving of application among the commercial community as elsewhere, by insisting on the disclosure of more information by directors to shareholders and public alike, and by strengthening the independence and status of the auditor. Before examining how far the provisions of the Bill succeed in attaining those objects, I would like to mention a few minor points, some of which were referred to by the Minister. First, there is the question of ultra vires, That is, in my view, one of the regrettable omissions from the Bill. The Cohen Committee's Report deals with the matter in definite and convincing language, and I would remind the House that on this question of limited liability companies and ultra vires we have now got to the position whereby every company which is formed incorporates in its "objects clause" a great many clauses, which are totally unnecessary, involve a great deal of verbiage, and could, with much advantage, be omitted. In the great majority of companies which are formed today, whether public or private companies, whatever the immediate object of the company may be, those responsible for forming the company take care to see that every conceivable object, however remote, is covered in the memorandum, with the result that one gets pages and pages of verbiage. My suggestion is that there should be a standard form of objects clause similar to the standard form of articles found in Table A, which all companies who so desire may be free to adopt. There will be some companies which quite properly wish to confine their objects to certain limited purposes. They will continue tree either to adopt the statutory form of the memorandum or not as they desire.

Apart from that, which is an internal and domestic question—an affair of the shareholders amongst themselves—I further ask the President of the Board of Trade seriously to consider during the Committee stage of the Bill whether there is any reason why the express recommendation of the Cohen Committee should not now be adopted. They suggest that a company qua third parties should be put in the same position as a private individual. That would involve a simple amendment of the law. It would give every company in its relation to third parties the same rights and obligations as an individual. I have heard no convincing explanation as to why this unanimous recommendation of the Cohen Committee has not been adopted. I submit that it is idle to say that the ultra vires question has not produced very much inconvenience in the courts, and that there have been only one or two cases about it. That is not sufficient reason for failing to carry out the recommendations of this important Committee, particularly as the objects to be gained by it are so obviously of public advantage.

The second point to which I would like to refer is another omission from the recommendations of the Cohen Committee. The Cohen Committee, in paragraph 163, as will be remembered, recommended that there should be power, when the interests of justice so require, to direct that in criminal cases involving fraud in connection with the formation or the conduct of the affairs of companies, it should be open, on the application of the prosecution to the High Court, if satisfied that the interests of justice so require, to direct that the case be tried at a place designated by the Court, by a Judge of the High Court and a City of London special jury. Here, again, I find that the reasons which were given by the Lord Chancellor in another place for rejecting this recommendation of the Cohen Committee entirely unsatisfactory. I know that certain of my hon. Friends on these benches recently have expressed disapproval, which I share, of discriminating between special juries and common juries for different classes of civil cases. But that has nothing to do with the recommendation of the Cohen Committee for securing that, in the interests of justice, a criminal case of a particularly difficult technical nature shall be tried, as far as possible, by a jury competent to understand what it is all about. That seems to be a provision which is just as desirable in the interests of the prosecution as of the accused. I would remind the House that if the recommendation is adopted, that the power so given is entirely permissive, and would be used only in appropriate cases; but I suggest that the power ought to be there.

May I next refer to a practical point in connection with Clause 74 of the Bill? The President of the Board of Trade pointed out that now, for the first time, the Registrar of Companies is given much greater discretion in rejecting any name proposed for a new company—a reform which I think we all agree is highly desirable—but it does not go far enough. In my own experience, on two occasions comparatively recently, new companies have been formed with a name which ought never to have been granted, because in each case the name given to the new company was so similar to the name of an existing company as would inevitably lead to confusion. Therefore, it was not in the public interests, apart from the interests of the existing company, that the new company should retain its name. As the law stands at present, in these circumstances, there is no redress for the existing company, and the registrar has no power to correct a misnaming. With the increasing number of companies being entered on the register, the possibilities of error in this respect are bound to increase. My suggestion, therefore, is that there should now be included in the Bill a provision which would enable the regisrar, on cause shown, within a period of, say, six months after the incorporation of any new company, to require that new company to change its name.

There is another point which may appear of some importance in Clause 9 of the Bill, which, I gather, was introduced as a result of certain proceedings that came before Mr. Justice Cohen in 1944, and which gives the court very wide and very novel powers to impose a settlement on the parties when proceedings are brought by the members of a company for a winding-up order. It is very desirable in those circumstances, as the Bill provides and the Cohen Committee recommended, that the court should have power to grant alternative remedies. I ask the Solicitor-General to consider whether the language of the Bill, as it stands at present, is sufficient to carry out the recommendation of the Cohen Report, for example, does it give the court power to impose alterations in the memorandum or in the articles, because matters of that kind were quite clearly contemplated by the Cohen Committee in making their recommendations?

Another practical point arises on Clause 50, which deals with the obligation to prepare and lodge an annual return. As the law stands, companies are required to keep copies of their annual return in their register, and this provision, in my experience, is quite obsolete, and more frequently honoured in the breach than in the observance. It serves no useful purpose, it is frequently disregarded by private companies, and, I think I am right in saying, the Cohen Committee recommends its abolition. I gather that parts of Clause 50 are intended to secure its abolition, but I am doubtful whether the language of the Clause carries out the full intentions of the Cohen Committee.

Before turning to the more important principles with which the Bill deals, may I be permitted to refer to Clause 112, which, as the President of the Board of Trade indicated, is designed to bring the provisions of the Registration of Business Names Act into line with the new provisions of the company law with regard to disclosing on notepaper particulars of directors' nationality or former nationality. The result of the Bill as it stands at present will be that individuals subject to the Business Names Act who were originally of foreign nationality and who have changed their names will no longer be required to show the nationality of origin on their notepaper, but they will still have to show their original name. That seems to me to involve just as much hardship as the obligation to show their original nationality. The object of the changes now proposed in the Bill is to mitigate this hardship, but it will not be completely eliminated unless a further provision is made in Committee. That provision may take one of two forms. The Board of Trade might, for example, he given power to grant waivers of the requirement in certain circumstances, but I think that would lead to administrative difficulties and inconvenience. It would be much better if it could be provided that where a person has ceased to use a former name for a period of, say, 10 or 20 years, he should no longer be under any obligation to insert what his former name was.

May I now pass for a moment to what is, I think, the central object of this Bill, namely, an attempt to improve and strengthen the control of shareholders in companies over the directors who represent them and who should be fully responsible to them? The keynote of this matter is responsibility, about which in general I should like to say a word later. As has been pointed out, the provisions of the Bill, which are designed to strengthen the control of the shareholders over the directors, include such provisions as the right of minority shareholders to circulate notices, proposals and resolutions at the expense of the company, the extension of the time for holding the annual general meeting, the statutory right to demand a poll, the statutory recognition of two-way proxies—perhaps more important, the statutory recognition that any person, whether a member of the company or not, may be a proxy, and in the case of a private company may speak as well as vote—and the right to remove directors by ordinary resolution.

My question is whether those provisions go far enough in strengthening the control of shareholders over the directors For example, I should like to see all directors in every company subject to automatic statutory retirement at least once in every three years. That is a provision that operates in a great many companies and is very salutary. There is no reason why it should not be a statutory obligation. The Bill, it is true, gives shareholders the power to propose and pass an extraordinary resolution to remove a director, but it is well known that it is much more difficult to get together the impetus and take the initiative in removing a director than it is to resist his reelection when he comes off automatically. Such a provision would not in any way prejudice capable and efficient directors, and I am sure it would not be resented by any self-respecting company.

My hon. Friend would probably know the precise answer to that as well as I do. Speaking from memory, I think the position is that the Stock Exchange rules '9 require some provision in the articles of public companies whose shares are quoted on the Stock Exchange for retirement in rotation, but they do not necessarily involve a requirement that every director shall retire once every three years. This is a rather technical matter, but as my hon. and learned Friend the Solictor-General and others will know, one not infrequently finds a provision in the articles of companies that the nearest number to one-third, not being greater than one-third, of the directors of a company shall retire once in every three years. In operation that provision sometimes enables directors to continue in office for five years without retirement. Having studied these provisions designed to secure the control of the shareholders, I consider that they really do not go far enough, and that the real protection for oppressed minorities is to make the fullest use of the powers of investigation given to the Board of Trade by Clause 40 and other Clauses of the Bill.

Reference has been made to the revision carried out in another place of the Clauses originally contained in the Bill dealing with nominee shareholders. I share the view expressed by previous speakers in this Debate that it would unfortunately be unworkable, as the Cohen Committee itself realised, to maintain with any efficacy provisions of the kind contained in the Clauses which have now teen withdrawn. Here again, the real safeguard for oppressed minorities, for those who have any reason for doubt about the management of the company with which they are concerned, is to make the fullest use of the powers of investigation conferred on the Board of Trade. One hopes that the Board of Trade will have a staff adequate to enable these investigations to be made in any cases where, unhappily, they may be necessary.

Finally, I welcome all the provisions contained in this Bill, as other hon. and right hon. Members have done, requiring increased publicity and the disclosure of information, both in the company's accounts and as to the remuneration, emoluments, and so forth, of directors. I should like also to agree wholeheartedly with what has been said on the Benches opposite that the same provisions which require the disclosure of the payments made to directors by way of salary, fees, expenses or other emoluments should apply equally to the case of the members of the nationalised undertakings. I can see no distinction between them; it is not a party or a controversial matter. I believe that the members of the National Coal Board, or the Regional Coal Boards, the civil aircraft corporations and so forth, would welcome just as directors of public companies welcome the honest independence which would accrue to them from the fullest disclosure of the emoluments they enjoy. I can see no reason why that principle should not be adopted for all similar concerns.

I share the regret expressed by my hon. Friend at the somewhat complacent attitude of the Cohen Committee to the practice whereby directors of some companies make use of inside knowledge of their company's affairs either with regard to some pending contract or with regard to some increase in dividend in order to purchase shares in their own company and thereby feather their own nest. That kind of practice is one of the matters which has brought directors of companies into disrepute. I think it is the duty of the House to condemn that practice in no unmeasured language. Hon. Members will remember that the Cohen Committee points out that there are people adopting that practice whose conduct in other matters is quite worthy and above reproach. In the past, it was not thought reprehensible to descend to that kind of conduct.

I realise that there are obvious difficulties in the way of making it an offence. It may well be desirable that directors should make investments in companies which they control. What is improper and unethical is that they should take advantage of inside knowledge which comes into their possession in their capacity as trustees for the shareholders, to buy shares on the Stock Exchange, and thereby make profits for themselves of a kind not subject to taxation, an advantage which is denied to the rest of the community.

Many boards of directors share the hon. Gentleman's anxiety about this question, but, unfortunately, not even the Cohen Committee, and, as far as I can discover, no power on earth, can find a method to prevent people from speculating in shares of companies which they own. This practice is not confined to directors; it extends to managers who may have inside information.

I am obliged to the right hon. Gentleman. I think it is perfectly relevant to say that the abuse is not necessarily confined to directors; it may spread to other persons. But the relevance of what I was trying to suggest was that it is the duty of this House to condemn the practice. It has been said earlier in this Debate, and with some justification, that nowadays it is the auditor who sets the criterion of commercial morality. But that is only partially true; This matter which I am considering must be left to the judgment of public opinion, and if this House is to play its part in forming public opinion, then, I think, it is important that condemnation of that practice should go out from here.

Would my hon. Friend make it quite clear that he is condemning share transactions by directors who use their knowledge of the company's affairs to their own financial advantage, but that it is quite legitimate for directors to purchase shares in companies on whose boards they sit?

I think it desirable that this should be clearly understood. I agree with the view expressed by the Cohen Committee that, in principle, it is not undesirable, and it may, in fact, be desirable that people should be able to invest their own money in companies of which they are the directors. What is undesirable, improper and reprehensible is that they should, on occasions when they have inside knowledge of, some matter which has not yet become public knowledge, but which will at an early date become public knowledge, during that interval of time, use their inside knowledge in advance of other members of the community to purchase for themselves, with a view to making capital profit, shares in the company they control. That is the abuse which, in the past, has brought directors of companies into disrepute and odium. Unfortunately, this mischief, which has only obtained in some sections of the commercial community, has not been sufficiently condemned by public opinion. I venture to emphasise that, because it is not a matter which is dealt with in the Bill, and, perhaps, rightly so.

I have trespassed too long on the time of the House, but I conclude by expressing the hope that the President of the Board of Trade will not overlook one of the final recommendations made in the Cohen Committee's Report. I think it is in the final paragraph, which suggests that a standing advisory committee, not necessarily a Statutory committee, should be set up to advise the Board of Trade on matters arising in the future on the administration of the Companies Act, because it is quite obvious that, when the Bill becomes an Act, it will continually be necessary to adapt the provisions of this Measure to changing requirements of the age. Personally, I would hope that this may be the last occasion on which the Company Law will come before the House in its present form with its present philosophy as to the relations between directors and shareholders, and without any reference to the new position of mangers, to which the right hon. Gentleman referred.

I think the time has come when the whole question of relationship between directors and shareholders and 'managers and others will have to be considered in the light of changing national conceptions. The kind of thing I have in mind is that, as the law stands at the moment, the responsibility of the directors is to their shareholders alone. One of the evils which this Bill is attempting to remedy is the fact that shareholders have insufficient control over the directors. Hon. Members will realise that under the planned economy to which we are now committed, directors of public companies may, to an increasing degree, well have a responsibility, not only to the shareholders, but to the public. There may well be occasions when their duty to their shareholders will conflict with the national interest. At the present moment, the legal position is that directors have to study the interests of their shareholders alone, even though those interests conflict with the public interest. In my submission, that is the kind of problem which may well call for reconsideration on the next occasion when the principles of the Companies Acts is reviewed in this House.

2.38 p.m.

I would like to make one point, but before doing so I think I must conform to the usual practice of this House and say that I have an interest in this Bill, both as a director of a public company and also as a shareholder. I do not propose to follow the hon. Member for Widnes (Mr. Shawcross) in any way in the confession of premature senility. The hon. Member for East Islington (Mr. E. Fletcher) has raised the very important point of directors dealing in shares of their own company. In doing so he has, I think, not taken fully into account one very great danger that may arise from the attitude of mind which has been indicated on that matter. I think that everybody in this House will join in condemning the jobbing in shares of their own company by directors, which is really the correct description of the evil which the hon. Member for East Islington described. It a is the taking of the piece of knowledge which comes to them, and the abusing of it for their own purpose by buying or selling the shares of their own company. That is one way in which a director is interested in the shares of his company. It must not be lost sight of, however, that there is an entirely different class—the director who has for years been a holder in the company which he directs. That is a very good thing and is to be encouraged because it gives far and away better safeguards to the public and the shareholder than anything in this Bill, which has been produced by professionals for professionals. The over-riding thing must be the community of interest which should be created between the shareholder and the director, and no better community of interest can be created than by the director being a permanent shareholder in his own company. Unless we are careful, the right and legitimate condemnation that we are passing now on jobbery in the shares of his own company may lead to frightening the director out of being a permanent shareholder and sharing the risks and understanding the point of view of the shareholders. I think it was right to deal with that before coming to my main points on this Bill.

I join with everybody else in the shower of congratulations which we have had all round the House to the Cohen Committee, to the President of the Board of Trade, and to the general attitude in the House concerning this Bill today. But I must bring out certain notes of warning. I said before that this Bill has been drawn up by professionals for professionals, and that really is the great danger. Today we see before us a period in which, owing to redistribution of wealth, the shareholders in any company are going to be spread over a far greater area of the country, and that is a very good thing. Redistribution of wealth wrings not only advantages but responsibilities, one of which must be the responsibility of investing the redistributed wealth in public companies in this country. We are, therefore, quite certainly going to deal now with a period of education of the shareholders in the country.

The President of the Board of Trade used an extremely significant phrase in his admirable and clear speech when he spoke about control by informed opinion, which is really the finest and best form of control there can be. That informed opinion has to be kept informed in every possible way. The main danger in this Bill, as I see it, is that there may be too great an increase in the status of the professional. The enthusiastic amateur can sometimes keep up with the hardened professional, but not always, and the shareholder will have to work hard to retain his place. If we make of the auditor a watchdog to look at the director, to see what he is doing, and to over-control him, we shall be harming the main interest. The auditor's position must be very clearly defined. Any director of a company knows that he relies upon the advice of his auditor and his lawyer to an enormous degree, and this has set a pattern which other countries have copied. It has worked extremely well, but if the position of the auditor and the lawyer once encroaches on the main raison d'être of the director—that is, as the policy maker for the company—then great harm will be done

There is no doubt that one of the difficulties of the era in which we now live is that the director has been looked upon with considerable disfavour. I must say, however, that if all we have heard in today's Debate is a general cross-section of opinion on the opposite side of the House, there has certainly been a change for the better. The speech of the hon. Gentleman the Member for East Islington was an example of this, and in following him I am making it a family affair. The hon. Gentleman did show that there had been a considerable change of mind when he suggested that there should be a special jury drawn from the City of London to deal with certain cases. There is no doubt that a good deal of the scorn which has been poured upon the City of London will be washed away by the hon. Gentleman's suggestion that the City of London is the only place in which it would be possible to find a competent jury to deal with matters of this kind.

To return to the relationship between director and shareholder, and the danger of allowing the professional to intervene too greatly, I would say that if we do allow such intervention it will lead to an era when the director has to take more difficult risks than he has ever had to take before, to the detriment of the greatest asset he can possibly place at the disposal of the shareholders—his ability to be really enterprising, to create new business and not to allow them to drift on with old business. If, then, you bring in too great a degree of restraint from the professional you will, without meaning to, do a great deal of harm to private enterprise, and I would sound a real note of warning about not allowing the shareholder to rely too much on the auditor. The person responsible to the shareholder is the director and no one else, and we must not allow to grow up any intervening professional body who may be pointed to as in any way relieving the director of that responsibility.

There are three classes of people dealt with in this Bill, the director, the shareholder and the professional man. The professional man, the auditor or chartered accountant in particular, seems to me to have won the day. There is considerable danger there because by far the greater part of this Bill is devoted to the balance sheet and how it is to be presented. A balance sheet is an instantaneous photograph of a moving object. The business is a live entity, and it moves as its condition alters from day to day. If you take an instantaneous photograph of a moving object you automatically produce distortion, and there is very considerable danger of what is called, in some cases, window dressing—the risk that the balance sheet shall become the bible, the be all and end all and the final foundation of everything to do with public companies. To my mind that is a source of real danger, for one very potent reason. Some 75 per cent. of average shareholders cannot understand a balance sheet and 90 per cent. do not read it. If, therefore, not only for the protection of the shareholder but for his education and to Make him a more useful member of the comity which the public company is, we are relying solely on the consolidated balance sheet, bringing in everything from the subsidiary and associated companies, we are in a way deluding ourselves as to-the true effect of -this Bill.

To my mind it is a very notable defect that we do rely too much upon figures. I am chairman of a public company and when the balance sheet is prepared every year I know perfectly well that when it is submitted to me in its crude form I have the greatest possible difficulty in understanding it. I have a large number of associated and subsidiary companies, and their balance sheets have to be looked at in the same way. I believe that if every director were perfectly truthful about the matter he would not only confess a very considerable degree of inadequacy regarding the finances of his own company, but would realise very fully the very much greater extent to which his shareholders must have the same difficulty in understanding the affairs of the company from the balance sheet. On that point of the balance sheet and associated companies, I should like to say that it is too often forgotten why and for what very adequate reason associated and subsidiary companies have come into being. In matters of international trade—which are very important today when we are speaking of an export drive, the distribution of goods from this country, and the obtaining of raw materials—the company which deals internationally is forced to have associated and subsidiary companies. It is forced so to do by the laws of the countries in which it wishes to operate, and by the discrimination of such countries against companies which are not registered and which have not a considerable shareholding on the spot. Such a company cannot carry out its business adequately unless it has a whole number of associated companies all over the world.

It is very often much against the wish of the director that this should be so but he cannot avoid it. It is very burdensome on him in the matter of taxation. The Chancellor of the Exchequer has made great and successful efforts to get over some of the bad effects of dual and triple taxation for companies who have associated and subsidiary companies in other countries, but there is a long way to go yet. Too often we find that if he wants to carry out a proper business of his own the director is faced with having to take a four to one risk against his shareholders by the time the taxation in various coun- tries has been taken into account. It is, therefore, most important not to get too much in people's minds that subsidiary companies are formed solely for tax evasion purposes or with some rather nefarious end in view. They are very largely a pattern which is imposed upon the directors of the parent company by the necessities of international law and trade.

On the question of directors, their functions and their age, let me say I believe age and quality go together, certainly in the case of wine and possibly in the case of law. I believe the law produces better people beyond 70 years of age than anything else. It may be a process which is conditional upon age, like the pickling of pork. The age of directors has been brought up considerably today. The Government have set a good example recently with the youngest, most modern of all industries, civil aviation. They have appointed as its head Sir Harold Hartley, in his 69th year. I asked a question on his age when his appointment was announced, The Government have at the same time appointed Mr. Street, who is a young, up-and-doing man with great knowledge. That is a very good pattern. There you have the garnered wisdom which comes to a man in his 70th year coupled with great public service and service in a great many companies. You have also the impulse which comes from youth. It must be clear that it is possible to have a young head on old shoulders as well as an active mind in a relatively inactive body, as we see in the case of the hon. Member for Oldham (Mr. Hale).

As the hon. Gentleman has thought fit to make a personal reference to myself, perhaps I may inform him that the matter to which he referred has been under active consideration for some time and that steps are being taken for producing a streamlined model of the hon. Member for Oldham.

Active consideration hardly ever produces results. It is very important that we should think of the Bill in terms of the shareholders. How are we to bring to them a full sense of responsibility and awaken sufficient interest for them to attend the annual general meeting of the company? There may be difficulties in the way. Some big concerns, like Imperial Chemical Industries, the Imperial Tobacco Company and others may have 150,000 shareholders. They would have to have a special day for them at Wembley if they really wanted to get all their shareholders assembled. If we could arouse sufficient interest among the shareholders to make that possible, we should be doing the right thing. With the redistribution of wealth that has taken place it is necessary to arouse interest, but despite all the admirable safeguards there are in the Bill I do not think we have got down to the root of the matter yet.

We have to simplify everything for the shareholder. When we come to the Committee stage I shall propose a new Clause to provide that the director's report shall show a great deal more than it does at the present moment. The shareholder does not read, and cannot understand the accounts, but if the directors' report makes very clear any major changes that there have been in the type of business of the company the shareholders will begin to understand what is being done by the board with his money. It is very curious that even if the Bill passes—I have checked this point very carefully—it will be possible for a shareholder to take shares in a public company, let us say the Midland Wagon Repair Corporation, for the directors to be seized during the ensuing year with oil mania invest the whole of the money in oil, and, if the accounts are carried out meticulously according to the Bill, for it to be absolutely impossible for the shareholder to see what has happened. That is a considerable criticism about what has been omitted.

One of the reasons why that can happen was explained by an hon. Member opposite. The memoranda of companies are now drawn so widely that the same memorandum will serve for a company making pails in Birmingham as for one growing sisal in Tanganyika. They are practically meaningless, and have hardly any force or substance. That is an added reason why it is necessary to get down to something simple in spite of the fact that the chairman's report usually gives a splendid description of what has happened during the past year. It is circulated nowadays. We are not dealing with anything but with past companies. If the director's report could in future contain a statement of any major changes which have taken place during the year in the activities and the investments of the company, that would be a step forward towards showing the ordinary shareholder what was happening and preventing him from going to ask professional advice. That is very good up to a point, but sooner or later we shall be increasing the number of shareholders in this country and they must learn to take the full responsibility.

The Bill is admirable as far as it goes. The final criticism is that it does not go far enough. In regard to public bodies now being created under the nationalisation proposals, how are we to have a shareholders' meeting when the whole nation is a shareholder? Is it to be by ballot, or are we all to have a day off when the National Coal Board has its annual general meeting? There may, possibly, be some directors present, and no doubt the Minister of Fuel and Power may appear almost in the position of chairman to answer a few questions.

Every hon. Member here today has undoubtedly debated this Bill in a constructive spirit. Anyone who came to curse will go away blessing it. I came to give it a limited blessing, and certainly, to give some encouragement to the Government to go further, particularly on the positive' line of attack, rather than the negative one which is stamped all over this Bill. Finally, I would like to go back to the phrase used by the President of the Board of Trade in his admirable opening speech, when he said that the only satisfactory control which we shall have of private enterprise will be the control of informed opinion among the shareholders.

3.1 p.m.

I listened with great interest to the speech of the right hon. Gentleman the Member for Bournemouth (Mr. Bracken). Here is a Bill of 119 Clauses which is literally bristling with restrict-ions and controls, and, in the normal way, on the basis of the propaganda that emanates from the party opposite, one would have expected indignant expostulations at the great body of restrictions comprised in the legislation we are now considering. Of course, the reason why hon. Members of the Opposition support this Bill is contained in the words used by the hon. Member for Bury (Mr. W. Fletcher) when he said that this Bill was primarily concerned with shareholders. I trust that the party opposite will become rather more broadminded on the subject of controls which affect large numbers of the community and particularly those not in the fortunate position of being able to invest money, and that these other necessary controls will command their wider support in future.

May I remind the hon. and gallant Gentleman that I was a Member of the Government which appointed this Committee, and, in more than 20 years, friends of mine and myself have been most anxious to see a Bill like this?

I willingly concede that remark. The only point I was making was that it shows a very admirable extension of breadth of mind that a Bill of this kind should have been given such generous support, as also, incidentally, were the measures contained in the Bill for the extension of information in accounts and for the wider circulation of accounts. This attitude on the part of the Opposition is very creditable indeed, and one hopes that, in years to come, favourable consideration will be given by the party opposite to the publication and wider circulation of the accounts of the Conservative Party and subsidiaries of that party, such as the British Housewives' League. The Bill we are considering is based on a most excellent report, to which I wish to pay my tribute, along with other hon. Members. Actually, 102 out of 179 paragraphs of the Cohen Committee's Report have been directly responsible for the framing of specific Clauses in this Bill, and I think that is a very high proportion with which any report can be credited. I would also endorse the remarks made by other hon. Members as to the very clear way in which the Bill has been drawn up.

Under this Bill, the rights of individual shareholders have been greatly strengthened, and I think there will be a great improvement in the fuller presentation of accounts, in their wider circulation and in the fuller protection of minority shareholders which will be accorded under certain Clauses of the Bill. The position of prospective shareholders will be improved by the tightening up of provisions relating to prospectuses, by the extended liability in respect of statements made by directors and experts, and also by the inclusion of much more information in the prospectuses themselves. The directors themselves have benefited under the Bill in that the removal of certain of their number can now be brought about, if necessary, more easily than in the past. Modern methods of accountancy have been legalised subject to proper safeguards, and the "stags," who often are the curse of any new board of directors, have been virtually eliminated. The position of auditors has been strengthened and even the workers employed in companies, who do not appear to receive very much attention under the Bill, can console themselves that they have one benefit. When a company is wound up now, instead of the ordinary workman employed being entitled to only £25 of the preferential debt, he is now entitled to get up to £100. I do not know whether this goes far enough, for the recommendation of the T.U.C. in a memorandum to the Cohen Committee favoured £200. I have no doubt when the Solicitor-General comes to reply he will be able to give some indication why the lower sum was chosen.

What is the effect of this Bill on the working population of the country? By that I mean the vast portion of our population who are engaged in productive enterprise in the various companies affected by this Bill. For many years now the trade unions of the country have been battling to obtain more information on which to base wages claims, or for that matter to moderate wages claims which they have suspicions for thinking may not be justified anyway. This battling has centred round two points, first of all, round the real ownership and control of the companies, in which the general public is also interested; and, secondly, the determining of what profits have, in fact, been made in the companies in which the workers are employed. This brings me to the question of the nominee shareholders, which has already been discussed here. On page 714 of the Minutes of Evidence before the Cohen Committee, there is a most specific recommendation by the T.U.C. representatives, who included the present Minister of Labour and it reads as follows—
"It is, therefore, recommended that it should be made compulsory for any ordinary, preference or deferred shareholder, to file with the company within a reasonable time a statutory declaration of the full names, addresses, nationality and description of the true beneficial owner on a certain specified day."
There are obvious reasons for this. The practice has grown up during the last few years among people desirous of concealing their ownership of any shares in certain undertakings. In 1895, Sir Francis Palmer, speaking of this, said:
"This is in many cases a matter of great importance, and especially in the case of syndicates, for it commonly happens that leading financiers, Members of Parliament, and commercial men, whilst willing to subscribe to a syndicate, make it a condition that their names shall not appear."
That tendency has become a matter of serious concern over the last 20 or 30 years. The Cohen Committee commented on it in paragraph 79 which I have not the time to read, and as a result Clauses 57–63 of the original Bill were inserted, in which the responsibilities in regard to that matter were embodied. After Debate in another place, these Clauses were eliminated on the grounds of the impossibility of enforcement.

I appreciate the point that it is difficult to enforce a law of the type proposed in the Bill originally, but what have we in exchange? We have Clauses 44, 45 and 46 in the present Bill which give the Board of Trade powers of investigation into the ownership of companies. The T.U.C., however, were not concerned with giving the Board of Trade such powers; what they were concerned with was that the public should have information as to the ownership of shares in companies. All the existing Clauses do is to give the Board of Trade these powers, and I ask the Solicitor-General: is his right hon. and learned Friend prepared to consider inserting in the Bill a provision which will empower the President of the Board of Trade to make public the results of the investigations which he thinks ought to be undertaken?

The second point which has always exercised the trade union movement in this country in the negotiation of wage claims is the disclosure of accounts. Under Section 26 of the 1929 Act a private company was defined as a company restricting the right to transfer its shares and limiting its members, subject to minor qualifications, to 50, and prohibiting any invitation by the company to subscribe for shares or debentures, and it was exempt from the obligation to file its accounts annually. Expert evidence was given by the T.U.C. on this matter—and I believe evidence was given by the present Minister of Labour. The arguments adduced by the representatives of the T.U.C. in evidence were very wide and I have no doubt they received full consideration in the Cohen Committee's Report. Indeed, paragraph 51 on page 27 of the Report makes some mention of this, and the Cohen Committee conceded the principle that all limited companies should make their accounts public by filing them with the annual returns. At the same time, fears were expressed that this would place these companies in an adverse position in relation to other larger companies which could stand the publication of their acounts much better. The Cohen Committee comments succinctly on this point as follows:
"While recognising that these fears are sincerely expressed, we do not believe that publication would have so completely one-sided consequences. In any event, in the public interest, stimulation or elimination of the inefficient, whether small or large, is desirable."
In those circumstances, I cannot understand how it is that the exempt company has come into existence. The scope of the exempt company is very wide indeed. The restrictions have already been given by the President of the Board of Trade. So long as another limited company or body corporate does not hold shares in it, so long as the members are limited to 50—and there are certain other quite minor requirements to be complied with—the company need not file its accounts. I think that the right hon. and learned Gentleman should look at this matter again. For my own part, I prefer to go much further than this. There does not seem to be any reason why every limited company, whether it be private or public, should not publish its accounts on the walls of its factory or workshop or office in exactly the same way as the Factory Acts are put up. There is today much too much of a private ledger complex, as a result of which the workers and technicians employed in a company are not permitted to know what is going on behind the scenes, are not permitted to know what profits are made, are not permitted to know the internal finances of the company. That is not the way to stimulate production. There are certain exceptions to this. I can quote the case of Vauxhall Motors, Ltd., who actually present a copy of their annual report and accounts to every one of their workpeople.

A very good scheme, indeed. I do not see any reason why that very excellent practice, followed quite voluntarily and admirably by this firm, should not be followed by Statute by other firms in some suitable form—by posting the accounts on the factory walls, or the office, or workshop walls.

That instance quoted by the hon. and gallant Gentleman is not the only one. A whole series of companies in this country do precisely the same thing, and give the fullest possible information to their workpeople.

I am aware of that, but I would remind the hon. Gentleman that there is still the necessity to pass this Bill, and that if all companies were doing that it would be unnecessary to pass this Bill. It is because all companies ought to follow this practice which some private enterprise firms have followed, and do not, that we have this Bill. It may be that other legislation will be necessary in this House to bring in partnerships and other private and non-liability concerns. It would be interesting to bring them in. We might then find where the Economic League are getting their money from to finance the anti-nationalisation campaign. It would be useful to have these accounts published. This, however, would not be of much consequence had not the form of accounts been simplified, and in this the Bill has admirably succeeded in my view. Speaking as a professional accountant, I would say that there is altogether too much of a mystery made about profit and loss accounts. Those of us who have been associated with people who have to run their personal budgets pretty tight in relation to the money they spend week by week know they are quite capable, by and large, of understanding the implications of a balance sheet, but the standards now insisted on are very largely the result of the practice to which the hon. Baronet has referred. My own profession will be greatly pleased to have the provisions of this Bill in respect of greater disclosure and more information.

And more work, certainly. There is no monopoly of the lawyers, or even of the textile owners, in that matter. But I would insist that turn- over should be revealed. The interesting provisions of the profit and loss account are a little nebulous, and still do not go far enough. The Cohen Committee's advice has not been incorporated in the Bill in this respect. I have not time to read it, but my hon. and learned Friend the Solicitor-General can look up the point. It has not been incorporated in the appropriate Clause of the Bill. It should be possible to state, as Vauxhall Motors have done on page 9 of their last year's accounts, exactly what a firm's total net sales are. This is important and of very great interest to the workers and technicians, and all those who have an interest in the work. Certainly, it would be of interest to the firm's competitors too. But "the weakest to the wall" and "the devil take the hindmost" is the best philosophy to adopt in relation to that.

In conclusion, I should like to refer to one matter which touches on the question raised by the right hon. Gentleman the Member for Bournemouth in relation to the spirit attained at public meetings. For some inexplicable reason, in another place the provision inserted in the original Bill, that a proxy holder had the right to speak on behalf of shareholders at a meeting, has been eliminated in respect of public companies. I gather the reason that provision was eliminated from the Bill was because their lordships felt that, by and large, a race of professional proxy holders would grow up, and would tend to monopolise company meetings. With the greatest possible respect, I think that is a completely fallacious argument. There is much too much tendency for annual company meetings—especially large company meetings—to be regarded as formal occasions only, at which the gallant boards of directors assemble together to be patted on the back by comparatively small numbers of shareholders, and the meetings are concluded as quickly and formally as possible. I say that company meetings should last for two or three days if necessary, at which proxy holders could, if they wished, get up on behalf of those they represented and put their points as much as they liked. That would have a very salutary effect indeed on the whole scope of company meetings.

Does my hon. and gallant Friend think that a chartered accountant would make a good proxy holder?

Possibly he would, in certain circumstances; in other cases, a lawyer or technician.

The hon. and gallant Member has said that there is too much tendency for company meetings to be regarded as formal. Regarded by whom? By the shareholders or by the directors?

Regarded by the shareholders, the directors, the public, and everybody concerned. It has now become a matter of habit to hold these purely formal meetings. I think that this elimination of the right of proxy holders to speak at company meetings is a matter which should be reconsidered with a view to its re-insertion. We on this side of the House all support this Bill. During the Committee stage many of us will take an opportunity of introducing such Amendments as will impart what we consider to be a new and necessary spirit into the provisions of the Bill from the point of view of the workers, technicians and managers employed in limited liability companies.

3.22 p.m.

We have had a very interesting Friday indeed, and in the course of it many interests have been disclosed. The hon. and gallant Member for North Portsmouth (Major Bruce) disclosed his interest on behalf of the T.U.C.; lawyers on both sides of the House have taken a great interest in this Measure, as have directors, and have disclosed their interests. I have to disclose two interests, as a lawyer and as a director of one company, although I am not immediately threatened by the age limit provisions of this Measure. I think the right hon. and learned Gentleman the President of the Board of Trade must be glad at the reception of this Bill. Only one jarring note has been struck during the whole course of the Debate, and that was in the speech of the hon. and gallant Member for North Portsmouth, who, in his abysmal ignorance of what the Conservative Party stands for and has fought for, sought to jeer and sneer at the party on this side of the House. I should have thought he would not have wasted the time of the House in that manner this afternoon.

I must say, I thought the right hon. and learned Gentleman was treading on rather dangerous ground in his praise of directors generally, but to my surprise that praise has not acted as a red rag to hon. Members opposite—perhaps because there is not a full attendance on this Friday. I entirely agree with what was said about directors generally, and with what has been said on both sides of the House from both the Front Benches and the back benches. Many hon. Members raised Committee points, and I do not intend either to cover the ground of principle, on which there has been so much unanimity, or to raise any Committee points at this late stage. It is true, however, that the Bill does want looking at pretty closely in parts, and in my view is still capable of minor improvement.

The hon. Member for East Islington (Mr. E. Fletcher), in a very well informed and interesting speech, made particular reference to Clause 9. I think Clause 9 requires very careful examination indeed, when it provides power for the court to reduce the capital of a company to pay the shareholders, and thereby injure a creditor, and when it provides power to effect compulsory purchase, and to order someone to purchase shares at a price one does not know. I was glad to hear the observations the hon. Member made in regard to publication of accounts and information as to nationalised industries. I am surprised that the hon. and gallant Gentleman the Member for North Portsmouth did not, in his desire to see accounts published on the walls, go further and talk about publication of the Coal Commission's accounts.

I hope that that is his view, and that we shall have support from other Members opposite in asking that all information in respect of allowances, cars and so on shall be given. Private companies are rightly divided into two categories. I ask the right hon. and learned Gentleman to look again at the definition of an exempt private company. One has to go first to Clause 22 (3, c) where no definition is given, and then turn to Clause 118, where we are told:

"The expression 'exempt private company' has the meaning assigned to it by the Section of this Act relating to the inclusion of a private company's accounts in its annual return."
That will make someone not familiar with this Bill scratch his head a little, and he will probably look at Clause 52 to find which private company is not exempted. If he reads on he will come to Subsection (3), which gives a little more information. He then comes back to Subsection (2), and will then have to look at the Third Schedule. It is a matter of great difficulty to determine what is the definition of an "exempt private company." After hunting through the Bill, one comes to the Third Schedule, where there is a very loose definition. It will be very difficult for the company which the right hon. Gentleman wishes to see exempted to give a certificate that the holders of the shares have the beneficial interest. This is one of the things which should be looked at to see whether the object we want is achieved. It is very obscure, and I hope that Amendments will be accepted in regard to it. We welcome this Bill, which should effect considerable improvement without unduly hampering private enterprise and legitimate business. It should deter the operations of the sharepusher and the fraudulent gentlemen who, in the past, have been such good employers of the lawyers.

3.28 p.m.

This is a Bill on which it is difficult to make a reply to the Second Reading Debate. Its origin and its passage through Parliament obviously render superfluous a great deal of what I might otherwise have said. When the right hon. Member for Bournemouth (Mr. Bracken) rose I thought to myself that he at least would make me think furiously, whereas all he wanted to say was "Ditto" to my right hon. and learned Friend. The best contribution I can make is not to go over the general matters of principle in regard to which all sides of the House are in agreement, but to endeavour to review very briefly the number of points hon. Members have made in the course of the Debate. I will preface what I have to say by telling the House that this Bill will obviously require, as the hon. and learned Member for Daventry (Mr. Mannin{ham-Buller) has said, further detailed investigation in Committee, where it will be subject to painstaking examination by Members who have an intimate knowledge of the matters with which it deals. If I do not deal in detail with a large number of the points which Members have made today I hope they will not think it is due-to lack of respect for the trouble they took with their speeches, but will take it as an indication that these matters can be further discussed in Committee. So far as I can recollect, not one speech has been delivered today which should not have been delivered, and not one speech should have been any shorter. Every speech has been extremely helpful.

I think I can select, at the outset of my reply, certain matters which involve a principle, a clash of feeling—not a clash on inter-party lines—according to personal taste and approach. For instance, there is the point about directors not being appointed over the age of 70. It would be ungraceful and unseemly to imply that anybody over 70 could not continue in whatever walk in life he was engaged and still make an extremely useful contribution, even a more useful contribution than a younger man could make. On the other hand, there is this important consideration: that young active persons, aspiring and ambitious to take their place on the boards of companies, should not be held back by the feeling that they can get to a certain stage but might perhaps have to wait for some years until a place was made for them by the natural processes of old age. One consideration has to be balanced with the other. What we have endeavoured to do is to see that the shareholders of companies shall, in effect have their attention drawn to the ages of the directors on their boards. It will be a matter for them, if they wish, to dispense with the prima facie requirements under Clause 29. We do not seek to draw any hard and fast line. All we have sought to do is to bring the matter to the notice of the shareholders and let them choose—

There are a great many instances where delicacy and embarrassment will constantly arise, and which will have to be overcome in the commonsense British way. The right hon. Member for Bournemouth raised the question of consolidation. I cannot give an undertaking, but it is the wish of the Government and, I believe, of Members generally, that there should be consolidation. In a Companies Bill, as in all other Bills, people who want to ascertain their rights should not have to look from one Act to another, if it can be avoided. That is what we want to see remedied, in relation to this Bill, as soon as possible.

May I deal with the question of nominee shareholders? The House is aware of the approach we have sought to make to this matter. We have felt regret about the impossibility of implementing the three recommendations of the Cohen Committee. The first fell out fairly soon, and the second has since fallen out. We have sought to compensate for leaving out Nos. 1 and 2 by going further than the Committee did in No. 3. We have sought to give greater powers of investigation than were recommended by the Committee. I would call attention to the words, "for good reason." Previously, and in the Cohen Committee's Report, the words were, "in the public interest." The Board of Trade was to have power to investigate under Clause 44, if it thought it was in the public interest so to do. With regard to a particular concern, it may be difficult to say that it is in the public interest, and that the public interest requires that there should be an investigation. We have, therefore, chosen words to make it much more easy for the Board of Trade to decide on an investigation. We have substituted the words "for good reason." Anything that can be said to be a good reason from a sensible point of view shall be sufficient to warrant the institution of an investigation. The Board should not have to wait until such grave circumstances have arisen that it can be said that the public interest requires that there should be an investigation. We hope that by so doing we will have made up for the fact that we feel bound to omit the first and second recommendations.

That brings me to a point made by the hon. Member for North Portsmouth (Major Bruce). He said, "You have gone very far in doing that but, after all, what is to happen when the Board of Trade has made its investigation," and he asked if my right hon. Friend would be prepared to accept an Amendment providing that the Board of Trade would have power to publish its report. In reply, I would say that there is already that power in the Bill. If the hon. Member will look at Clause 44 (4) he will find—although I do not think that the House will want me to go through the intricacies of it—that there is incorporated in the Bill the necessary power to publish the report. Therefore, one will have the position that an investigation can be undertaken whenever it is thought desirable, the report can be published, and any further steps can be taken which are thought necessary.

I want again to call attention to the drastic powers in the Clause. The Board of Trade can call for information when instituting an investigation, and require assistance from persons to give assistance and information. We have introduced machinery which will make it possible for an extremely drastic investigation to take place, whenever it can be fairly said that there is good reason so to do. We hope that hon. Members will feel that this is the best way of dealing with this matter. I ask hon. Members to assume for the purposes of my argument that it is not reasonable to accept the implications of Recommendations 1 and 2. I do not want to go into the details now. They have been discussed in another place and they will, no doubt, be further investigated on the Committee stage, but briefly speaking, the objection to them is that the implementing of these recommendations would be at the expense of an enormous amount of time and trouble, and the result would be that we should get information which we already have, and those persons who want to withhold information could do so.

Would the Solicitor-General say whether it will be a normal matter of course for these reports to be published, or would he give some idea of the circumstances which may exist which would make it possible to refuse to publish any such report?

I thought about that question before I addressed the House. The only answer which I can give is that it must of necessity depend on the result of the investigation, and the circumstances in which it was made. It might be extremely unfair on a particular concern if an investigation was made and there was no real reason for it. Therefore, I would prefer to say that it must depend on the circumstances and nature of the investigation, and the result of the investigation, rather than make any general assertion with regard to it. That, I think, conveniently leads to the second point which can be said to he a point of principle. We are all agreed that we strongly condemn, and wish publicly to condemn, what, in order to use a purely harmless phrase, I would describe as improper dealing by directors in the shares of their own companies. It has been pointed out that one has to use the phrase "improper dealing" subject to qualifications and with due caution and reserve, but I think a conscientious director, although sometimes it is difficult to draw the line, would in ordinary circumstance, have no difficulty in answering the question he would put to himself as to whether it would be improper to have any transactions in relation to a particular parcel of shares. We strongly condemn such practices, and I am sure the House would not desire me to emphasise again our dislike of any sort of improper dealing.

The reason why I come to that point after having dealt with the question of investigations is that one of the primary results of an investigation may well be, and should always be when there has been improper dealing by directors in the shares of their company, to bring that improper dealing to light. Then, of course, it will be brought to the notice of all persons interested, and the director can be dealt with in whatever may be the appropriate way in a particular case. As we see it, that would be, quite apart from anything else, one of the extremely valuable results of this new investigation machinery, and I would draw the attention of the House to that particular result in asking hon. Members to say that we were right in thinking that the third recommendation, strengthened and augmented as we have sought to make it, really compensates for the abandonment of the other two.

If I may shortly deal with the question which I think is sometimes described as the ultra vires point, one or two hon. Members who asked about that were concerned with the question of altering the powers set out in the memorandum. My hon. Friend the Member for East Islington (Mr. E. Fletcher) sug- gested that there might be a stock form. Other hon. Members were disappointed that we have not met the position vis-à-vis third persons, that is to say, hat we have not dealt with the position which is sometimes associated with the name of the Royal British Bank against Turquand. What we have done, and again we hope the House will agree that we have drawn the right dividing line, is to make it much easier for a company to alter the powers in its memorandum and articles. It can now do it by special resolution, and is then only subject to an appeal to the court. That is a very big change from the position as it existed under the Companies Act of 1929. Under the terms of that Act it could not do so unless, upon an application made by the company itself to the court, the court authorised the change. We hope that by making it easier in that way to alter the powers that we have gone a good way towards putting an end to, or at any rate modifying, what some people would describe as a very definite abuse of the drawing up of powers in a memorandum. Memoranda now include power to do almost anything in the world—a very small company can almost jump over the moon, to judge by its powers. So we feel that we have met the first point made by the Cohen Report on this matter. We hope that in course of time the result of that will be that powers will be much more precisely formulated, and memoranda will not be drawn up as they are now.

It is said that we have not met the second point, namely that there should be, so far as third parties are concerned, nothing in the nature of the Turquand case complication. With regard to that I would simply say that experience bas shown that difficulties of that kind have not in fact often arisen. That is what I believe to be the case, and what I am told is the case. It has not often arisen that the doctrine of the public notice of the contents of a memorandum has brought about complications. It is conceivable that, if by making it easier to alter the powers of a memorandum, it comes about that the powers would be much more precisely formulated, and if, as a result of that tendency, we begin to get cases in which questions arise as to whether third parties dealing with the company should or should not have had notice of the altered terms of the company's powers, then the matter will have to be reconsidered. But, at the moment, no difficulty has risen. If, in view of the alterations we have made, difficulties arise, then, in due course, the matter will have to be considered.

In the limited time at my disposal, I should like to deal with one or two other points. My hon. Friend the Member for Bolton (Mr. J. Lewis) raised what I thought was an interesting point on Clause 17. That Clause deals with the accounting periods of holding companies and their subsidiaries. It was pointed out that there might be difficulty when there was a foreign subsidiary. My hon. Friend also referred to the Finance Act of 1930, and said that there might be difficulties in that the Inland Revenue might select the period which was disadvantageous to the companies. If my hon. Friend will look at Clause 17 he will see that the procedure outlined has to be adopted unless the directors are of opinion that there are good reasons against it. I should have thought—and this, of course, will be further investigated in Committee that a director might fairly say that, in his opinion, there was a good reason against making the two accounting periods coterminous if the result might involve a heavier Income Tax and Profits Tax liability upon one of the companies concerned. I should have thought that, if it were difficult because of the location of the foreign subsidiary, a director might equally well say that there was, in his opinion, good reason against it.

Surely, the director would be incapable of knowing whether or not the Inland Revenue would assess to his disadvantage? He would have to do it first, and then, afterwards, put himself entirely in the hands of the Inland Revenue to make a decision.

That is a fair point, and one which we might go into in Committee. It really applies to the first year, but, even so, that night be a valid reason against the argument which I have adduced. I think that my hon. Friend said that the disclosure provided for in Clause 36 might result in a discontinuance or discouragement of the process of putting senior executives of companies on to the Board. One would have to wait and see. The Cohen Committee made the recommendation, but it was not the first to make it. I believe I am right in saying that the Greene Committee of 1928 made a similar recommendation. We have sought to implement it now, but one will have to wait and see what happens. Whether or not it will have the unfortunate effect of discouraging the appointment of senior executives to the boards of companies, which I feel scarcely qualified to say, must be left for experience to decide.

Other hon. Members made what I thought was a very interesting suggestion —that something in the nature of a statement indicating the trend of future policy or changes in policy should be circulated to shareholders. There, again, I feel that the Bill does not deal with that, and the Cohen Committee's Report does not deal with it. Clearly, it is a suggestion which will have to be investigated and looked at carefully on the Committee stage.

The hon. Member for South Hendon (Sir H. Lucas-Tooth), and, I think, one of my hon. Friends, asked whether the disclosure provided for in Clause 36 would have to be limited to emoluments that were subject to tax. In particular he asked whether expenses would have to be disclosed or only expenses that were subject to tax. What I would say in regard to that is that everything that can be said to be compensation within the meaning of Clause 36 (1, c) might well not be subject to tax. It might be a capital payment, and probably would be, and that has to be disclosed. In so far as the actual question of expenses is concerned, if hon. Members will turn to the top of page 32 of the Bill they will see that expenses are limited in terms to expenses subject to tax. I would simply say that, as I think the House will agree, the mere fact that a thing is called an expense does not necessarily mean that it is not subject to tax. It is a question of whether it is really a justifiably non-taxable expense. If a thing is called an expense, but that is a misnomer and it is really part of the income of the director concerned, it would, I should have thought, come within the scope of expenses which would have to be disclosed.

The hon. Member also contended that it was unfortunate that there was nothing in the Bill to provide for shares of no par value, and he advanced the argument that in the case of a large number of companies the value of the company's undertaking bore no sort of relationship to the nominal value of the shares. There again I can only refer to what was said by the Cohen Committee in their report. They obviously considered the matter and in paragraphs 17 and 18 they set out the result of their deliberations. I do not think that in the course of this Debate I can add anything to what they have said.

My hon. Friend the Member for Accrington (Mr. Scott-Elliot) was con- cerned about directors who dealt in the shares of their own companies, but I cannot do anything beyond again reminding him of the importance of the results of an investigation which is to be undertaken under Clause 44. I should like also to call his attention to Clause 27 which requires that directors must be voted for separately so that there is not likely to be any kind of block appointment. Any director with regard to whom there has been anything of discredit—even though it may not be grave discredit—must be separately considered by the shareholders before he is re-appointed to the board.

My hon. Friend also referred to the undesirability of "stagging" There again I would remind him that, as I believe he is aware, Clause 57 (5) provides that applications for shares cannot be cancelled in the way in which a "stag" requires to cancel in order to carry on his activities. My hon. Friend the Member for Widnes (Mr. Shawcross) asked me a question on the definition of a subsidiary company. I would ask him to look at Clause 18 (3 b ii), where I think he will see that for the purpose of deciding whether a company is a subsidiary of the holding company any shares held in the former company by a subsidiary of the holding company must be treated as if it were a holding of the holding company. This covers the point he made. He also complained that the requirement in Clause 40 that 200 shareholders should be necessary to demand an investigation was putting the number too high, and that it should be 50. The way the Clause is meant to work is this. As an alternative you can have a fifth of the value of shareholding or 200 shareholders. I should have thought that it would not be difficult to have that number in the case of a large company, and in the case of a small company it should not be too difficult to have a tenth in value. That is the way in which the conception is founded and in which it is hoped that it will be worked. But that again is a matter which I think can be considered more fully in the Committee stage.

Now let me deal with one or two points which were made by the hon. Member for East Islington, who said he was rather disappointed in connection with special juries in certain criminal cases. I would remind him that the point cannot be considered in isolation, apart from the larger problem of what is to be done with special juries. He asked me whether under Clause 9 (3), which deals with minority shareholders and is designed to protect their interests, the wording would enable an alteration to be made in the memorandum. The answer is definitely "Yes." My hon Friend will see that this is the case if he looks at the first two lines of the Subsection. He asked why in Clause 50 we had not done away with the necessity, described by the Cohen Report as otiose, of keeping a copy of the annual report. By reference to Clause 50 (3), he will see that we have abolished the necessity to keep copies. This and other matters it will no doubt be convenient to discuss during the Committee stage.

The object of the provision requiring the disclosure of change of name is so that we can get a discreditable record disclosed. The present law applies to British subjects except in relation to changes of name under the age of 18. A person who had been to prison, or had been a bankrupt, or had some discreditable incident in his record under another name, might well evade a disclosure of that discreditable record if he had not to disclose a change in his previous name, whatever his nationality might be. That is also a matter for consideration further in Committee. There are many other points with which I should like to deal, and I hope hon. Members will acquit me of discourtesy if I am unable to refer to them now. The Bill bristles with Committee points. I feel I should now commend it to the House for its Second reading.

Question put, and agreed to.

Bill read a Second time, and committed to a Standing Committee.