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Orders Of The Day

Volume 979: debated on Tuesday 26 February 1980

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Companies Bill Lords

As amended ( in the Standing Committee), considered.

New Clause 24

Continued Application Of Provisions Of Protection Of Depositors Act 1963

'(1) The repeal by the Banking Act 1979 (the "1979 Act") of the Protection of Depositors Act 1963 (the "1963 Act") shall not affect, and shall be deemed never to have affected, the application of the following provisions of the 1963 Act to unexempted companies on and after the commencement of Parts I and III of the 1979 Act, that is to say—

  • (a) sections 6 to 17; and
  • (b) so far as relevant to the operation of those sections, sections 5 and 22 to 27.
  • (2) In this section "unexempted company" means any company within the meaning of the 1963 Act which is not excepted by section 2(1) of the 1979 Act from the prohibition on the acceptance of deposits imposed by section 1 of the latter Act.'.—[ Mr. Eyre.]

    Brought up, and read the First time.

    4.8 pm

    I beg to move, That the clause be read a Second time.

    The purpose of this new clause is to remedy an omission from the Banking Act 1979, which was enacted by the Labour Government, which among other things provides for the repeal of the Protection of Depositors Act 1963. The Protection of Depositors Act 1963 restricts and regulates advertisements for deposits and requires companies subject to the Act to deliver to the Department annual and half-yearly accounts. These accounts are examined by the Department to ensure compliance with regulations made under the Act and to check the companies' general financial position.

    The Banking Act 1979 was enacted to improve the control of banks and deposit takers. It provides for the recognition of certain banks and for the licensing of other deposit-taking institutions by the Bank of England.

    It was originally envisaged that, fairly soon after the bringing into force of the major provisions on 1 April 1980, it would be possible to repeal the 1963 Act. The position would then be that deposit takers could take money from the public only if they had a licence under the 1979 Act. Unfortunately, account was not taken of the continuing need to keep an eye on deposit takers which failed to obtain a licence under the 1979 Act and which, while therefore unable to continue to seek deposits from the public, continued in existence making use of money deposited with them earlier. Repeal of the 1963 Act will remove all control from such deposit takers with possible risk to their depositors; on the other hand, failure to repeal the Act will mean that deposit takers licensed under the 1979 Act will have to make returns both under that Act and under the 1963 Act.

    Accordingly, it is proposed to keep the relevant provisions of the 1963 Act alive to control the 60 or so unlicensed companies which continue to hold deposits. This will protect people who have money deposited with those companies; and it will not hamper the express repeal of the 1963 Act in respect of licensed deposit takers.

    Although the 1963 Act has not yet been expressly repealed, I am advised that it is possible for repeal to have come about by implication on bringing into force the major provisions of the Banking Act, on the reasoning that the provisions of the later Act are so inconsistant with, or repugnant to, the provisions of the 1963 Act that the two cannot stand together: hence, as a safeguard, the retrospective nature of this amendment.

    At the end of the previous Parliament, the Banking Act was passed so quickly that Homer did not merely nod; he was knocked over in the rush. It is important that the 1963 Act provisions as to unexempted companies should be preserved.

    Although the Minister is restoring many of the sections of the 1963 Act, he expressly retained in the repeals section 17, which gives the Department of Trade the power to see documents to discover whether there has been any breach of the 1963 Act, and section 18, which provides for search and entry. I should like to know whether Homer nodded again or whether it is a deliberate act of Government policy to leave out the provisions for the production of documents, search and other powers to obtain information. Those powers are important. If there is to be the protection of depositors, the powers of entry and obtaining information must be preserved. Why have those been omitted in the restoration of the repeal of certain provisions of the 1963 Act?

    The second question is one that perhaps the Minister would like to think over and consider whether something should be done in another place by way of an amendment to the the new clause. I refer to the way in which the law is stated. It is difficult if someone reads the Banking Act and comes to the same conclusion that the Minister came to—that the 1963 Act is repealed—and then finds tucked away in the Companies Bill of this year a provision saying that the repeal did not take place but was restored. It is an unsatisfactory position. I am not sure whether the law will now he stated with the clarity that it should be stated. I doubt whether people can easily see that that which was intended to he repealed, or which was repealed by implication, is not now repealed. Perhaps the Under-Secretary would like to think about that point.

    In basic principle, we retain such powers as we believe are necessary for the continuing supervision of the limited number of companies which will continue to retain deposits for a period in the manner that I explained.

    The Department is willing to discuss with these unlicensed companies their new position and its implications for the future. The hon. Gentleman need have no fear in respect of the continuing supervision of the function of these companies. It may well be that this will be only a transient stage as moneys are withdrawn from those companies, or they make other arrangements. Perhaps the unlicensed company will merge with another licensed company. For that reason, this is probably a transitional arrangement which we believe will adequately deal with the present situation.

    Question put and agreed to.

    Clause read a Second time, and added to the Bill.

    New Clause 22

    Application Of Sections 54 To 58 And 60 To 64 To Unregistered Companies

    Section 435 of and Schedule 14 to the 1948 Act (which provide for the application of certain provisions of that Act to unregistered companies) shall have effect as if sections 54 to 58 and 60 to 64 above were provisions of that Act and were included among the provisions of that Act specified in that Schedule which relate to accounts and audit; and the reference in the last entry in column 3 of that Schedule to provisions applied by virtue of the foregoing entries in that Schedule shall be construed accordingly.'.—[Mr. Eyre.]

    Brought up, and read the First time.

    I beg to move, That the clause be read a Second time.

    The effect of this new clause is to enable the Secretary of State, by statutory instrument, to extend the disclosure provisions of part IV of the Bill to unregistered companies. These are defined in section 435 of the Companies Act 1948 as
    "all bodies corporate incorporated in and having a principal place of business in Great Britain"
    other than a body incorporated by or registered under any Public General Act of Parliament or a body not formed for the purpose of carrying on a business for gain or any body from time to time exempted from the provisions of section 435 by direction of the Secretary of State.

    The bodies corporate falling within this definition are, broadly speaking, those that are incorporated otherwise than by registration under a general system of incorporation. They include bodies incorporated by Royal charter or by Private Act of Parliament, and the provisions of the Companies Acts 1948 to 1976 do not automatically apply to them. There is, however, power in section 435 of the 1948 Act to apply to such companies those provisions of the 1948 Act that are listed in Schedule 14 to the Act, with such adaptations and modifications as may be specified by the Secretary of State in the regulations applying therein. In both the 1967 and 1976 Companies Acts and the European Communities Act 1972, provision was made to include in Schedule 14 those parts of those Acts that it was felt desirable to be applicable to unregistered companies.

    The provisions of the Companies Acts that have been extended to unregistered companies are currently set out in the Companies (Unregistered Companies) Regulations 1975. Under these regulations the vast majority of the Companies Acts' provisions relating to accounting and disclosure have been applied without modification to unregistered companies, including section 197 of the 1948 Act and section 16 of the 1967 Act. The present position is, therefore, that companies formed under the Companies Acts, as well as unregistered companies, are subject to the same regime as to the disclosure of loans to directors and contracts between directors and their companies.

    As presently drafted, clause 64 of the Bill, when it comes into effect, will repeal section 197 of the 1948 Act and section 16(1)(c) of the 1967 Act, and they will be replaced for companies formed under the Companies Acts by the broader disclosure provisions of part IV. As I have explained, those broader provisions will not themselves automatically apply to unregistered companies, so that a more rigorous regime of disclosure will be applied to Companies Act companies and no disclosure provisions, other than those contained in the constitutions of the individual companies, will be applied to unregistered companies. Right hon. and hon. Members will agree that such a result would be quite unjustified, and the aim of this clause is to enable the disclosure provisions of part IV, which replace sections 197 and 16(1)(c), to be applied to the unregistered companies as were these sections.

    Therefore, the Government's intention is that the same requirements for disclosure of directors' transactions shall apply equally to Companies Act companies and to unregistered companies. I hope that this will meet with the approval of the House.

    I make no complaint about this new clause. It embraces a sensible concept. However, regrettably, I want to start on a note of complaint. New clauses 20 to 24 were all tabled last Wednesday night. The Government have had a long time between the Committee and Report stages. On a technical Bill of this character the Government—aided, as they are, by a group of hard-working officials, who undertake the task with great dedication —should have been able to table this and the other new clauses long before last Wednesday night. If they were not in that position, they should not have proceeded with the Report stage at this juncture.

    Faced with a large number of Government amendments. Opposition amendments and Back Bench amendments, it is extremely difficult for the Opposition to consult about these matters as we feel entitled to do. It is possible that the Government have got this one right. There is an awful lot that they have got wrong in drafting. I understand that. We are dealing with a highly technical Bill. One can never be absolutely right in company law. We shall return to that argument on another new clause.

    On highly technical matters such as new clauses 20 and 23, this is not the right way to deal with the House. The Minister was kind enough to write to me and, I presume, to other hon. Members who served on the Committee about new clause 24, but the Government did not find time to write to us about the other matters. We are entitled to some explanation. One understands that Ministers are heavily burdened. All hon. Members have been heavily burdened with getting the necessary information and reading up the necessary law for this difficult Report stage.

    I believe that the Minister owes those who served on the Committee an apology. I hope that in the absence of any real opportunity for scrutinising matters that require consultation with outside bodies the Government will recognise that it may be necessary for them to be scrutinised with great care in another place. I hope that the Government, if necessary, will not feel backward about producing amendments if such scrutiny requires this.

    Having made that complaint, which also applies to other amendments, the Opposition feel that this new clause has a great deal to commend it.

    I think that the hon. Gentleman is confusing me with the reasonable man on the Clapham omnibus.

    I apologise to the hon. Member for Hackney. Central for having thought that I had seen him on the Clapham omnibus. The hon. Gentleman would certainly be qualified for the role of the reasonable person riding on than omnibus. It was entirely fair of him to say that this is a highly technical Bill. Having struggled with it in Committee, all hon. Members know that this is inevitably so. I am, therefore, sorry if Opposition Members have been inconvenienced by the fact that because of the sheer complexity of the matter and the pressure of events the Government have not been able to give much longer time to consideration of various clauses.

    I am grateful to the hon. Gentleman. It is not a question of inconvenience; it is a question of not being able to do one's duty properly in scrutinising these difficult proposals.

    I appreciate that. The hon. Gentleman, with his experience in Government, especially his experience in respect of these complicated matters, will know that the Government have to follow a complicated process of consultation with interested parties. The hon. Gentleman, if he thinks back some months, will know that this process of consultation takes up a long time.

    The hon. Gentleman acknowledged that I had written to him about new clause 24. He will know that Ministers have tried to be considerate and to write to and consult Opposition Members. I do not wish to disguise the difficulty of the job that we have to discharge in this respect. I can only assure the hon. Gentleman —I thank him for the welcome that he has given the new clause—that we will continue to assist him as much as possible in discharging his job and dealing with these highly technical matters.

    Question put and agreed to.

    Clause read a second time, and added to the Bill.

    New Clause 20

    Extension Of Section 26 Of 1967 Act

    `(1) In subsection (1) of section 26 of the 1967 Act (disclosure of director's service contract with company) the following paragraph shall be inserted after paragraph ( b)—

    "(c) in the case of each director who is employed under a contract of service with a subsidiary of the company, a copy of that contract or, if it is not in writing, a written memorandum setting out the terms of that contract;".

    (2) The following subsection shall be inserted after subsection (3) of that section—

    "(3A) Subsection (1) above shall not apply in relation to a director's contract of service with the company or with a subsidiary of the company if that contract required him to work wholly or mainly outside the United Kingdom, but the company shall keep a memorandum—
  • (a) in the case of a contract of service with the company, setting out the name of the director and the provisions of the contract relating to its duration;
  • (b) in the case of a contract of service with a subsidiary of the company, setting out the name of the director, the name and place of incorporation of the subsidiary and the provisions of the contract relating to its duration,
  • at the same place as copies and the memorandums are kept by the company in pursuance of subsection (1) above.".

    (3) Each reference in subsections (4), (5) and (7) of that section to subsection (1) shall be construed as including a reference to subsection (3A) of that section; the reference in subsection (7) of that section to a contract of service with a company shall be construed as including a contract of service with a subsidiary of a company; and in subsection (8) of that section, paragraph ( a) shall cease to have effect.'.—[ Mr. Eyre.]

    Brought up, and read the First time.

    With this it will be convenient to take Government amendments Nos. 302 and 247.

    Section 26 of the 1967 Act provides for the disclosure of directors' contracts of service with the company. Clause 47 of the Bill, which will prevent directors from entering into long-term service agreements with their company without the approval of the general meeting, covers a wider category of employment agreements. This includes contracts of service which are the usual basis on which people are employed and contracts for service, for instance, where a director makes his services available through his own private company or as a consultant.

    The disclosure provisions of these two sorts of service contracts are to be effected in different ways. Contracts for service which are not at present required to be disclosed as such will in future fall for disclosure under clause 54. A director will be required to declare his interest in such contracts by virtue of section 199 as amended by clause 59 of this Bill. Under clause 54, the principal terms of the contract and the nature of the director's interest in it must be disclosed in the company accounts.

    Contracts of service are already largely provided for in section 26 of the 1967 Act, which requires details of directors' service contracts to be open to inspection by members of the company at an appropriate place. This section needs amendment, however, to bring it into line with the Bill in two respects.

    First, we need to ensure that a director's service contract with a subsidiary company is disclosed in the same way as his service contract with the holding company, of which he is a director, is already required to be disclosed. The effect of this is achieved by subsection (1) of new clause 20.

    Secondly, we need to restrict the exemption embodied in subsection (8) of section 26 for the disclosure of service contracts which require directors to work wholly or mainly overseas. Companies will now be required, by virtue of subsection (2) of this new clause, to disclose the existence of such a contract and those terms of the contract relating to duration in the same manner as those for non-overseas contracts.

    Subsection (3) is merely consequential on subsections (1) and (2). It applies the provisions in section 26 relating to the inspection of service contracts, fines for default, and variation of service contracts to contracts of service with subsidiaries. It disapplies the present total exemption from disclosure of foreign service contracts.

    Amendments Nos. 247 and 302 are also consequential. The latter extends the exemption from the disclosure requirements in clause 54 to contracts of service between a company and a director of its holding company, as this is now provided for in the amendment to section 26.

    I concede that I have not looked up the reports of the Committee stage of the 1967 Bill. I should like to know what is the rationale for the exclusion of the contract of service that is to be wholly or mainly performed abroad. The Minister must have been impressed by that qualification in the 1967 Act, as he has incorporated it in the Bill.

    4.30 pm

    I understand that the effect of the clause is to provide for disclosure of such contracts, but there are no sanctions similar to those which are provided subsequently in the Bill in relation to breaches of the contract of service provisions. I content myself with asking the Minister to reply to those specific points.

    To build on what my hon. Friend the Member for Hackney, Central (Mr. Davis) said, there must be very cogent reasons for exempting overseas service contracts, because the benefit in respect of a director who has an overseas service contract is no less than that applying to any other contract. If it appears that there is no need to disclose in respect of overseas contracts, greater use might be made of overseas service contracts for the purpose of evading the disclosure provisions applying to domestic contracts.

    Having listened to the hon. Members for Hackney, Central (Mr. Davis) and Swansea, East (Mr. Anderson), I can only think that they misunderstood what I said. I emphasised that we needed to restrict the exemption embodied in clause 26(8) for the disclosure of service contracts which require directors to work wholly or mainly overseas. Companies will now be required by virtue of subsection (2) to disclose the existence of such a contract—

    I did not misunderstand it. I think the Minister must have misunderstood what I said. I conceded that there was disclosure, but I said that there were no sanctions.

    It was the hon. Member for Swansea, East who misunderstood me, then. I am sorry if I misunderstood the hon. Member for Hackney, Central.

    Companies will now be required, by virtue of subsection (2) of the new clause, to disclose the existence of such a contract and the terms of the contract relating to duration in the same manner as those for non-overseas contracts. The exclusion of foreign service contracts in the 1967 Act was to prevent the disclosure of details which might be embarrassing to the holder of the contract.

    The hon. Member for Hackney, Central went on to raise the question of sanctions—

    There are, of course, sanctions for breach of the provisions which appear in the relevant clauses, but they do not apply in this instance, as I read the clause.

    I remind the hon. Gentleman that under section 26 of the 1967 Act companies and any officers of companies in default are liable to a fine. There are, therefore, adequate means within the Bill for the enforcement of the requirement.

    Question put and agreed to.

    Clause read a Second time, and added to the Bill.

    New Clause 21

    Duty Of Auditors Of Company In Breach Of Sections 54 Or 56

    'If in the case of any group or other accounts of a company the requirements of section 54 or 56 above are not complied with, it shall be the duty of the auditors of the company by whom the accounts are examined to include in their report on the balance sheet of the company, so far as they are reasonably able to do so, a statement giving the required particulars:.—[Mr. Eyre.]

    Brought up, and read the First time.

    With this it will be convenient to take Government amendment No. 293 and amendment No. 91, in page 67, line 14, at end add— '(8) If in the case of any such accounts as aforesaid the requirements of this section are not complied with, it shall be the duty of the auditors of the company by whom the accounts are examined to include in their report on the balance sheet of the company, so far as they are reasonably able to do so, a statement giving the required particulars'.

    I beg to move, That the clause be read a second time.

    We have tabled the clause in response to a helpful suggestion made by the Consultative Committee of Accountancy Bodies. Its effect is to place a duty on auditors to include in their report a statement giving the particulars of any loans and other transactions of the kinds described in part IV of the Bill, such as quasi-loans and credit transactions, which have not been disclosed in the accounts.

    The disclosure provisions in clauses 54 and 56 are intended to replace section 197 of the Companies Act 1948, but they do not at present include a provision replacing subsection (3) of that section. That subsection goes further than the general requirement on auditors to qualify their report it any information required by statute to be included in the accounts is not so included, as it places a duty on them actually to supply, as far as possible, the missing information required to be included by section 197 in a separate statement in their report. The subsection can therefore serve to discourage directors and officers from attempting to withhold the information in the first place. As we regard the new disclosure provisions as an important policing mechanism for the general prohibitions in part IV, we consider that, by maintaining this duty on auditors, the disclosure provisions will be that much more effective.

    The clause therefore repeats the wording of section 197(3), though extending the new provision to group accounts and to all the disclosure requirements of sections 54 and 56.

    We recognise that the intention of amendment No. 91 is very similar to that of our new clause 21. The scope of amendment No. 91 does not, however, extend either to group accounts or to the additional disclosure provisions in clause 56—that is, disclosure of loans to officers, and aggregate disclosure of loans to directors of recognised banks. We believe that this wider coverage is desirable and that the new clause is, therefore, preferable to amendment No. 91. I hope that Opposition Members will recognise that we have accepted the principle of amendment No. 91 in our new clause and will feel able to withdraw the amendment.

    I will put the Minister out of his misery at once by telling him that there will be no Division on the clause.

    I am delighted to see here the hon. Member for Folkestone and Hythe (Mr. Costain). He takes such an interest as Chairman of Committees and in many other matters. I am anxious to know what he is interested in today.

    I readily agree that the clause is an improvement on our drafting in amendment No. 91. It is amazing how valuable are the parliamentary draftsmen from time to time. We are all agreed about the principle, and I agree, therefore, that the new clause is to be preferred. I welcome the addition that is being made to the Bill.

    May I thank the hon. Gentleman for his tribute to the parliamentary draftsmen?

    Question put and agreed to.

    Clause read a Second time, and added to the Bill.

    New Clause 23

    International Bonds

    '.—(1) Section 65 above shall not by virtue of section 67 above prohibit an individual from doing anything in relation to any debenture if—

  • (a) that thing is clone by him in good faith in connection with an international bond issue—
  • (i) not later than three months after the issue date, or,
  • (ii) in a case where the international bond issue is not proceeded with, before the date on which it is decided not to proceed with the issue,
  • and he is an issue manager for that issue or is an officer, employee or agent of an issue manager for that issue; or

    ( b) he is or was an issue manager for an international bond issue who is making a market in that debenture, or is an officer, employee or agent of such an issue manager, and that thing is done by him in good faith as a person making a market in that debenture or as an officer, employee or agent of such a person;

    and in either case the unpublished price sensitive information by virtue of which section 65 would but for this section apply in relation to that thing is information which he holds by virtue of his being (or having been) such an issue manager or an officer, employee or agent of such an issue manager, and is information which it would be reasonable to expect him to have obtained as an issue manager, or as such an officer, employee or agent.

    (2) In subsection (1) above—

    "international bond issue" means an issue of debentures of a company (the issuing company")—
  • (a) all of which are offered or to be offered by an off-market dealer to persons (whether principals or agents) whose ordinary business includes the buying or selling of debentures, and
  • (b) where the debentures are denominated in sterling, not less than 50 per cent. in nominal value of the debentures are so offered to persons who are neither citizens of the United Kingdom and Colonies nor companies incorporated or otherwise formed under the law of any part of the United Kingdom;
  • "issue date" means the date on which the first of these debentures is issued by the issuing company; and
    "issue manager" means—
  • (a) an off-market dealer acting as an agent of the issuing company for the purposes of an international bond issue; or
  • (b) where the issuing company issues or proposes to issue the debentures to an off-market dealer under an arrangement in pursuance of which he is to sell the debentures to other persons, that off-market dealer.'.—[Mr. Parkinson.]
  • Brought up, and read tile First time.

    With this it will be convenient to take Government amendment No. 317.

    I beg to move, That the clause be read a Second time.

    Like several clauses we have discussed this afternoon, this is a highly technical clause. Its objective is relatively simple. It is to seek to exclude from the operation of clause 67, the insider dealing clause certain activities carried on by those who manage the Eurobond market. The reason why we seek that exclusion is that by the very nature of the market those who deal and act as brokers also make the market. By the nature of their activity, insiders will be caught by clause 67 unless we seek to exclude them. It is an international market which is dealt in by professionals. The way in which the market operates ensures that the person making the market is the one broking the bonds. The clause has been drawn up to try to define Eurobonds, and to seek to provide defences for those who legitimately deal in them.

    I turn to the new clause and the definitions therein. The key definition is that of an international bond issue. While many recognise a Eurobond when they see one, it is especially difficult to define it. We approached the question from a rather unusual angle. We confined the definition to bonds that are to be offered to professional dealers—that is, persons, whether as principals or agents, whose ordinary business includes the buying or selling of debentures. That requirement applies in all cases.

    The bond must be denominated in foreign currency If it is denominated in sterling, at least half of the issue by value must be offered to persons, whether legal or natural, who are foreign. In the case of individuals, that means not citizens of the United Kingdom or colonies, and in the more usual case of companies incorporated or formed under the law of a country other than that of the United Kingdom.

    We have attempted to build into the definition a substantial international element to make up for the fact that we cannot directly define what is usually called a Eurobond. The other definitions of issue manager and issue date are, we believe, more straightforward.

    I turn to subsection (1). There are two separate defences. The first excludes from the operation of clause 67 anything done in relation to debentures by an issue manager or officer—or an employee or agent of such a manager—provided that it was done by him in good faith in connection with an international bond issue within three months of the issue date. That is intended to protect issue managers in allotting bonds while in possession of information about people's reaction to the original invitation and, also, where they make a market in the bond issue and take market positions in it, going long or short.

    There are two limitations. First, whatever is done must be done in good faith in connection with an international bond issue, so that if they had in mind some quite extraneous consideration the defence would not apply. Secondly, it is implicit in the defence that it should be limited in the sense that it relates to information about the issue of an international bond. It is better to make that explicit, and we have introduced a limit of three months after the issue date. By that time, the inside information that is linked to the issue manager's relationship with the issuing company will have lost its force.

    Obviously, there is an element of arbitrariness in selecting a specific period, but we think that it is desirable to put an explicit limit on the operation of the defence.

    The second defence protects the issue manager and his officers, employees and agents when, in addition to being the issue manager, they make a market in other bonds already in issue by the same company that is making the present issue, or some closely related company, for example, another company within the same group.

    4.45 pm

    The defence permits them to continue to deal in those other debentures, provided that they are making a market in the debentures and that they deal in good faith as a market maker. The defence permits an issue manager to continue to make a market subject to those limitations in cases where, as issue manager, he possesses "unpublished price sensitive information".

    The argument in favour is one of continuity in market making, as the alternative would be withdrawing from the market. That would create confusion and speculation that would damage the market. My arguments are the same as those which lead to the defence for other market makers—for example, jobbers—under clause 65(8)(c).

    Both defences are further limited in that the information that would otherwise preclude them from dealing must be information, first, which an individual holds by virtue of being an issue manager, officer, employee or agent of that manager, and, secondly, which it would be reasonable to expect him to have obtained in such a capacity. Therefore, as in the jobber's defence, the defence is limited in its scope.

    Amendment No. 317 provides a definition of market maker, which will, if the House accepts amendment No. 323, apply for the purposes of clause 67.

    I thank the Minister for his explanation and definition. At least we have the satisfaction of knowing that Eurobonds, in common with elephants, are difficult to define, but one knows what they are when one sees them.

    As the Minister said, this is a technical matter, and one that is better examined by looking at the cold print rather than by trying to understand what the Minister has said in detail from the Dispatch Box. In so far as the Minister has made that explanation, I think that it will be broadly accepted.

    I have two major criticisms of the new clause. The first is procedural and the second is substantive. In making the procedural criticism I adopt the remarks of my hon. Friend the Member for Hackney, Central (Mr. Davis) in relation to timing. In response to that, and in mitigation of the Government, the Minister said that these were technical matters which needed a complicated system of consultation. Those two considerations apply to virtually all the matters in the Bill and are not a sufficiently adequate answer.

    We know that the amendment, which is highly technical, was tabled on 20 February, at the last moment. It may be of considerable importance. In the light of the Minister's explanation, it is probably not of world-shaking importance. Clearly we have had insufficient time as an Opposition to appraise the matter and to make the relevant consultations among the affected bodies and among those who could be of assistance to us. As a result, we cannot carry out our job to scrutinise and to improve Government legislation. We cannot obtain in time properly considered responses. It is asking too much of an Opposition when contrasted with the veritable army of advisers available to the Minister.

    Hence the need for the other place. Their Lordships will not recognise the Bill that we shall eventually return to them. It is of a wholly different character from the minor Bill which left them in July last year.

    If, as the Minister said, a lengthy process of consultation is needed, our response is "Yes", but we must also point out that the new clause was tabled at the last minute. There is no need to rush it. Indeed, if there is a deadline, it is a self-imposed one. It is one which the Government have imposed themselves by having the legislative timetable dictate that it will be this week that we shall examine the Bill on Report.

    That raises general problems about criticisms of the procedure for examining Bills of this nature. By and large, this measure is non-controversial between the parties. However, the Committee would have been aided if at a pre-Committee stage we had been able to call expert evidence on 'patters such as this in order properly to make up our minds on the validity of the several proposals that have been made. One wonders whether this Government or any other Government will draw the lessons in terms of parliamentary procedure from the shambles of a procedure that we have had in regard to this Bill.

    As the Minister said, the substantive matter is highly technical. He said that it was in response to the consultative document of October last year. Therefore, there has been ample time for the affected bodies to make their views known in response to those who are active in the Eurobond market.

    The way in which the new clause has been drafted and the procedure that I have outlined necessarily make one ask how serious the Government are about the effectiveness of these insider provisions. We know that there have been false starts in respect of insider legislation. One occurred in 1973, and the general election of 1974 brought that legislative attempt to an end.

    Another occurred in 1978, and the general election of 1979 brought that to an end. One wonders whether what has emerged from the consultative document, and the Government's improvement on it, will be truly effective,

    I invite the Minister and the draftsmen to ask themselves whether they should have put themselves in the shoes of a judge who is trying to direct a jury in making up its mind in respect of the criminal provisions that have been set out. I shall try to illustrate some of the difficulties of a judge in explaining these matters to a jury because of the multiplicity of tests that have to be satisfied at one and the same time.

    Clause 65 is the governing clause in respect of the new clause. According to clause 65(1), the individual must be
    "knowingly connected with a company".
    There is no rebuttable presumption, for example, that he is so connected. He must have information
    "which—
    (a) he holds by virtue of being connected with the company;
    and other hurdles—
    "(b) it would be reasonable to expect a person so connected … not to disclose except for the proper performance of the functions attaching to that position; and
    (c) he knows"—
    that the information he holds—
    "is unpublished price sensitive information in relation to those securities".
    What is "unpublished price sensitive information"? We are told by the definitions in the interpretation clause, clause 69(2)(a), that "unpublished price sensitive information" is information
    "which—
  • (a) relates to specific matters relating or of concern (directly or indirectly) to that company, that is to say is not of a general nature relating or of concern to that company; and
  • (b) is not generally known to those persons who are accustomed or would be likely to deal in those securities."
  • The obstacles which the Government have erected continue clause after clause. Should it not be a necessary test for any draftsman in any provision that creates penal sanctions to seek to ask himself "Can a judge get across to a jury the nature of this crime?"

    I have tried to illustrate this point. Clearly, it is technical, but one accepts the possibilities contained in those clauses and the extra hurdles that have been set up by the new clause. One need not itemise them. This must be done in good faith, and the new clause goes on to reproduce what is contained in clause 65. In total, it appears that the possibility of a successful conviction in respect of these insider clauses is very remote indeed as a result of the obstacle course which the Government have provided for the prosecution.

    For that reason, one is bound to express some doubt as to whether the Government seriously want these provisions to be effective or whether they are saying that the whole purpose of this attempt to deal with insiders is essentially to be a deterrent and that they do not seriously expect a criminal prosecution to succeed for the reasons I have given. At least the new clause will be declaratory and will give an indication to people who are tempted that such action is viewed with sufficient official disfavour that it is brought within the ambit of criminal sanctions.

    By the new clause and the other insider clauses, the Government have imposed on the tempted insider not a straitjacket but a string vest, as one journalist has said. It is a string vest with so many holes that anyone so tempted is probably unlikely to be deterred.

    I should like to echo the grumble of the hon. Member for Swansea, East (Mr. Anderson) that a new clause of this complexity has been tabled so recently. It does not give hon. Members the opportunity to study the implications. It is really beyond the majority of us in the House, even those who take an active interest in company law, to be perfectly certain about the implications of this and similar clauses. However, my hon. Friend the Minister for Trade has taken a great deal of trouble and has said much that will repay close study. No doubt it will receive it. Even so, there are some general observations that one must make in considering a new clause of this kind.

    I am not qualified to make particular observations, but my general observation is that it seems that here we are acknowledging a failure of self-regulation in the management of companies. That is a point which is worthy of comment, although I do not want to dilate on it now. Something must be done because companies are failing to discipline themselves. The Department has decided on a change in company law. That is an important decision, because there are other ways in which problems such as the one dealt with in the new clause could be tackled. However, the Department has taken that decision. That is important, because company law is growing like Topsy. Virtually every day the Department seems to have a brainwave about ways in which the conduct of directors or managements of companies should be regulated more minutely than ever before.

    5 pm

    I am concerned about the weakness of the supervisory elements in the company law framework that exists in Britain. The supervisory elements in British company law are much weaker than those in America, Germany or other free enterprise societies with which we have to compete. I have constantly sought to draw attention to that deficiency. Should company law be allowed to become more minutely detailed and unenforceable, or, as I believe, should we look for some other way of cleaning up a fraudulent, inefficient or drowsy firm? I am not opposinfi the clause, which may be correct and necessary. I am simply making a warning sound to the Department. Deeper thought is needed as to the way in which we should tackle known problems.

    I cannot help but reflect that before Parliament decided to make auditing compulsory lion. Members must have been distressed by a series of unhappy stories from companies about fraud or incompetence. In due course, those problems were dealt with by introducing compulsory audits. Will the Minister indicate that this is a problem that must be dealt with by legislation? It cannot be dealt with in any other way.

    I shall deal briefly with all the points that have been raised.

    The hon. Member for Swansea, East (Mr. Anderson) opened the debate for the Opposition. Although we had the pleasure of listening to him from the Opposition Front Bench in Committee, this is the first time that I have heard him speak from the Front Bench in the House. I enjoy his remarks and I look forward to hearing many more from him from that Dispatch Box. However, I cannot accept what he said, although he said it charmingly.

    It is difficult for a party in Opposition to move at the speed at which Governments can move. Having sat on the Opposition Benches for some time, listening to the hon. Gentleman sounding masterly as he repeated those beautifully drawn-up briefs provided by civil servants, I am aware that one has to do a great deal of homework oneself and that that presents difficulties.

    This clause arose from representations by the Law Society. Unless the Law Society is a different body today from the body that it was a few months ago—I know that it is not—I am sure that whatever the Law Society said to the Government about its criticisms of the clause, it said equally to the Opposition.

    One of the problems that must have confronted the Law Society was the time scale. The problem confronting us was how we could equip ourselves to deal with these complicated matters. The Government should have realised on Wednesday night, when they were faced with this problem, that they should have deferred the Report stage for a week or so to enable all hon. Members to get to grips with these matters.

    The clause has been drafted to meet an objection that was raised by the Law Society as a result of its examination of the original Bill. However, that is an argument on which we shall never reach a satisfactory conclusion. As the hon. Member for Hackney, Central (Mr. Davis) knows, we delayed the Committee stage so that he could take advice. I accept the difficulties that he has mentioned, but I hope that he will not continue to refer to them, because that could delay matters.

    In order to put the record straight, may ir say that the Law Society mentioned to the Opposition the problem to which the Government have adverted. The difficulty arose over the way in which the Government dealt with it.

    It was because the Government recognised that problem that I devoted a good deal of time to it in my introduction to this new clause.

    The second part of the strictures of the hon. Member for Swansea. East was not valid. He talked about our approach to insider dealing. In this new clause we are excluding those people who deal in and make Eurobond markets from the provisions of the insider dealing clause. I listened with interest to his remarks about our approach to insider dealings, but we are making arrangements not to apply those provisions to this particular market.

    Nevertheless, a potential defendant would still have to bring himself within those exemptions.

    The difficulty is that the Eurobond market is an international market. It is quite capable of picking itself up and moving itself out of the country. Most of the market is made by telephone and Telex, and it is the dealers who make the principal part of the market. If we were to apply the insider dealing clauses, the market could easily leave Britain and we would lose. There is, therefore, some urgency in getting this legislation on to the statute book.

    The views of my hon. Friend the Member for Kensington (Sir B. Rhys Williams) are always studied with great interest, especially by Ministers. However, we have debated on a number of occasions whether we should make insider dealing a criminal offence. There is widespread agreement throughout the House that we should do so. I hope, therefore, that my hon. Friend will forgive me if I do not follow him into a discussion on whether we should approach the problem in that way. The decision has been taken, but we respect his view that there could have been another way of dealing with the matter.

    Question put and agreed to.

    Clause read a Second time, and added to the Bill.

    New Clause 3

    Special Audit Committee

    'In any company with a paid up capital of £100,000 or more the shareholders shall at the Annual General Meeting appoint a Special Audit Committee on the following terms:—

  • (a) all members of the Board of the Company shall be completely and expressly excluded from membership of the Special Audit Committee, and no relative of any Director nor any person holding shares in the Company shall be a member of the Committee;
  • (b) the Committee shall consist of not less than three nor more than six persons and shall be authorised to employ professional staff to carry out its duties;
  • (c) funds for the work of the Committee shall be voted by the shareholders at the Annual General Meeting;
  • (d) the Committee and its staff shall have an unqualified right at any reasonable hour and without notice to examine the books, records, documents, vouchers, ledgers, contracts or any papers whatsoever relating to the business of the Company or the remuneration of any Director or employee of the Company;
  • (e) the Committee shall report at least annually to the shareholders and may report at any time on any matter which in their judgment should be brought to the attention of the shareholders, and may also if they think fit make reports to the Department of Trade.
  • This section shall not be construed as overriding the normal statutory duties of the Company's duly appointed auditors.'—[ Mr. Hooley.]

    Brought up, and read the First time.

    I beg to move, That the clause be read a Second time.

    New clause 29— Audit Committees:

    '(1) The agenda of every annual general meeting of a major public company shall include either—

  • (a) the report of the audit committee of the board to the members, or
  • (b) consideration of the appointment of an audit committee of the board.
  • (2) The report of the audit committee of the board to the members of any company shall state in what ways if any the practice of the company or of the audit committee has differed from the practice required to conform with the provisions of Schedule () to this Act (Constitution and Functions of Audit Committees).

    (3) In this section a major public company shall mean any company registered in Great stock exchange if at any time within a period of five sears ending on the last day of its last Britain whose shares are listed on a recognised accounting reference period being a day not more than 12 months after the passing of this Act, the company has—

  • (a) employed a number of employees in excess of 25,000; or
  • (b) had total net assets in excess of £200 million.'.
  • New clause 30— Appointment of Non-Executive Directors:

    '(1) Every company to which this section of this Act applies shall either—

  • (a) have in addition to any other directors not less than three directors who shall be non-executive directors of the company, or
  • (b) shall include in the agenda of the annual general meeting the consideration of the appointment of non-executive directors of the company.
  • (2) This section of this Act shall apply to any company registered in Great Britain whose shares are listed on a recognised stock exchange.

    (3) The remuneration to be paid to the non-executive directors shall be decided by the members at each annual general meeting of the company and shall be at the discretion of the members, notwithstanding any provisions in the articles of the company governing the remuneration of directors.

    Amendment No. 383, which proposes to insert a new schedule—

    Constitution And Functions Of Audit Committees

    "(1) If at an annual general meeting of a major public company it is resolved in accordance with the provisions of section (audit committees) to appoint an audit committee, such a committee shall (unless otherwise specified in the articles of the company), be constituted by the board of the company within three months of that meeting and shall be required by the board to function in accordance with the following provisions of this section:—

  • (a) the audit committee shall consist of such directors of the company as the directors shall determine but shall include not less than three non-executive directors;
  • (b) not less than half the members of the audit committee shall be non-executive directors of the company;
  • (c) the non-executive directors who are members of the audit committee shall nominate one of themselves to be chairman of the audit committee;
  • (d) the company secretary shall carry out the responsibilities of secretary of the audit committee;
  • (e) each member of the audit committee shall have a vote and in the event of an equality of votes the chairman of the audit committee shall be entitled to exercise a casting vote;
  • (f) the audit committee may act notwithstanding any vacancy in the number of its members;
  • (g) the chairman of the audit committee shall convene audit committee meetings not less frequently than twice between each annual general meeting of the company and shall preside at such meetings;
  • (h) the auditors of the company shall be entitled to receive notice of and to attend every meeting of the audit committee and to be heard thereat and the audit committee may require attendance by the auditors and every member of the audit committee and the auditors may require meetings of the audit committee to be convened, but the auditors shall not be members of the audit committee.
  • (i) the audit committee shall—
  • (i) undertake reviews of all audited or unaudited financial statements prepared by the directors before such statements are issued to members of the company or in any other manner published (and any such statement shall indicate whether or not it has been approved by the audit committee and any qualifications or reservations made by the audit committee) and of such data and estimates prepared by the company as in the opinion of the audit committee are necessary to allow a reasonable assessment to be made of the future profitability of the company and its ability to meet its debts as they fall due.
  • (ii) consider any matter which the auditors require to be brought to the attention of the board.
  • (j) the proceedings of audit committee meetings shall be minuted and a copy of the minutes shall be sent by the chairman of the audit committee to every director of the company within seven days of every meeting of the audit committee, but shall not be published, and the board shall consider at the first suitable opportunity the matters which have been examined by the audit committee and the opinions of the audit committee upon them;
  • (k) before any meeting of the company at which the appointment of auditors is to be voted on. the audit committee shall make a recommendation as to the choice of auditors and this recommendation shall be circulated to the members with the notice of the meeting;
  • (l) before any meeting of the Board at which the remuneration of the auditors is to be considered the audit committee shall make a recommendation as to the amount of such remuneration.
  • (2) The audit committee of a major public company shall continue in being and to function in accordance with the provisions of this section notwithstanding any change in the classfication of the company as provided in section 1 of this Act unless at a meeting of the company convened on special notice its appointment is revoked by extraordinary resolution.

    (3) In all companies in which an audit committee has been appointed in pursuance of the provisions of this section:—

  • (a) the audit directors shall make a statement in each accounting reference period (to be known as the audit directors' statement) in which they shall say whether in their opinion the reports of the audit directors on the board were duly considered by the board;
  • (b) a copy of the audit directors' statement shall be attached to the balance sheet and read before the company in general meeting by the chairman of the audit committee;
  • (c) each audit director shall sign the audit directors' statement or resign from the audit committee;
  • (d) an audit director who has resigned from the audit committee for any reason shall give to the chairman of the committee and to the chairman of the company a statement in writing as to the reasons for his resignation and shall notify his resignation to the Registrar of Companies and such notification shall be accompanied by a letter confirming that there are no particular circumstances connected with his resignation which he considers should be brought to the notice of members of the company or the Registrar of Companies or, if there are any such circumstances, he shall require the company to have printed and circulated at the expense of the company to the members of the company a personal statement not exceeding one thousand words in length and a copy of any such personal statement shall be delivered by the company to the Registrar of Companies at the same time as it is circulated to the members of the company;
  • (e) an audit director who has resigned from the audit committee shall not thereby become ineligible for re-appointment as an audit director of the company on any future occasion and shall continue to hold office as a director of the company subject to the provisions of the articles of association of the company;
  • (f) an audit director shall be paid such additional fee, if any, as the members at each annual general meeting of the company shall determine in addition to the fees paid to him as a director of the company, notwithstanding the provisions of the articles of association of the company relating to the remuneration of directors;
  • (g) the directors' report shall state in respect of the accounting reference period to which the report relates—
  • (i) which directors of the company served as chairman or as members of the audit committee;
  • (ii) the name of any audit director who ceased to be a member of the audit committee; and
  • (iii) in the case of any director other than a non-executive director who served on the audit committee the nature of his other primary responsibilities to the company.
  • (4) In this section of this Act:—

    "accounting reference period" has the meaning given in section 2 of the Companies Act 1976;
    "audit director" means a director appointed to serve as a member of the audit committee of a major public company;
    "auditors' report" has the meaning defined in section 14 of the Companies Act 1967;
    "the Companies Acts" has the meaning defined in section 40 of the Companies Act 1976;
    "directors' report" has the meaning defined in section 15 of the Companies Act 1967;
    "non-executive director" means a director who is not an employee of and does not hold any other office or place of profit under the company or any subsidiary or associated company of the company in conjunction with his office of director or audit director of the company '.

    I venture with a good deal of diffidence into the thicket of company law, but I am encouraged that my new clause is accompanied by a new clause and an amendment in the name of the hon. Member for Kensington (Sir B. Rhys Williams) which touch on the same principle. He has a great deal more knowledge of these matters than I could pretend to have.

    It is my belief that in Britain we should have a powerful statutory independent body to overview company law and the activities of companies, not dissimilar to the Securities and Exchange Commission in the United States. So long as we have a mixed economy, and private companies are as powerful and independent as they are at present, such a body should be created, and it should have extensive powers. The answer of the City to that argument has always been self-regulation and self-discipline. Let us look after those matters ourselves, and all will be well.

    All is manifestly not well. By proposing the new clause, I have in a sense accepted the principle of the City's idea. We should build a mechanism into the behaviour of companies and company law which will make that self-discipline and self-regulation work. At present it does not.

    I hope that the House will excuse me if I go into the background to the new clause, which is necessary to establish the case that I am putting forward. Over the past 10 years, and I suspect long before, self-regulation and self-discipline have not worked within the framework of company law. That company law needs some adaptation of new mechanism, which I have tried to provide, although I do not doubt that the Minister will attempt to pull it to pieces on technical grounds. The principle is nevertheless important. I shall listen with great interest to what the hon. Member for Kensington has to say. Although I disagree with certain details in his new clauses, they are closely connected with mine.

    I wish to refer to an early-day motion that appeared on the Order Paper on 11 November 1975. It noted with growing concern the official inquiries being conducted by the Department of Trade into the affairs of private companies. It noted the chain of City failures, embracing some 30 secondary banks, property and insurance companies, including London and County Securities, Lonrho, London Capital Group, Nation Life, Vehicle and General, Fire Auto and Marine, Jesse] Securities and others. It noted the industrial failure of British Leyland, then private, Court Line, Ferranti, Alfred Herbert and others. It emphasised the damage caused to British manufacturing industry by Slater Walker. It called upon the Government to issue a statement on Haw Par and Spydar. It is almost a roll of honour of the City of London. That was in 1975.

    In 1976, we had the famous or notorious report on Lonrho, which attracted a great deal of public interest and led to debates in the House. It caused the right hon. Member for Sidcup (Mr. Heath) to discover, rather late in life, the unacceptable face of capitalism.

    In the Financial Times on 8 July 1976 there were reports on the behavior of the key figures in this dispute, which is probably the most famous punch-up on a board of directors, if not this century, at least since the war. One comment was:
    "You are dealing with a man who had completely converted what was a sleepy, dozy company into something dynamic and who was a sort of tyrant and part madman to boot, but a brilliant one".
    It may be pleasant for companies to have tyrants and part madmen on their boards, especially if they turn out to be brilliant, but with such people in charge of company affairs, perhaps the miserable, non-tyrannical shareholders ought to have some protection against tyranny or madness, in case it goes beyond the bounds of reasonable behaviour.

    The report goes on to quote what Mr. Rowland saw as the function of directors:
    "In a letter to Angus Ogilvy in 1968: 'Lonrho is in my view nothing else but Alan (Ball), yourself and myself, combined in turn to give the company character and soul and constant and continuous drive and motion.'"
    That was Mr. Rowland's version of how a company director should behave and use his power—the company consists only of himself and two other persons who happen to be directors. That was it.

    Mr. Rowland made an even more startling and revealing comment:
    "He had heard how Harley Drayton had managed his companies:
    'Harley would say" Well, we are going to sell this, we are going to buy this, and incidentally he has got this, and I have done that," and this was the pattern and the right sort of behaviour, and the rest was a sort of Christmas-tree decorations.'"
    What a delightful definition of the way to run a company! Certain directors do this or that in the interest of shareholders and employees—presumably all the business of audit, financial control and responsibility, legal regulation and company law—and the rest was "Christmas-tree decorations". That is the considered opinion of a man whom, with no disrespect, I would describe as probably the most outstanding tycoon of the past 20 years. It does not say much for the rights and powers of shareholders.

    5.15 pm

    A couple of days later, on 10 July 1976, The Economist commented:
    "Easy money and easy morals upset Mr. Heath, and most people enjoyed a good dirty fight in the City."
    I am not sure what the word "dirty" means. I do not know whether it is supposed to include fraudulence, manipulation, swindling and cheating. I would not care to pronounce on the morals of the City, but it appears that a good dirty fight is acceptable.

    The article went on—and this is perhaps more pertinent to the argument—
    "Good business practice, only some of which is properly and clearly codified in law, sets bounds to the freedom of men who run companies."
    That is fair enough.
    "If their companies have to survive them, they have to carry their board on major decisions; the board has to tell shareholders what it is doing with their companies. Mr. Rowland clearly broke those bounds".
    Some directors, including Mr. Rowland, clearly believe that it is not necessary to tell shareholders what is going on. Provided directors are dynamic and successful, they can do this and do that, and the rest is "Christmas-tree decorations". to use Mr. Rowland's agreeable phrase. The Economist believes that there should be bounds to the freedom of directors to do what they like. My new clause would provide a mechanism to make sure, within the bounds of human certainty, that there was a check on the arbitrary, tyrannical and perhaps sometimes mad behaviour of directors.

    The article continues:
    "there is the undesirability of directors making personal financial arrangements with a chief executive whose activities they were there not just to support but to monitor."
    That is part of the problem. In that case, the directors were manifestly not monitoring such activities or at least, when they attempted to do so, there was an almighty row in the board room, which ended up in the High Court and led to investigations by the Board of Trade.

    The Economist comments further about those who practise such behaviour:
    "Some have ended in the honours list, some in disgrace, some both."
    On one occasion someone ended up in both. There is the more recent case of Peachey Properties. I shall not go into the whole of that disagreeable business. However, it led once again to a formal investigation by the Board of Trade.

    The inspectors found that the principal director had used the company as a private bank. He had spent company money as if it had been his own. He persisted in acting recklessly until he left the company. He apparently regarded it as quite proper to buy valuable jewellery without telling anyone. He had all sorts of dealings with other stockbrokers and with merchant banks. He failed to produce invoices for extremely valuable pieces of jewellery. He bought a silver model of Concorde costing £22,500 for display at the group's offices. That type of activity can be carried on by a director of an important company under present company law. However, in certain respects he clearly broke that law.

    No effective check can be made by shareholders on such activity. That raises some disagreeable queries about the nature of the accountancy profession. I am particularly concerned about the work of professional auditors. They would appear to be rather casual, if certain revelations are correct.

    Amendment No. 383 stands in the name of the hon. Member for Kensington. This clause and that amendment share the principle that a completely independent mechanism is needed. Mishaps, unpleasantness and malfunctionings have a long history. One need look only at the roll of honour of the past seven years for the City of London. Such mishaps have usually arisen as a result of improper behaviour by directors. By law, they are supposed to run the company in the interests of shareholders. Indeed, in general terms they should run the company in the interests of shareholders and of employees. Presumably they also have some responsibility to the community.

    I part company with the hon. Member for Kensington, because his amendment states that:
    "the audit committee shall consist of such directors of the company as the directors shall determine but shall include not less than three non-executive directors;"
    That falls foul of the problem. Lonrho, Peachey Properties, Vehicle and General, London and County Securities and other companies have shown that this problem concerns the misbehaviour or incompetence of company directors. There is an apparent failure by auditors and shareholders to exercise an effective check. The clause is designed to provide a layman's idea of a mechanism by which the shareholders would have an independent instrument at their command to investigate and call to account the behaviour of the board or of its individual directors.

    I am no particular friend of shareholders as a tribe. I do not have any shares. The only shares that I hold are held indirectly through a couple of modest insurance policies. However, important share holdines are held by pension funds that act on behalf of thousands—if not millions—of ordinary people. Such funds act as trustees and they should have some effective means of safeguarding the interests of those for whom they act. Such institutions can exercise a fairly powerful influence if they so wish. However, they sometimes seem to be astonishingly reluctant to pursue obvious malpractices. They wait until they are totally out of hand.

    There is now a new category of shareholders. Some of my friends, who are shop stewards, hold one or two shares in Johnson Firth Brown, a private steel firm in Sheffield. That gives them the right to appear at the annual general meeting and to speak on issues that they feel to be important to themselves and to their fellow workers. The law does not recognise the status that they have. However, the Bill will alter that to some extent.

    There are therefore two categories of shareholders: pension funds and those individual workers who avail themselves of this technique. They should be able to check whether a director's behaviour is out of line. A director's behaviour may be irresponsible, or perhaps illegal. This clause is set out in layman's language. I am sure that it does not appeal to the gobbledegook of parliamentary draftsmen. However, I hope that it is understandable.

    I suggest that the annual general meeting should appoint a special audit committee. I have suggested a company with a paid-up capital of £100,000. However, at present rates of inflation the paid-up capital may need to be £100,000 million. I shall take a chance. The sum of £100,000 is a good figure to argue about. If the clause is accepted and is debated in another place, the figure may be amended. It may become higher. I shall not quibble about the figure of £100,000. It acts as a marker.

    The key point of the clause is that the directors of a company will be expressly excluded from membership of the special audit committee. No relative of a director shall have anything to do with it. The clause also states:
    "nor any person holding shares in the Company."
    Perhaps that is a bit draconian. The object of the exercise is to ensure that the Committee will be financially independent of the progress of the company. It will have no financial incentive to condone or overlook any malpractice that might be justified on the ground that it is good for the company and, therefore, does not matter. Basically, that was the Lonhro defence.

    5.30 pm

    The other points are fairly straightforward. The committee will consist of three or four people, and not more than six. Obviously the shareholders must vote some money to the committee to enable it to do its work. (d) is the key paragraph in many ways in that it gives the committee an unqualified right at any reasonable hour—and by that I do not mean midnight, as we are not dealing with VAT inspectors—to examine any
    "books, records, documents, vouchers, ledgers, contracts or any papers … relating to the business of the Company or the remuneration of any Director or employee of the Company".
    Then the committee will have the right to report to the shareholders and draw the attention of the Department of Trade to anything which it may think has gone wrong.

    Hon. Members may ask me what is wrong with the auditors. I do not know why the auditors cannot do this kind of thing, but apparently they do not. Of course, the auditors have the drawback of being appointed by the board of directors and, therefore, there is a danger of undue or improper influence being brought to bear on them. In any case, auditors have basically the rather pedestrian function of ploughing solemnly through great masses of ledgers and computer print-outs, checking on all the tedious detail of the company's goings-on. What is needed is something with a rather sharper cutting edge—a small body or inspectorate which can come in at any time, go into the directors' office and ask for certain documents. It should be a body that can ask what amounts have been spent on certain items and demand to see the bank statement for any par- ticular date. It must have an unqualified right to inspect at any time.

    Also, the key factor would be that this committee would be responsible to the shareholders, and the board of directors would have no control over it whatever. If the directors sought to interfere, the committee itself could immediately refer the matter to the Department of Trade.

    Does my hon. Friend agree that his committee might be able to do what auditors are not normally called upon to do—look at the company not only from the point of view of honesty but also from that of effectiveness in management?

    I would in no way dissent from that very sensible suggestion. I am a little surprised that Conservative Members, who are always talking about efficiency audits of public corporations, seem not to be so enthusiastic about efficiency audits of private companies. That is another point.

    I emphasise that I am entirely a layman in this matter. I am not an expert in any sense on company law. However, I am profoundly uneasy about a great many of the scandals which have occurred and which have involved a lot of money for shareholders. Also, serious failures can involve not only loss of money but also the loss of jobs, which means a complete loss of livelihood for thousands of innocent workers who had no means of knowing that the affairs of the company were not being properly conducted. For this reason, I put forward this new clause and I look forward to hearing the Government's response.

    I am delighted to find that the number of hon. Members interested in audit committees has doubled since I began my campaign. At this rate we shall soon have the whole House on our side. Perhaps my optimism is running away with me, but one needs to be pretty optimistic to continue the struggle year in and year out for company law reform, which is by no means one of the major enthusiasms of hon. Members.

    A number of points have been made admirably by the hon. Member for Sheffield, Heeley (Mr. Hooley) in moving this new clause. I would not wish to comment on his remarks, because grouped with his proposed new clause are a number of detailed proposals of mine. I shall not bore the House by going over familiar ground in detail which is altogether too minute, but there are some points that should be made about the proposal to move in the direction of establishing audit committees and about the whole role of the non-executive directors and the ways in which they may be helped to operate more effectively.

    The audit committee, as developed in Canada and North America, is a subcommittee of the board which is of particular concern to non-executive directors. It is welcomed by the non-executive directors because it provides them with a real function and necessary access to data. It also gives them the standing on the board that they might not otherwise have among their executive collegues.

    We must consider whether we should make the practice of appointing audit committees mandatory and, if so, in what classes of companies. I am increasingly inclinde to the view that an audit committee is appropriate only in very large companies. The etiquette of operating an audit committee is not by any means established, either among boards of directors or among auditors, but there is a general feeling that a need exists for closer co-operation between the auditors and the directors, particularly in large and complex organisations.

    We have the example of the New York Stock Exchange, which has made having an audit committee a qualification for having a company's shares quoted in New York. Many companies in this country are becoming familiar with the idea and would like to explore its possibilities.

    The hon. Member will recall that during the passage through the House of the last Companies Bill I had some responsibility for the matter. Is the hon. Member in a position to inform us whether, since that time, there has been any shift of opinion in the securities industry towards his proposals, which were debated at some length then? At that time I recall that there was a certain reluctance—I put it no higher than that—to see his proposals made mandatory. However, there was an acknowledged interest in the general principle.

    I acknowledge the force of what the hon. Member said. With the study of the practice of the audit committee there have grown up some doubts as well as some enthusiasm. I hope to visit New York again this year in order to make inquiries among those who take a particular interest in these aspects of company law and to learn what I can from the blunders and mistakes or wrong directions in the operation of audit committees over the years in these large American companies.

    I stress the fact that in the United States audit committees operate only in very large companies. The New York Stock Exchange is really concerned only with very large enterprises. It is not like the London Stock Exchange, where the share of quite small companies may be traded along with the very largest. Therefore, to say that one must have an audit committee to be quoted on the New York Stock Exchange does not imply that the generality of American companies are necessarily appointing audit committees.

    I feel that there is a general trend in favour of strengthening the relationship between auditors and non-executive directors. If audit committees are to exist and to grow in importance, the House must ask what their legal standing would he. If this is a phenomenon that is beginning to develop in British company practice, how do we deal with it from the company law point of view, if at all? What provisions should be included in company law to help companies in this respect of their work?

    In my new clause 29 it is suggested that in very large companies the practice should be considered of appointing an audit committee at the annual general meeting so that the subject is kept alive and a shareholder who chose to raise the subject could thus never be deemed to be out of order at an annual general meeting. I hope that that suggestion will be thought a useful device whereby the thoughts of management will be directed towards the advantages or disadvantages of appointing an audit committee and that management should have to be ready with its thoughts on the subject without being obliged to hurry faster than its shareholders would like.

    Suppose that they decided to set up an audit committee. What next? All to few companies have established audit committees in this country and few people know exactly how to go about setting one up. What is likely to prove successful in one company may be superfluous or a blunder in another. In order to set down some suggestions-1 always try to be absolutely specific—in my new schedule listed as amendment No.:383 I have had printed what I hope is a useful code of practice. It is an attempt to produce the draft equivalent of table A in so far as the conduct of an audit committee may be organised.

    In order to guide people towards the successful operation of an audit committee we should also make sure that companies that are bent on fraud do not set up such committees as a front organisation in order to deceive shareholders into believing that their interests are being properly looked after when they are not. I believe that it would be good to have a detailed code of practice set down somewhere in company law but to leave it to the shareholders to decide whether their companies should adhere precisely to that code or be free to vary the method of operation to suit their own circumstances and experience. The device that I recommend in my new clause is that shareholders must be informed if the company's practice, when it sets up an audit committee, differs from the norm as laid down in the Act. I hope that the Department will think that this is a useful way forward.

    I have not asked for separate votes on my new clauses or my schedule because I think that they have to be regarded as tentative and a possible basis for consultations. I hope, nevertheless—though I am quite willing to express my diffidence about them—that they will serve a useful purpose and will not die with tonight's debate.

    I turn now to the issue of non-executive directors. Once again I have only provided that it should be mandatory on companies to consider the appointment of non-executive directors if they do not have as many as three already. I believe that this should be a regular item on the agenda of the annual general meeting. We have heard increasingly about the importance of non-executive directors, and I believe that many people are interested in the status and the possible role of such directors. I do not claim the credit for my campaign, but I believe that an in- creasing number of people are concerned with the health of private companies and have discerned that non-executive directors could be more useful than they currently are.

    There is also a sense of uneasiness where companies are known to have no outside directors.

    We should ask what is the status of the non-executive director, who is often called the outside director. The implication is that these are people who do not quite belong to the company. The words "outside director" suggest in some way that outside or non-executive directors do not fit in quite as well as the other components of management.

    The weakness of the non-executive director is a relatively new feature in British company law. Before the war, and certainly in the nineteenth century, the vast majority of boards consisted of non-executive directors only. It is only in relatively recent times that the managerial revolution has changed the character of boards so that now the majority of directors of British public companies are the heads of department and only a minority survive from the pre-war boards which used to be entirely made up of outsiders who were there to look after the interests of the shareholders and to keep an eye on management.

    In British companies non-executive directors are now almost always in the minority, and though only rarely does one find a board of directors actually proceeding to a vote—except in times of serious trouble or contention—the minority element is at a disadvantage.

    My second point about non-executive directors is that they do not always have access to the facts, because they are unable to insist on having all the facts. That inevitably weakens their argument when they are dealing with heads of department who may have spent 20 or 30 years in becoming familiar with the company and its ways in terms of their particular functions. Such heads of department can silence criticism by demonstrating an absolute mastery of the company's practice and interests. That mastery nevertheless can fail to grasp some essential point of value that an outside director is trying to make. We should sympathise with the ineffective non-executive directors, because not only are they in a minority but they cannot be sure whether they are right when they try to take a stand.

    5.45 pm

    My third point about such directors is this. When they try to take a stand, what are they able to achieve? Company law does not give such a director any responsibility or function that would enable him to throw his weight about on the board. If he does not like what is going on, he can acquiesce notwithstanding his anxieties—many non-executive directors do that—or, if he is very unhappy, he can resign quietly, in which case his going will not be noticed. It will be assumed that he has reached the normal age of retirement, that he is withdrawing because he has new commitments or because there is a natural reason why he chooses not to present himself for re-election. Such a resignation is unlikely to attract the attention of the shareholders or the press, or, indeed, of anyone else.

    However, the non-executive director who chooses to resign may force a major row and make a statement as to his reasons for resignation. He can try to alert the shareholders or in many other ways try to attract attention to his point of view and thus force a confrontation with his colleagues. Almost always the non-executive director who chooses that cause is ill advised. His action will damage the company without his having made his point, and he will then probably be regarded as a dangerous person who flies to conclusions without knowing what he is saying and will damage any company that he is supposed to serve.

    That is the difficulty of the non-executive director if he tries to be an effective director. I believe that we have to solve this problem if we intend to cure a major deficiency in British company law. I believe that this is a matter for the House of Commons. I do not think that we can leave it to outside influences to deal with this problem quickly enough.

    Over the years I have tried to suggest various ways in which outside directors could be given the necessary status to enable them, while in a minority, to make a useful contribution. I believe that such directors should be given more information as a statutory right. That was provided for in one of the clauses that I proposed in Committee.

    I think that it would be helpful if outside directors had to make some kind of written return or were given some obligation to appear at the annual general meeting and to make a statement—even if only an oral statement—that would come from them in their capacity as supervisory directors. However, I realise that as soon as we give non-executive directors a role that is different from that of other directors we have started to make them into a different type of director from their fellows round the boardroom table.

    I do not feel that this is a particularly heretical move, because they are different from the heads of department in so far as they are non-executive directors. I think that shareholders are entitled to know, from the list of directors with which they are provided, who their outside directors are. Normally those directors are not clearly identified.

    At the annual general meeting, the outside directors should do something to justify their existence. I should like them to be required to make some sort of statement to the shareholders, which would correspond to the statement made by the auditors. The auditors are obliged to state on the balance sheet that they consider that the accounts present a true and fair view. It would be quite appropriate for the outside directors to make a statement such as that they have confidence in the management or that they consider that the assets are being properly employed.

    The advantage of that sort of statement is not that people would rush to read what they have said year after year, because it would tend to be taken as read, but that in the course of the preparation of the balance sheet the non-executive directors would be able to tell their colleagues, if they were unhappy with the way that things were being run, that they would have to qualify their report to the shareholders unless more attention was given to their point of view. The threat of the qualification of the non-executive directors' statement would provide a necessary element of discipline without resulting in any leaks, boardroom splits outside the company, or friction and disunity within the board.

    At the moment, non-executive directors are tolerated by the heads of department provided that they do not have views of their own and do not rock the boat or exercise their supervisory role in an effective way. Once they begin to exercise a supervisory role, I recognise that we have set out on the road towards the creation of a two-tier board. Of course, that is an immensely controversial question, partly because it is completely misunderstood. As soon as a two-tier board is mentioned, it gives rise to the suggestion that the idea is being promoted of worker directors. People in this country are nervous about such a development. I believe that industrial democracy is inevitable and right and that we should seek to encourage it in every way that we can. But it would not encourage or help the development of worker democracy to force the pace. The inevitability of gradualness is a necessary slogan when dealing with company law reform. However, at least we should know where we are going. I believe that we should strengthen the supervisory element so that in due course—it might be in 30 or 50 years' time—British company law will look much more like Continental law and there will be an identifiable supervisory team supervising the policy and not only the auditing of a company. That would be desirable.

    Will my hon. Friend extend his argument about the proper role and possible statutory provision for non-executive directors to making some sort of statutory provision for the formation of audit committees within companies?

    My hon. Friend may not have heard my earlier remarks on this point. I commend him to Hansard in order to pick up some of my views on that subject.

    It is necessary for us to identify our aim. That aim should be that the supervisory board and the executive board should have a somewhat separate existence. In this country we suffer from a lack of knowledge about the way that things are done in Germany. In that country two-tier boards have been normal practice for 100 years. They were developed there long before anybody thought of worker participation at board level. It may be that the success of the Germans in introducing worker directors was due to their having the two-tier board as an established and well-understood practice long before they thought of bringing in worker directors for the supervision of the management.

    I shall not digress too far on what, inevitably, will be the subject of future Companies Bills. I hope that when my hon. Friend the Minister winds up the debate he will indicate that he is giving serious consideration to the sort of reform that I have advocated before and which I am advocating in these new clauses. How can the necessary changes in the British private sector company be stimulated from outside? Should we leave that to the press, the Stock Exchange, the institutional investors, or even the pressure of increasingly organised middle management? All those forces can be healthy within the private sector, but Parliament must not abdicate its responsibility.

    In this country we have a glorious tradition of company law. In the nineteenth century it was far ahead of that of any other country, and it set a tremendous example to trading and manufacturing communities all over the world. Parliament must not abdicate and leave our company law as it is. We have to admit that it is now obsolete and inadequate.

    I begin by congratulating my hon. Friend the Member for Sheffield, Heeley (Mr. Hooley) on an excellent speech about which he was far too modest. The draftsmanship of the clause has been extremely competently done and I hope that he will take some comfort from that view. The importance of his tabling the new clause was to direct attention to the important issue of the appointment of non-executive directors and the role of audit committees, although I dare say that if he had not tabled the new clause we would still have debated the issue. We might have relied on the hon. Member for Kensington (Sir B. Rhys Williams) to ensure that.

    My hon. Friend approached the matter from an important angle—the protection that might be afforded in the reputation of companies to shareholders and those interested in fair dealing. For that purpose he drew attention to certain City scandals and company investigations, some of which I had a hand in setting up. An interesting feature of the sort of companies that are subjected to that sort of behaviour is that they are rarely, if ever, companies that are involved in making things—in manufacturing. They are companies which are involved in property dealing, speculation or financial manipulation. Such companies are sometimes susceptible to the sort of behaviour that gives rise to the need for investigations to be carried out.

    My hon. Friend was absolutely right to point out that recent experience over the course of the last two weeks has shown that everything is not manifestly well in connection with the system based on self-regulation. He said that his purpose was to make self-discipline work in practice.

    I also pay tribute to the hon. Member for Kensington, who, over a long period of time, has fought to some extent a one-man campaign to cause Governments to embark upon the process of reform about which, once again, he has spoken so eloquently today. He said that he was gratified that his support in the House seems to have been doubled by the recruitment of my hon. Friend the Member for Heeley. However, that is an injustice to me—I have always been a friend of his on this issue. Therefore, we have trebled our numbers.

    The concept of including the question of the appointment of the audit committee on the agenda of every annual general meeting is one that I commend to the Government on the basis that it was commended by the hon. Member for Kensington. Indeed, he founded his other notion on a similar basis which provides for flexibility of a company. It does not make it a statutory requirement that a company must have non-executive directors and an audit committee but it does provide for a company to ensure that it will deal with the matter at the appropriate time.

    What the hon. Member for Kensington did was to urge the Government to embark upon a process of consultation on that basis. I support him in that. I hope that we get a response, from whichever Minister replies, similar to that which we announced during the process of our bill in 1978, which was that we would enter into consultation. Indeed, that took place and I will refer to it in a moment.

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    I hope that the consultation is more specific this time and does not deal so much with whether it should be a statutory requirement as with whether the concept embraced by the speech of the hon. Gentleman might form a more satisfactory way of proceeding in the course of the next few years.

    I agree that non-executive directors need to be provided with some greater weaponry and armour to fulfil their duties of independent scrutiny more effectively than the law provides at present. I will not say anything about the two-tier board at this stage because that will be the subject of separate debate later in these proceedings.

    At this point I want to refer to our approach in 1978 following the consultation that we set up, about which I received a letter from the Minister today. That indicates that he is falling behind with all the work that he has to do, because he promised that reply in Committee. I do not blame him too much for the delay. It was helpful to have my attention drawn to the comments and research published in the Bank of England Quarterly Bulletin of December 1979, to which I will also refer in a moment.

    In his letter the Minister pointed out to me—this is evident from the replies that he received—that there was a great deal of support for the concept of non-executive directors among the many who were canvassed. It was felt that it would be conducive to the best interests of a company to have non-executive directors, but there was considerable opposition to the idea of making them a mandatory requirement.

    I dare say that if company directors in the United States and Canada had been similarly canvassed the answers would have been predictable. I am sure that they, too, would not want a mandatory system of audit committees imposed upon them. But the audit committees came about as a result of pressure from the Securities Exchange Commission; and the New York Stock Exchange, as has been said, decided to make them a listing requirement.

    I believe that very few people in the United States today would want to put the clock back. Throughout North America the system is proving to be a distinct success. It has not been an unqualified success, because it has its blemishes and there are anomalies attached to it. But overall it has been a distinct success.

    If we could have more rapid knowledge about the practice that goes on where companies have embarked upon this idea, I believe that people would more readily entertain it. However, there it is. I do not think that the Minister favours the idea of a mandatory requirement, and no doubt he will tell us that today. Many of those who were canvassed pay lip service to the benefits of these two concepts but do not want to see too much progress.

    When I made the statement about consultation I remember saying that if the voluntary method failed we would have to look carefully at the need to impose a legislative requirement, and I see no cause to dissent from that proposition today.

    In Committee the Minister also supported the concept. He had something very interesting to say about it. He said:
    "I believe that this is a subject to which we should return on the Floor of the House so that the whole House should have an opportunity to say something about it".
    As we all know, this very full House is avid in its interest in the subject and no doubt we shall have hundreds of speeches on the topic later.

    The Minister also said:
    "The difference between my hon. Friend and myself is simply the question whether we impose these things by statute at this time."[Official Report, Standing Committee A, 6 November 1979; c. 35.]
    I emphasise the words "at this time". So the Minister does not seem to be ruling out the possibility of legislation if progress cannot be made swiftly enough. But still he believes in the principle of voluntarism when it comes to this concept.

    The Minister has said that more and more companies now recognise that non-executive directors are important and are appointing them, and we must look at the scale of advance that has been made. I hope the Minister will—not necessarily today—seize the opportunity to publish the information about the progress that has been made so that not only I but others receive it. Is there sufficient evidence to support the conclusion that the voluntary approach will succeed over the next five years or so? What time scale do the Government think is appropriate to test this matter out properly? If progress within such a period is inadequate, should we not review, once again, the acceptance of the voluntary approach?

    My hon. Friend the Member for Swansea, East (Mr. Anderson) pointed out that the Government were placing entire reliance on voluntarism in this sphere of economic activity but yet denied that when it came to the trade union sector. I think that that nonplussed the Secretary of State. He was clearly stumped for an answer at the time and almost conceded that.

    What I commend to the Minister is that we should, at the very least, undertake a more coherent study of this matter. The prime purpose of having non-executive directors and audit committees, as I see it, is to encourage companies to be more responsive to change, to encourage greater efficiency and to keep them more in touch with what is happening in the world outside, and also to act as a balance to the overweening influence of members of the board. That is a subject to which we shall return later and something that was well illustrated by the recent Newman Industries case.

    All this, in every respect, is designed to assist and protect shareholders and at the same time those who are engaged as members of the work force in the progress that a company should be making. For the same reasons, I believe that it can act as a barrier against fraud and abuse.

    The paper submitted to me by the Minister and which was published by the Bank of England is very interesting. It certainly shows that there has been some progress since the Bullock committee conducted a survey into the application of the idea of non-executive directors and audit committees. An interesting fact was reported in the survey—namely:
    "About one-quarter of the companies in The Times 1,000 are controlled by foreign shareholders."
    That is about one-quarter of our top companies. The survey states:
    "This presents certain difficulties both in compiling and in interpreting the figures of non-executive directorships."
    It is much more than that. It presents all sorts of problems for the application of other aspects of company law. The survey adds:
    "The mere presence of non-executive directors on company boards does not, of course, ensure that they will be active in their role of independent critical advisers, nor that companies will use them in this way."
    That is one of the difficulties to which I alluded in my remarks in Committee. There are some matters which the proponents of non-executive directors and audit committees must deal with adequately.

    It would be fatally counter-productive if non-executive directors were chosen, or if their choice were influenced, by a powerful chairman or other board members who wanted cronies to help to camouflage and thus institutionalise existing inefficiency, malpractice, misfeasance and perhaps deceit and fraud.

    A compliant non-executive director manipulated by an authoritarian chairman, or by others on the board wielding such influence, would contribute to the death of this important idea. The selection of non-executive directors and audit committees should be independent of the sort of influences to which I have referred.

    The idea of non-executive directors must not be seen as a substitute for the concept of industrial democracy. I think that the hon. Member for Kensington recognises that. It is to be viewed, however, as a spearhead towards it. Essentially non-executive directors must be active, critical and independent if they are to be of value to the company and the concept, otherwise they will become discredited.

    The Stock Exchange has suggested that it might be possible to recommend that the concept be included as a listing requirement, a suggestion which did not receive wild acclamation. It is one of the ideas coming out of the Stock Exchange which I find interesting and progressive I hope that the Stock Exchange will not abandon it.

    In the Bank of England Quarterly Bulletin, to which I have referred, it is suggested that the survey which the Bullock committee carried out, and which was followed, should be undertaken at intervals to check developments. That is something that the Government might well undertake. As the hon. Member for Kensington said, it is a concept with which the Bank should be intimately concerned and connected. I hope that it will feel it appropriate to carry out a survey at intervals to check developments. That is incumbent upon it if it is not merely to pay lip service to an idea which the hon. Gentleman has caused to flourish and which I hope will be brought to fruition in the not too distant future.

    6.15 pm

    I intervene briefly. The hon. Member for Kensington (Sir B. Rhys Williams) made his plea for non-executive directors and audit committees, but he did less than justice to the degree of support which his ideas on this subject have enjoyed not only in the course of this debate but in the course of the debates that preceded it during the abortive passage through the House of the Labour Government's Companies Bill. He suggested that the supporters of the idea in the House can be numbered in single figures.

    I recall vividly putting to the hon. Gentleman the Labour Government's view, which was strongly sympathetic to what he had in mind. However, I made it clear that there appeared to be considerable opposition to the proposal on the part of those most likely to be closely affected by it. It was for that reason that I thought it right to announce in Committee that wide consultation would be initiated by the Department of Trade. My hon. Friend the Member for Hackney, Central (Mr. Davis) has referred to that.

    In my brief intervention I asked the hon. Gentleman whether he was aware of any change in opinion since the days of the Labour Government. Although he acknowledged that I had a point, he did not altogether answer the question. I hope that the Minister will help to clarify the position. There has been an exchange between the two Front Benches on this issue to which the House would like to be privy.

    There has been some desire, perhaps, to interpolate into the discussion on the attractiveness or otherwise of non-executive directors and audit committees some consideration of whether this approach might lead to two-tier boards or whether the concept has some relationship to industrial democracy. If we are to tackle either of these concepts, they must be tackled directly and not by an indirect process.

    If these proposals are meritorious, they are meritorious in themselves and not for what they might lead to ultimately. There is widespread support for the establishment of audit committees. That support was strongly expressed by the Governor of the Bank of England, Gordon Richardson, in a powerful speech which caused something of a flurry in the dovecotes at the time.

    Some people may have wrongly taken the view that the Governor was calling for the introduction in a statute of a mandatory requirement that audit committees be established as part of our company law. I think that the Governor had no such intention. None the less, the idea is finding increasing favour.

    I was interested to hear of some of the facts that my hon. Friend the Member for Hackney, Central quoted from the Bank of England Quarterly Review. In the last analysis we should not place too much weight upon the possible value of non-executive directors in all companies. That essentially is what the hon. Gentleman's proposals are designed to lead towards.

    I acknowledge that, as the hon. Gentleman has couched his proposals on this occasion, they are to some extent permissive. They merely require the issue to be raised at every annual general meeting and to be considered. The question whether non-executive directors are serviceable must depend upon their quality. The mere presence of non-executive directors on a board is no guarantee that they will be any more effective than executive directors. One of the general complaints about the proposition that they should be required to sit on every board is that there is a shortage of people with suitable talent. I know that the hon. Member for Kensington does not take that view. However, it is an argument that weighs against them.

    Some of the company directors with whom I have talked have considerable hostility to the idea of swelling their ranks with non-executive directors with no particular knowledge of the business that they are required to supervise through their role, and they regard the whole concept as an unnecessary appendage.

    That view is held strongly by those who would be most affected by any suggestion that the requirement should be mandatory.

    I am in considerable agreement with almost everything that the hon. Gentleman said. Does he agree that it is precisely those managements that are opposed to the idea of making room for a supervisory element beside them on the board table that are possibly most in need of just that element?

    I do not agree with the hon. Gentleman. I hesitate to name names. However, as I was challenged I will say that one of the directors of the company to whom I spoke was named either last year or the year before as The Observer's business man of the year. He expressed strong hostility to that idea. He has a proven track record as an exceedingly successful business man. I cannot accept the general view of the hon. Gentleman.

    The willingness of the Stock Exchange to consider this matter seems to me to be a significant development. It will be of interest to hear from the Minister what is his reading of this development. No doubt he will give us the benefit of that advice. Important though the idea may be in the United States context—and it is interesting to learn from American experience—it is important to remember that just as German experience of two-tier boards is foreign to our present company law system, so the highly regulated American system is also foreign to our system. Perhaps we should move in the direction of the German and American systems. We should not tackle this problem through the side door. We should face these issues squarely. Indeed, some of the later clauses will give us a chance to do so. We should not seek from the proposals anything more than a modest change in the structure of boards and in the degree of supervision that would come about.

    I am hostile to the idea of introducing any requirement for mandatory non-executive directors without very much more evidence of the effectiveness of the role that they could play, not merely in respect of some but in respect of all companies—because we are legislating for all companies.

    Previous speakers referred to the fact that there was growing support for audit committees. The difference comes about when we discuss the composition of audit committees. The hon. Member for Kensington (Sir B. Rhys Williams) referred to the proposed provision that

    (a) the audit committee shall consist of such directors of the companty as the directors shall determine but shall include not less than three non-execuive directors".
    They will still be judge and jury in their own cause. My hon. Friend the Member for Hackney, Central (Mr. Davis) referred to an audit committee that was independent of the board. It would be able to give a better, clearer and fairer judgment of the situation.

    Non-executive directors are no alternative to alert, alive and questioning shareholders and shareholders' meetings. They have the responsibility to ensure that the directors keep on the straight and correct line. Strong chairmen of companies have a great deal of their own way. They may quite easily choose yes-men as non-executive directors.

    In Standing Committee one hon. Member said that he was a non-executive director of a number of companies but had little time to go into the detailed control of them. In other words, non-executive directors may be just decorations on the board to give the impression that things are all right and that there are experts on the board who are helping the company with its business. The trouble with directors and directorships is that some persons have too many directorships. Their interests are spread far too widely. They cannot give sufficient time to the business of the companies of which they are directors.

    The national press has referred to comments about executive directors. A newspaper quoted the opinion of a well-known national trade union leader of such directors as "titled idiots". A well-known member of the other place summarised the functions of non-executive directors in this way:
    "For £500 a year he turns up once a month, says 'I agree' twice, utters a thought- ful 'I don't think so' once, and then goes off to a good lunch. It is like a permanent hot bath."
    It is undeniable that some outside directors are appointed purely for prestige purposes. Some are friends of the chairman to be relied on for their votes in case there is a split. Some are retired company lawyers, merchant bankers, accountants or former executives of businesses acquired in takeovers, or they might even be civil servants. The appointment of non-executive directors will not cure companies' problems or render the companies any more efficient. There is no guarantee of honesty by the remainder of the directors. This is not a solution to the problem of democratisation of companies. It will not lead to industrial democracy for employees of companies. Such directors are appointed to companies to counter the criticisms made of the autocratic nature of directorships.

    I am grateful for the opportunity to intervene briefly in the debate.

    Audit committees are discussed frequently. I pay tribute to the work done by my hon. Friend the Member for Kensington (Sir B. Rhys Williams) on this matter. However, we should proceed carefully before accepting this concept. New clause 3, which was persuasively introduced, outlines some of the dangers. It does not start by saying what an audit committee should do. There is no limitation on the powers of the people appointed to it. It gives them the right to inspect the books without notice. That reminds me of inspections by Customs and Excise officers, to which many people object. This is a serious innovation. It could damage companies.

    The clause refers to the employment of professional staff. I declare an interest as a practising solicitor. I am not keen on clauses that encourage the greater employment of professional staff, which again is a way of increasing companies' costs.

    More seriously, I feel that such a committee, once appointed, between its appointment and the next annual general meeting would have a free hand to range round the company and contribute not so much to industrial democracy as to industrial warfare without any remit and without any set objective.

    6.30 pm

    New clause 29, propounded by my hon. Friend the Member for Kensington, covers some of those points. It specifically states what audit committees are there to do. That clause, I believe, muddles or muddies the two distinct jobs that some people feel have to be done. The first is that directors responsible for management need greater control and greater advice in the management of companies. The second is that the role of auditing watchdog—the job that auditors of companies are supposed to do—should be carried out to a much greater extent. We should try to distinguish between these two objectives and not muddle them.

    I am sympathetic to the idea of non-executive directors. I do not go along with the faint praise that has been given to this concept. I believe that, if voted upon by the shareholders, they would be some protection in the management of the company at board level and a guarantee, to some extent, to the shareholders that objective standards of behaviour were observed by management in the course of running a company.

    The hon. Member for Sheffield, Heeley (Mr. Hooley), who opened the debate on his new clause 3, would, I think, be the first to admit that he rather overstated his case. The picture that he painted was of a company law structure that no longer works, that is collapsing and that gives rise to permanent trouble. I should like to put his complaints into perspective. Over 700,000 companies are registered. There are very few complaints of the kind to which the hon. Gentleman referred. The problems that occur from time to time in individual companies are not the norm, as he tried to suggest.

    We are talking about the way in which to deal with problems that arise in a tiny minority of registered companies. They are serious problems, but they are not widespread. I do not think that the hon. Gentleman helped his case by pretending that they were. He suggested that absolutely nothing could be done at present if a company got into the wrong hands. He obviously does not understand the role of the auditor, who appoints him and to whom he reports. I should like to explain briefly. The shareholders have a person to do the job that his special audit committee would do. That is the auditor, who is appointed by the shareholders. It is his duty to report to them how the directors are handling the assets of the company. That is his job.

    The auditor does that job through the annual audit report and also by appearing at the annual general meeting and reading his report. I do not believe that the present position of the auditor is wholly satisfactory. I prefer, however, to concentrate on trying to improve his position and his role rather than to create a body that would simply duplicate that job. Nothing that the hon. Gentleman says justifies the creation of a new body. We should perhaps find ways to make the existing official—the auditor—more responsive to those to whom he is due to report. I do not believe that putting this new clause on the statute book would do anything of the kind. The role of the committee, as my hon. Friend for Dorset, North (Mr. Baker) said, is extremely ill defined. One would merely be creating another body to do the job that an official already exists to do.

    I should like to explain to the hon. Gentleman one of the powers of the auditor. Section 14(5) of the 1967 Act states:
    "Every auditor of a company shall have a right of access at all times to the books and accounts and vouchers of the company, and shall be entitled to require from the officers of the company such information and explanation as he thinks necessary for the performance of the duties of the auditors."
    So the auditors have the powers that the hon. Gentleman says that his special audit committee needs. I do not believe that he has established the case for creata new body. His new clause perhaps reflects his lack of understanding of the existing law and the existing powers of the auditor and the duties of that official.

    The Minister must explain to the House why these massive scandals have occurred. It seems to me that if the auditors had been exercising all the formidable powers that the hon. Gentleman has outlined, they would have come upon these malpractices much sooner. Does he not realise that in the period 1973–74, now happily behind us, the malpractices that occurred nearly brought down our banking system? Is he dismissing that as a matter that should have been dealt with by auditors?

    No. I am saying that the hon Gentleman's suggestion would have done nothing to help deal with the problem that he thinks he identifies. How did a number of these scandals come to be known about? The answer is that the auditor, having conducted his investigations, qualified his report. Again, under the Companies Act my Department has power to appoint inspectors. Having learnt from those inspections, the House has the power to amend the law.

    I should like to refer to part IV of the Bill, which we shall be discussing later. That is specifically designed to deal with some of the problems that emerged as a result of the work of the auditors and the inspectors. The Bill makes illegal some of the things that happened and makes sure that when these things happen they are revealed to the shareholders, so strengthening the power of the auditor.

    In fairness to my hon. Friend the Member for Sheffield, Heeley (Mr. Hooley), it must be said that the assertion that many of the scandals came to light through auditors qualifying their reports is not accurate. The auditors have been criticised in virtually every report.

    The hon. Gentleman is saying that there was a duty on the auditors that they did not carry out properly. That does not destroy my case. To give an ill-defined duty to a group is an interesting idea, but it is very badly defined. There is already a person with clearly defined duties. Where there are weaknesses in the law, the House has the capacity to deal with them. That is what the Bill is about.

    For the reasons that I have given and some of those at which I have hinted, the Government do not find new clause 3 acceptable. I hope that the hon. Member for Heeley will be partially reassured by my informing him of the powers that already exist and the ways that we are seeking to strengthen the arm of the auditor and to make sure that such practices come more readily to light. If we are to deal with this problem—to strengthen the power of the auditor and make sure that shareholders get a better report on the activities of directors—I must say that I prefer the approach of my hon. Friend the Member for Kensington (Sir B. Rhys Williams).

    I prefer the way in which my hon. Friend has modified his approach since we discussed these matters in Committee. He now seeks to put into company law the right for the shareholders to decide whether they should have these bodies. That is a major improvement on his previous idea, which sought to impose on every company of a given size a number of non-executive directors and the requirement to have an audit committee with the clearly defined duties contained in amendment No. 383.

    Early in 1979 the previous Government conducted a survey of 20 bodies representative of both sides of industry, the professions and securities interests. They found support for the idea that companies that wished to do so should experiment in this way, but they found unanimous hostility and opposition to the idea that non-executive directors and audit committees should be statutorily imposed on the boards of companies.

    I still take the view that that is the best way to go about these matters, although I accept that there is a growing interest in the subject, thanks to the activities of my hon. Friend the Member for Kensington, and consultations on this subject will continue. The approach that my hon. Friend is now making, of not seeking to impose this requirement on every company but to give a company's shareholders the option of having such a body and non-executive directors, and defining their duties if they choose to have them, is a major step in the right direction.

    I deal now with the question raised by the hon. Member for Hackney, Central (Mr. Davis) and mentioned by the hon. Member for Caithness and Sutherland (Mr. Maclennan), whom I welcome to our discussions. He and I sat facing each other for 23 happy Committee sittings in the previous Parliament, and it is a great pleasure to see the hon. Gentleman taking part in our debates. I agree very much with his analysis of the problem and his approach to its solution.

    As the hon. Member for Hackney, Central said, I wrote to him and sent him a copy of an extract from the Bank of England Quarterly Bulletin stating the progress that is being made by companies in appointing non-executive directors. It will not waste the time of the House if I give two or three figures from that report. It compares the results of a survey carried out about three years ago for the Bullock committee with the position that emerged when the Bank carried out its own survey three years later.

    Three years ago, at the time of the Bullock survey, 75 per cent. of the top 1,000 companies had one non-executive director or more. Three years later that figure has risen to 88 per cent.—a substantial increase. The number of companies having three or more non-executive directors has risen from 36 per cent. to 53 per cent., so there is a substantial move towards the appointment of non-executive directors and a growing awareness of their importance. On behalf o f the Government, I welcome the decision by companies that it is in their interest to have non-executive directors in ever-growing numbers on their boards.

    May I say in a joking spirit that the hon. Member for Hackney, Central slightly dented his formidable credibility by the warmth of his compliments to his hon. Friend the Member for Heeley on the new clause and by adding 1 to 2 and saying there had been a 300 per cent. increase in the number of people in favour. He is a lawyer and not an accountant, so we will forgive him for that slight failure in his arithmetic.

    6.45 pm

    The Government's approach to this problem is to continue consultations on the subject of the audit committee and the non-executive director. We welcome the growing number of appointments of non-executive directors. We hope that more British companies will experiment with the audit committee and find out whether there is a place for it in our company law and whether it has a worthwhile contribution to make.

    I am a supporter of the concept. There is a need to strengthen the position of the auditor. Far too frequently the auditor is reporting to the directors, the very people about whose activities he should be reporting. We must encourage the strengthening of the links between the auditor and the shareholders and find ways of doing that. There is a need to build up the position and the independence of the auditor and to make sure that he reports more directly to the shareholders.

    I hope that the House will feel that we have had a worthwhile debate on an important subject and that the hon. Member for Heeley will not seek to press the clause.

    I was interested when the Minister of State at the end of his speech announced his conversion and publicly came to the penitents' form. I have been persuaded to join him in the course of the debate, so the hon. Member for Kensington (Sir B. Rhys Williams) would be entitled to speak of a super exponential growth in the number of his supporters.

    What is in issue is not whether it would be worth while experimenting with non-executive directors and audit committees. The necessity for that seems to be agreed. I should be surprised if there were an issue as to how far my hon. Friend the Member for Sheffield, Heeley (Mr. Hooley) overstated his case when he spoke of the reasons for anxiety which had arisen over the past few years. If I may venture a modest note of criticism, I thought that the Minister of State was a little less than fair to my hon. Friend. It does not require a majority of companies to give rise to anxiety to cause us to wonder whether something should be done. For many years we have been talking about a crime wave. That does not mean that the majority of our citizens are criminals. We need to have only a fairly substantial minority to give a reason for thinking more about these matters.

    The issue is not whether we should proceed with this kind of experiment. Even the Minister of State recognised that audit as we have known it has at least two limitations. The auditors are appointed by the company, and that usually means that they are appointed by the very people whom they are set to report on. Most auditors are capable of standing up to pressure from directors. Certainly there is no reason to think that it is a widespread and worrying aspect of audit that auditors are always under the thumb of directors. But we cannot be sure that all auditors are always capable of withstanding pressure, and that has been borne out by a number of events in the past few years, particularly when there is a strong personality on the board.

    I should be the first to agree with the Minister that we should look for ways of making audit as it is at the moment more effective and strengthening the hand of those auditors who want to stand up to that kind of pressure. I am not sure that these are alternatives. I do not understand why that would necessarily exclude the proposals of my hon. Friend the Member for Heeley and the hon. Member for Kensington.

    The second difficulty about audit at present is that it is usually confined to examining first for dishonesty and secondly to ensure that where the resources of the company have been dealt with in a certain way proper authority was given according to the proper procedures. And I think that auditors are considering increasingly whether a company has received value for money.

    I declare an almost historic interest. I began my working life as a temporary boy clerk on the staff of a district auditor. But I am not sure that, even now, they test the effectiveness, imagination or energy of management. They do not necessarily look for the backing away from a challenge or for a missed opportunity.

    I hope that I am not minimising the effective work carried out by many auditors. Where they do not function fully, why should there not be a long stop? What is so wicked or wasteful about that? There are aspects of the role of considering a company's performance that audit committees may be better fitted to deal with than auditors as we have them at present.

    As my hon. Friend the Member for Hackney, Central (Mr. Davis) said, where the experiment has been tried extensively in North America it appears to have been generally regarded as worth while. Of course, as my hon. Friend the Member for Caithness and Sutherland (Mr. Maclennan) said, no one pretends that the mere fact of appointing non-executive directors, or of incorporating them into an audit committee, will necessarily ensure improvement in every company. Obviously, it depends on the quality of the non-executive directors.

    I agree with my hon. Friend the Member for Hackney, North and Stoke Newington (Mr. Roberts). It depends on whether the non-executive directors devote a meaningful proportion of their time to the job. As my hon. Friend the Member for Hackney, Central said—the Hackney twins were effective on this aspect of the matter—it depends on whether the non-executive directors are in the pocket of the chairman.

    What is at issue is whether this worthwhile experiment should be allowed to continue as an experiment or whether it should be made mandatory. It is true that many of the best and more progressive companies are experimenting in that direction, thought I would not wish to define an unprogressive company as one which at the moment is not persuaded. But we are not legislating for the best and most progressive companies.

    It is a story that has been repeated time and time again. It arose in the case of employee protection. It arose in the case of industrial safety. There were those who said that the best companies were doing it already, so why impose the straitjacket of a statutory, mandatory responsibility upon them? It is now accepted that, for many companies, it is essential and that there is nothing especially restrictive, frightening or wasteful about it.

    Perhaps the real question is whether we wait for the tide—as the Minister pointed out, the tide appears to be flowing in that direction—or whether we help it along a little. I was a little disappointed that the Minister did not respond to the suggestion of my hon. Friend the Member for Hackney, Central about the possibility of conducting further surveys to discover in which direction, and how quickly, the tide is flowing.

    We have to consider a series of choices about the way in which an audit committee would be constituted. Would the committee include any of the regular directors? My hon. Friend the Member for Heeley said "Certainly not". My hon. Friend the Member for Hackney, North and Stoke Newington supported him. The hon. Member for Kensington thought that it should. I am not clear why he thought that. He did not state why he parted company on that issue with my hon. Friend the Member for Heeley. Presumably, it was because he did not want the tide to flow too quickly but to progress a step at a time. Both agreed that an effective audit committee should include some non-executive directors who were not part of the establishment.

    If the right hon. and learned Gentleman considers the precise terms in which I have drafted my proposed new schedule, he will see that the non-executive director element has to be in a majority, even if only through the exercise of the non-executive chairman's casting vote.

    I believe that in North America it is normal for the committee to consist entirely of non-executive directors. That is in the context of an American board. In British companies, where there are so few non-executive directors, I thought that the necessity was to strengthen the audit committee with non-executive directors.

    I am grateful to the hon. Gentleman for elucidating that aspect of his thinking. At this stage, I would not wish to declare an option one way or another. That is one of the issues on which we may have to make up our minds.

    The other issue is, perhaps, more immediately important. It is how one ensures that the non-executive directors are not in the pocket of an over-authoritative, over-paternalistic chairman. The hon. Member for Kensington would prefer to see the non-executive directors constituted by the board. At least, that is the way in which the audit committee would be formed. My hon. Friend the Member for Heeley said that they should be elected by the shareholders at the annual general meeting. As my hon. Friend the Member for Hackney, Central said, it is important, if they are appointed by the board, that great care is taken to ensure that they are not in the pocket of an over-authoritative chairman. We may have to build in some institutionalised safeguards against that possibility.

    The next question in which I am interested is how detailed these proposals have to be. There are two proposals to make it mandatory by statute that there should be an audit committee. My hon. Friend the Member for Heeley left his proposal fairly broad, with the detail to be filled in later. That was a sensible approach. He does not have to apologise for his draftsmanship or for intervening in what is so often the prerogative of company lawyers. He more than justified himself.

    In Committee, the Minister was slightly critical of the hon. Member for Kensing- ton because his requirements were too detailed. He said that they were not flexible enough. The hon. Member for Kensington is unrepentant. Once again he spelt out his proposal in detail. The House should be grateful to him. Whether his proposal is incorporated in the Bill is a different matter. At least, it enables us to understand how these proposals will function.

    It was interesting to note the reaction of the hon. Member for Dorset, North (Mr. Baker). He finds it all slightly suspicious. He believes that an audit committee would take on the role of a snooper. He said that he was interested in the experiment and was prepared to see it go further but that it was dangerous unless kept in a clearly defined role. He is suspicious of my hon. Friend the Member for Heeley's proposal because it was not sufficiently spelt out. He joins issue on that matter with the Minister.

    What are to be the powers of non-executive directors? Clearly they will require to have a right to information. I was interested in the proposal of the hon. Member for Kensington that they would report to the annual general meeting. Such a report may have to be qualified.

    The hon. Gentleman has not resolved one question that I tried to put to him in Committee. If a non-executive director finds that he cannot sign a report which has been prepared by the majority of the audit committee, the hon. Gentleman said that he should resign. I am not sure why anyone who wishes to produce a minority report should, for that reason, be required to resign.

    I accept that this is not a situation that will frequently arise or that the hon. Gentleman envisages mass resignations. But if there is to be provision for it, it ought to provide for a minority report which does not entail the resignation of those who make it.

    7 pm

    The right hon. and learned Gentleman is tempting me to intervene at too great a length. Briefly, what I am trying to avoid is a situation in which a non-executive director decides to acquiesce with the majority of the board when in his conscience he knows that it is wrong. I would rather that he had the courage of Mr. Angus Murray, whose conduct has been so highly praised in connection with the Newman scandal, and that he should speak out or resign in the hope that he would rally the support of a big institution or of public opinion.

    Again, I am grateful to the hon. Gentleman. I can see that there may be a situation where, in order not to institutionalise the faults of a company, a director might feel impelled to resign. I would not wish to discourage him. What troubles me is the imposition of an obligation to resign. But that is a matter which we may have another opportunity of discussing at greater length. Of course, there will be other opportunities to discuss a number of aspects that have arisen in this debate, such as the question of industrial democracy and two-tier boards.

    It is for my hon. Friend to decide whether he wishes to divide the House, but I am sure that the House is grateful to him, and to the hon. Member for Kensington, for initiating the debate even though it may not bear fruit today. I suspect that the Minister will get his way today, but history may tell a different story.

    I thought that the Minister rather gave the game away in his closing sentences when he admitted that the powers of existing auditors needed to be refined, strengthened or beefed up in one way or another. The discussion has been useful, and I have no desire to divide the House. Therefore, I beg to ask leave to withdraw the motion.

    Motion and clause, by leave, withdrawn.

    New Clause 4

    Amendment Of Section 18 Of Companies Act 1967

    (1) In section 18(1) of the Companies Act 1967 there shall be inserted the following:

  • "(c) the members joining and leaving the company during the year and there shall be separately classified the numbers of school-leavers joining the company, the numbers of those retiring and of those who have been made redundant;
  • (d) the employment and training policies of the company and, in particular, those relating to employees under the age of 19 years;
  • (e) the trade unions recognised by the company for collective bargaining purposes, and a resumé of the collective bargaining arrangements;
  • (f) the employee participation arrangements;
  • (g) the numbers of man-days lost per year as a result of industrial disputes within the company;
  • (h) the pension and sick pay arrangements of the company;
  • (i) the numbers of disabled people employed and of those who have retired or been made redundant;
  • (j) a resumé of how the company's personnel practices cater for disabled employees.".
  • (2) In section 18(2) of the Companies Act 1967 there shall be inserted the following:

    "(c) those matters which are set out in section 18(1)(c) to (j) inclusive."

    (3) This section shall not apply to the directors' report in respect of a financial year ending before this section comes into operation.'.—[ Mr. John Smith.]

    Brought up, and read the First time.

    I beg to move, That the clause be read a Second time.

    With this we may take the following:

    New clause 6— Amendment of section 157(1) of Companies Act 1948:

    'There shall be added to section 157(1) of the Companies Act 1948 the following:

    "A public company shall also distribute to each of its employees the balance sheet and report described above.".'.

    New clause 15— directors' reports and employment of disabled people:

    (1) The Companies Act 1967 shall be amended in accordance with the following provisions of this section.

    (2) In section 16 (additional general matters to be dealt with in directors' reports) in subsection (1) there shall be added after paragraph ( g)—"( h) in the case of companies of such classes as may be prescribed by the Secretary of State, contain such information as may be so prescribed about the arrangements of the company and its subsidiaries in that year for the recruitment and training of disabled people and for the employment, training and advancement of disabled employees."

    (3) In subsection (6) of the said section 16 for the words "paragraph ( g) shall" there shall be substituted the words "paragraphs ( g) and ( h) shall".

    (4) After subsection (5) of the said subsection 16 there shall be added—" Any expression used in the said paragraph ( h) and in the Disabled

    Persons (Employment) Act 1944 shall have the same meaning in that paragraph as it has in that Act.".'.

    New clause 15 stands in the name of the hon. Member for Exeter (Mr. Hannam) and other hon. Members. I shall make a brief reference to it, but I shall leave it to those hon. Members to explain it.

    The purpose of new clause 4 is to require a company to make a wider disclosure of its employment practices. That would apply both to its able-bodied and to its disabled employees. It is in the belief that the general requirements which the law imposes on companies in the United Kingdom are not wide enough that we have put forward the new clause.

    In general, the disclosure requirements that are imposed on United Kingdom companies relate to their financial situation rather than to a requirement to show a general economic or social picture of their activities.

    Increasingly in recent years, in successive pieces of legislation, the minimum information that companies are required to disclose in their annual reports has been increased. There has been an increasing requirement on companies to show more detail of the financial side of their affairs. But the tradition has been to look on the information required as that which would principally be of interest to shareholders and creditors rather than to employees or to members of the general public who are interested in assessing the company's economic wealth as well as the details of its finances.

    In recent years, there has also been a recognition that those legitimately interested in a company's affairs constitute a much wider group than just the shareholders and creditors or those particularly interested in its finances. If we look at recent history, we notice that Governments have been taking a much closer interest in the affairs of companies. There were provisions in the Industry Act 1975 requiring disclosure of company affairs to the Government, and the Government also took power to elicit more information about particular company affairs. That is information sought by Governments in the interest of national economic planning. I do not suppose that that is a line which the present Government will be inclined to follow, since almost perversely it seems that they have decided not to interest themselves in national economic planning or in the fortunes of particular companies, be they in the public or the private sector.

    Another tendency which has been growing in recent years, and which is to be highly commended, is that the work forces of companies feel much more involved when given information about the companies for which they work. After all, their work represents a large part of their lives. They contribute that to the company, and as a result they have a legitimate interest. They have an interest as individuals and also an interest through their trade unions and professional associations.

    Under the Employment Protection Act. we have seen the growth of an obligation upon companies to give information, for example, for the purpose of collective bargaining. The requirements on companies to do that were strengthened in terms of that Act. But in Europe and other parts of the world much more information is disclosed and is required to be disclosed under the laws of other countries than is the case under the law of the United Kingdom, particularly in the case of countries that are members of the European Community. For example, the works council system in the Federal Republic of Germany leads to the disclosure of much more information on the employment side as well as much more general information about companies. I understand that a French decree will come into operation in 1984 under which employees will be able to demand a social balance sheet from a company. There are also developments in Belgium and the Netherlands.

    To a large extent, they build upon the system of statutory works councils that operate in many Community countries and which, whatever their merits or demerits in terms of industrial democracy, are a useful method of disseminating information to the work force. It gives a work force a sense of involvement in the decisions of the company, a wider and deeper perception of both the problems and opportunities of the company and an opportunity to make an intellegent critique of the management of the company. One hopes that that will lead to a better spirit of co-operation between the management and those who give their lives to the company in terms of the work that they perform throughout their working lives.

    New clause 6 suggests that a company should give a balance sheet and report to all its employees. I imagine that the objection to that will be that it is too cumbersome. If that is so, I am sure that my hon. Friends would settle for a reasonable abbreviation. However, I do not think that it would be too burdensome in principle to have an obligation to communicate to the employees who work for a company. One of the main points behind the new clause is the feeling that not enough information is required to be disclosed under United Kingdom law at present and that many other countries do a great deal more.

    There is quite an interesting survey by the Financial Times entitled "The Financial Times Survey of 100 major European Companies' Reports and Accounts", from which it is quite clear that many continental European countries publish much more information about their employees and various employment matters. It also becomes clear that the United Kingdom and other countries such as Australia, Canada and South Africa, publish much less. Indeed, many United Kingdom companies go no further than conforming to the basic requirements of the Companies Act 1967, which makes them disclose the numbers employed and the related wage costs.

    A number of guidelines were published by the OECD in June 1967 which apply principally to multinational companies, or, as they are called in United Nations parlance, transnational corporations.

    The United Nations has an international standard of reporting and accounting for those corporations. By and large, they appear to be ignored by the multinational companies and also by United Kingdom companies. There is much room for improvement. In this new clause we are not suggesting anything very dramatic. The idea of an employment statement was canvassed in the Green Paper entitled "The Future of Company Reports" published by the Labour Government in July 1977. A number of other matters were canvassed on that occasion, but for the purpose of this new clause we are confining ourselves to an employment statement.

    Does the right hon. Gentleman agree that in some countries where greater disclosure of matters relating to employment is required there is not the same detailed employment legislation—apart from company law—that we have in Britain?

    I am not in a position to confirm or deny that, because I do not have detailed knowledge of employment legislation in other countries. It does not matter how the information is obtained, but I am not confident that the Employment Protection Act covers all the information that we are seeking in the new clause. The Employment Protection Act provides for information that is required for collective bargaining purposes. Our ambition should be wider than that. There should be a desire to inform employees and the general public about employment within the narrow confines of the collective bargaining system.

    It is not unduly burdensome to suggest that companies should be required to disclose information about the numbers of employees joining and leaving the company, about their employment and training programmes, about the unions they recognise for collective bargaining purposes, about pension and sick pay arrangements, and so on. That is not an onerous obligation. Most good companies should have that information in any event. It would give a fuller picture to people interested in a company of how it carries out its employment policies and practices.

    We include in our requirements a reference to the disabled. I do not wish to trench on the provinces of other hon. Members who take a deep interest in the problems of the disabled. I simply say that we think that the disabled should also be included in the comprehensive disclosure about employment. They fit neatly into it. Most people would like to see a statement on how many disabled people companies employ and how they are employed. The same principle could apply to able-bodied employees also. Indeed, it might be preferable to include the figures relating to the disabled in a general employment statement rather than have them sticking out like a sore thumb in a separate statement.

    The advantages to be gained from the requirements in the new clause are considerable. We have a long distance to go in Britain to improve industrial relations in many companies. In some companies there are good industrial relations, in some companies there are adequate industrial relations, but in many companies there are not effective communications between the work force and the management and it is extremely difficult for the work force to find out proper and legitimate information from the company. It might also be useful for companies to be subjected to public assessment, not simply in terms of their financial performance—which tends to be the principal concern of the financial press—but in a slightly wider framework. It would be a useful start to have a disclosure of employment.

    7.15 pm

    Many companies may be willing to do that voluntarily. Many companies in other countries are able to do so. The requirements of the law should have the effect of bringing our regulations up to a higher standard. We do not think that enough is being done in this area, and we think that the process could be stiffened by the introduction of a statutory requirement. New clauses 4 and 6 are modest. I shall not trench too much on new clause 15, which has its own advocates, except to say on behalf of the Opposition that we wish the proposers of new clause 15 well. They will recognise that there are some advantages for them, as well as for the public, if the Minister gives a sympathetic reception to new clauses 4 and 6.

    I wish to speak particularly to new clause 15, which is in my name and the names of other members of the all-party disablement group. It is interesting to note how often that group is becoming involved in legislation. I notice and welcome the attendance of the four musketeers of the group, plus, in this instance, my hon. Friend the Member for Kensington (Sir B. Rhys Williams), who so ably moved a similar amendment in Committee.

    We seek to include in the 1967 Act provision for directors' reports on company policies relating to the employment, training and promotion of disabled people. In Committee my hon. Friend the Member for Kensington moved a similar amendment, and his presentation of the case received support from the Opposition and from the Minister, who promised to follow the guidance of the Manpower Services Commission's review of the quota scheme. The Minister gave an assurance to the Committee that he would use clause 48 powers to meet any requirement that the commission might recommend. However, there is a significant difference between the amendment that my hon. Friend tabled in Committee and new clause 15.

    All hon. Members are concerned at the appallingly high level of unemployment amongst disabled people. The figure for January is 137,063. The failure of the present quota system is due partly to non-compliance by employers but also to ignorance on the part of companies as to their responsibilities towards the disabled in our society.

    We do not seek to achieve a requirement to fulfil the quota. We accept the point made by the Minister in Committee that he would wish to wait for the Manpower Services Commission's quota study review before including any provision in the Bill. We have therefore removed that part of the orginal amendment, and we now propose that in its directors' reports a company should provide information on the recruitment and training of disabled people. That is a straightforward suggestion, and it is in line with the basic concept of section 79 of the Health and Safety at Work etc. Act 1974. Under that Act companies had to include information on their employees' health, safety and welfare at work. Many companies have done that, and some have moved even further. In recent years they have begun to give reports on local community actions, anti-pollution activities, and other varied policy matters.

    The greatest support for our amendments lies in the 1977 Green Paper entitled "The Future of Company Reports". In that Green Paper it was suggested that companies should publish information on their policies towards the employment of disabled people. At present, those companies with a good record in this field often have a director or a senior manager with a special knowledge of or a close interest in disability. Many other companies would happily employ disabled people if, each year, they had to concentrate their minds on the problem in a directors' report. The fact that disabled workers provide the most loyal and dedicated service to companies would be more widely known than at present.

    As in many other areas of disablement, we want to achieve a consistent and more uniform treatment for disabled people. A written statement of policy would ensure that every consideration was given to the employment and retention of disabled people. Another important factor is that non-disabled employees would have a much clearer indication of what their company would do in the event of their becoming disabled.

    For all those reasons, and with the intention, which I know the House shares, of enhancing employment opportunities for the disabled without imposing new and onerous requirements on a company, I hope that the Government will accept new clause 15. It does not prejudice the outcome of the quota review. If it is decided that the statutory quota system should continue, the Government can use their powers under clause 48. If it is decided not to continue the quota system, the proposal will nevertheless help to provide employment opportunities for disabled people.

    We cannot allow these large numbers of willing and, with training, highly talented workers to remain cut off from normal work opportunities. I hope that the Government will accept the new clause.

    I support the contentions of the hon. Member for Exeter (Mr. Hannam). I almost called him my hon. Friend. As the two chief officers of the all-party group on disablement, we work closely together. I should like the Minister to know that the all-party group feels strongly about new clause 15.

    The aims of the clause are to focus the attention of top management on the problems of disabled people. Far too often those problems are completely disregarded by companies or, alternatively, dealt with by junior staff. If attention is not focused on those problems, they simply go by default. As a consequence, disabled people suffer.

    Disabled people suffer not only in terms of employment but in terms of training. Far too often the legitimate claims of a disabled man or woman to adequate training are overlooked, partly because of -the common prejudice against disabled people—we are all aware of that—and partly because in the minds of some employers is the conviction that disabled people require more training than non-disabled people. That is a complete myth.

    For similar reasons, disabled people are often overlooked when it comes to promotion. The best men or women may be overlooked because they are disabled. That is gross unfairness. If the clause is accepted or viewed sympathetically by the Minister, it will mean that in the annual report of every company attention will be focused on the problems of disabled people.

    New clause 15 is of far greater importance to disabled people than is commonly realised. The employment of disabled people is an absolute disgrace, training is deplorable, and promotion is absolutely disgraceful. Last week I tabled questions about the rate of unemployment of the disabled—a subject about which we have been concerned for many years. The trend has not changed at all. There are proportionately many more disabled people who are unemployed. The problem is that many employers are breaking the law. They are not fulfilling their quota of disabled people and are taking on new people without permission to do so.

    We have deliberately avoided dealing with the quota in the new clause, because we want to meet the Minister as best we can. The quota system is under review. We have therefore deliberately kept the quota out, in order to give the Minister an opportunity to meet us. On Report the Government could insert a provision for reference to the employment, training and promotion of disabled people.

    I hope that the new clause will be accepted by the Minister. It is of profound importance. It is a small clause, which will cost the Government no money but will greatly help disabled people.

    I support the remarks of my hon. Friend the Member for Exeter (Mr. Hannam) and the right hon. Member for Stoke-on-Trent, South (Mr. Ashley). New clause 15 is a modest clause. It is put forward on the premise that we are all concerned about employment and want to see more employment for more people. We are particularly concerned about the disabled.

    The figures are well known and I need not go through them. As the right hon. Gentleman said, there are proportionately more disabled people unemployed than able-bodied people. The reasons are obvious, and I need not go into them.

    We are anxious that disabled people should at least get their fair share of employment opportunities. Indeed, we could argue the case that they should have more than their fair share because of their other disadvantages in life. However, that is not our case. It is only that they should have their fair share.

    The quota system is being reviewed. I have never been happy about it because the nature of employment varies so much. There are undoubtedly firms that could take far more disabled people into their service than any quota system would lay down. Conversely, there are firms, such as contractors and those working on building sites, in which, with the best will in the world, it is difficult to employ many disabled workers.

    We are putting forward the value of publicity. Surely that is what open democracy and government is all about. It is one of the premises of our existence in Parliament. Publicity helps to get things done. We in no way suggest taking executive power to compel firms to employ more disabled people. We advocate the use of publicity.

    If a company had to spell out in its annual report the modest fact that we suggest in the new clause, it would concentrate the minds of management, and hence others in the company, when writing the report. When the chairman or managing director reads the draft of the annual report produced by the company secretary and sees a thin return of what the company has contributed to the employment of disabled people, if he values his reputation he will say that it is not good enough and that the firm must do better next year. It will concentrate the mind, and that is one of the most important points. It is not just the external effect but the internal effect on an organisation of having to publish those statistics.

    We hope that in the long run there will be more incentives rather than penalties for companies to employ a greater number of disabled workers. For a number of years I have been most anxious to see the Queen's Award for Industry extended to include a company's performance in regard to disabled employees. The Manpower Services Commission has gone half-way in proposing a solution of its own. Because of the prestige of the Queen's Award for Industry, I should like to see it awarded for performance in regard to employment and subsequent training of disabled people. New clause 15 would be a good start. If it is incorporated in the Bill, I believe that it follows logically that the Queen's Award for Industry should be given to companies which perform well with regard to the disabled, as well as in export and technological innovation. The three go happily together.

    7.30 pm

    I am the fourth of the four musketeers. If the Minister has listened carefully, he will have decided to accept new clause 15. The more information, the greater the awareness. Directors will then appreciate what can be done. All too often, an attitude of defeatism prevails towards the disabled and their prospects of employment. I may cause some upset by saying that I am not completely convinced that the Manpower Services Commission understands the problems of the disabled. It makes an attempt to employ the disabled, but it has not got the message concerning what can and should be done.

    Perhaps this clause will give the commission another little weapon with which to approach the problems involved in employing the disabled. If the boardroom is aware of the problem, company policy may change. Those of us who are involved in this subject know that from time to time we meet pleasant personnel officers. They may say that we are quite right and that they agree with us. But then they go on to say that it is not company policy, or that there is no one on the board who believes in it. However, if this subject is included in the annual report, there may be a better chance of getting this concept of the disabled accepted. If it is accepted at boardroom level, it can be passed down to the shop floor.

    We tend to tuck the disabled away and to say that in the fullness of time they will die. The congenitally disabled, those who become disabled as a result of illness and those who become disabled as a result of industrial or traffic accidents may have an expectation of a working life of between 40 and 50 years, thanks to medical skill. Why should they be ignored as part of our work force?

    Managers tend to raise problems. They often say that there is a problem of mobility. They ask how the disabled can get to work. However, this is not such a big problem. Vehicles are adapted. Several schemes are run by the Manpower Services Commission in order to help the disabled to get to work. The problem of mobility can therefore be overcome.

    It is also said that there may be a problem of access to the factory. Directors should show some concern about that. If their premises are inaccessible, they should make them accessible. Should the disabled be employed? I am an unpaid director of Possum Controls Limited. From experience I know that if the will exists there is no disability. I shall repeat slowly for the benefit of the Minister. There is no disability that cannot be overcome by advanced technology.

    There are total quadraplegics who are unable to breathe, but they are able to control their environment and to earn a living. The oldest surviving respiratory polio victim in the world caught polio in Malaya. He can export specialised hospital beds all over the world from his bed. He can do that only because someone has thought about the problem and has considered how to exploit his obvious skill. He uses his mouth. Some people use their chins and others use their noses. This is a challenge to directors and to the Manpower Services Commission. Let us inject a little bit of life into directors. We should make them realise their duty. If we accept the clause, we may give the disabled a chance to indulge in industrial, economic and social work.

    No one will disagree with the need to employ the disabled. No one will disagree that new clause 15 will help towards that end. My hon. Friend the Member for Eastleigh (Mr. Price) has put forward constructive proposals. He has suggested that there should be some way of providing special provisions. After the First World War, anyone who employed a disabled soldier or sailor was allowed to put a medallion on his notepaper. Such companies were proud to do so. If the proposal of my hon. Friend the Member for Eastleigh is carried a little further, it will have greater effect than new clause 15.

    New clause 15 has its advantages. Perhaps it should be obligatory on every board meeting to include on the agenda information about its disabled employees. People tend to take too much notice of balance sheets. Once they have been published, they are of little interest to the general public. However, competitors may be interested.

    I am very much against new clause 4. I hope that the Government will resist it. Basically, it is a "Nosey Parker" clause. It would give a tremendous amount of information to competitors. Overseas competitors would be able to find out too much about a company. However, the information would be fairly useless. It might appeal to an employer or to someone who was investigating. Subsection (1) refers to
    "the members joining and leaving the company during the year and there shall be separately classified the numbers of school-leavers joining the company, the numbers of those retiring and of those who have been made redundant".
    However, the number of people travelling or walking to a building site will depend upon whether the site is starting or finishing. A tremendous amount of information will be produced that is of no value to anyone other than a competitor. A competitor may wish to know whether business is growing. What use can this information be as regards employment statistics?

    The new clause refers to
    "The numbers of man-days lost per year as a result of industrial disputes within the company".
    Workers may strike for an hour about a cup of tea. In order to comply with the requirements of the new clause, it will be difficult to work out the number of men on a site and the number of strikes over silly things such as sugar in the tea. I have known a strike to go on for half an hour as a result of a dispute about sugar in tea. That should not happen. However, putting statistics on an annual balance sheet will be a waste of time.

    The problems involved in the other subsections seem obvious. What purpose can be solved by putting this information on a balance sheet? It would be better to have a standard form of employment policy. It should be available to shareholders who wish to see it, but it would not be repeated year after year.

    I join my hon. Friend the Member for Folkestone and Hythe (Mr. Costain) in hoping that the Government will resist new clause 4. I have considerable sympathy with one line of new clause 4. The right hon. Member for Lanarkshire, North (Mr. Smith) proposes that emphasis should be placed on the employment and training policies of the company. During the next 10 years the Government should encourage companies by every means possible to undertake training schemes. Such schemes should be financed by the company. That is preferable to the practice of discharging employees whose skills have become obsolete. Those companies leave such people to the taxpayer to retrain. Companies take them on again when they have acquired the skills necessary for the next decade. The taxpayer cannot bear that burden.

    The Government should recognise the need for training within industry. They should give every possible emphasis to it. Much of the information that is called for in new clause 4 would be superfluous and misleading. Companies have to pay a lot of attention to public relations to the exclusion of their business. They would have to spend time explaining the facts to any hostile elements who looked through the accounts and who felt that they were on to something. Very often there are good reasons why things have gone wrong, and boards should not be harassed too much by being forced to disclose every detail. Therefore, I hope that the Government will resist new clause 4.

    I hope that the Government will also resist new clause 6. Although I am entirely in favour of a great many more consultations with employees, I do not think there is much point in blinding them with science by giving them the balance sheet. It would simply require an enormous amount of paper to be printed which would probably be thrown away unread. Once again, I recognise the intentions of the right hon. Member for Lanarkshire, North (Mr. Smith), but I think that in practice such a proposal would be a blunder.

    New clause 15 resembles the clause that I moved in Standing Committee. I hope that on this matter we shall have a gesture from my hon. Friend the Minister tonight. There have been speeches from both sides of the House that have been absolutely sincere and they have shown a real understanding of the problems of the disabled. The House often comes back to problems of the disabled and debates these matters, always with sympathy but not always effectively. The Government should adopt this proposal because hon. Members know what they are talking about. I hope that the Minister will be forthcoming.

    I declare an interest in that I am deputy chairman of a public company. I support the spirit of both new clause 4 and new clause 6. However, I think that much of what is contained in new clause 4 would be better put in a code of practice. Some of the information that is listed here could create difficulties either for management or trade unions and if a body such as ACAS were to draw up a code of practice this would be the best way of producing some real and useful information which could be used for the benefit of everyone.

    The other point with which I have some sympathy is that the list of information contained in new clause 4 is very much concerned with advancing good human relations in a company. It is right that the chairman of a company should be very much concerned, and if he had to sign a statement which described his recruitment policies, the training that was done within the company and how the different forms of participation were being developed, it would be helpful in terms of ensuring that the most senior person in the company concentrated his mind on seeing that his company was doing all that could be done. Inevitably he would look at his competitors to see what they were doing and at other companies which had established a reputation for good practice in these areas.

    I like the concentration on school leavers, and we should all be concerned about this. In my constituency there is a very real rapport between industry and education. There is a concern to ensure that children are given an early warning of the sort of areas where there are likely to be more jobs and the areas where jobs are likely to be fewer. On training, it might help to establish a better understanding of where the balance should be drawn between in-company training and training through the agencies of the Manpower Services Commission.

    Some chairmen may like to spell out the particular initiatives that have been helpful in their own companies. In my company we made every employee take the IBM aptitude test and as a result we found five people who had skills that no one had suspected. As a result, their career prospects were absolutely transformed.

    On the development of participation, sadly Bullock was the great missed opportunity of the decade. The loaded terms of reference and the insistence on a single channel fouled the water to the point where it is quite difficult to see what useful initiatives could be taken. I think that a code of practice is the only useful way that is politically practical at present.

    If one looks at some of the information that is required by new clause 4, one sees that some company chairmen might not wish to spell out the fact that they have been successful in getting unionists and non-unionists around the table. Or they might not wish to spell out that their employees, particularly members of some unions, were now member of BUPA. Also, they might feel that if all the unions were listed it might encourage multi-unionism. There would be certain unions who would look through company reports to see where they should have negotiating rights but did not have them. Therefore, I believe that there are serious practical difficulties which would be best explored through ACAS.

    7.45 pm

    On the question of circulating annual reports to employees, we already do this in my company. We have an employees' meeting immediately afterwards and we try to expand the information. A lot of the information that is listed in new clause 4 would be helpful for such a meeting. Again I endorse the spirit of the new clause, even though it may be premature and we may have to think rather harder about the sort of companies in which it would be useful. I am sure that when my hon. Friend replies he will take us further in these arguments.

    I open briefly by asking the motive of the obligations placed on directors' reports in the Companies Act 1967 under section 15 and thereafter. There are a range of obligations which include profitability, information about the average number of employees by the week and the amount of wages by the year, and contributions for political or charitable purposes—and there may be other motives in that. I note that section 20 requires that in certain circumstances the directors' report should include particulars of exports. It is not just a question of better disclosure of information; it is also a means of directing the attention of the chairman in a certain way to matters which the Government consider important. That appears to be a relevant consideration in the section relating to exports.

    As regards most of the suggestions made in new clauses 4 and 6, the information is readily available to the company. It is not as if the requirement will impose a vast amount of new paperwork on a company. The imposition of the obligation to include those particulars in the directors' report is a means of giving some official pressure for improvement in practice. This may be particularly relevant in the case of school leavers.

    Perhaps in passing I should mention that the practice stated by the hon. Member for Kidderminster (Mr. Bulmer) which operates in his company of distributing the directors' report is an example of what the best companies are already doing. The purpose of the new clauses is to impose on the laggards the practices of the best companies.

    I shall now consider the clause in relation to the disabled. To impose this obligation on a company in its report is, as it were, an official declaration of the importance which the Government attach to this matter. Very much has been done, as is illustrated in the recent report by the Low Pay Unit. This report shows, for example, the increase in the number of firms which are below their quota in percentage terms. On page 2 of the report there is a table showing the percentage of employers who have failed to fulfil the quota of disabled employees. In 1960 it was 38·2 per cent. of employers. That figure has increased a great deal since then. In 1970 it was 57·3 per cent.; in 1975 it was 60·9 per cent. and in 1978—the latest date for which figures are available—it was 63·2 per cent. Although there are other factors behind it and these figures need clarification, the general trend has been adverse for the disabled.

    This report and the corresponding report from the Royal National Institute for the Blind conclude—precisely in the terms suggested in the new clause—that all employers should be required to publish annually details of their levels of quota compliance. If the Government accept that there needs to be some pressure on employers, particularly at this time of high unemployment, when it is more difficult for the disabled to find jobs, this would he a small symbolic way of showing their determination to improve the situation and to ensure that chairmen of companies at least—since they sign the reports—have brought to their attention from time to time the practice of their own companies concerning the disabled.

    For a number of reasons, partly disclosure and partly the seal of official approval and pressure, let us hope that the Department will have something positive to say about these new clauses.

    Recognising the importance of the fact that so many hon. Members have spoken from both sides of the House on new clause 15, I hope that the right hon. Member for Lanarkshire, North (Mr. Smith) will understand if I reply to that part of the debate before going on to new clauses 4 and 6.

    The Government have considerable sympathy with the intentions of new clause 15, as I am sure that the House does. We are all concerned that the disabled should have better opportunities of obtaining employment. A number of points in this context are not matters of company law, and I ask the House to bear with me if I mention them.

    In 1977 the previous Administration published a Green Paper "The Future of Company Reports", which contained a proposal similar to that of this new clause that companies should, as part of an employment statement, publish details of the numbers of disabled people employed together with a short statement of how company personnel practices catered for the disabled. In responding to that proposal, companies pointed out that they were frequently unable to meet the required quota of disabled employees as laid down in the Disabled Persons Employment Act 1958 because there were not enough registered disabled persons applying for jobs.

    That may, of course, have been due in part to a natural reluctance on the part of the disabled to register as such and thereby to class themselves as a separate category of employee with lower expectations. Quite apart from the views of companies—as I explained in Committee—the Manpower Services Commission is undertaking an important review of the quota scheme for the employment of disabled people. In May last year the commission published a comprehensive discussion document which described trends in the operation of the quota scheme, posed a number of key questions and identified a range of future options for providing protection or assistance for the employment of disabled persons.

    One of those options was that there should be a statutory obligation on employers to publish statements about their policy and record on the employment of the disabled, possibly in their company report. As I made clear in Committee, it is well known that the commission's review, together with its recommendations, is expected to be available by the end of the year.

    I was much affected by the terms in which my hon. Friend the Member for Exeter (Mr. Hannam) put forward his new clause 15, and I recognised as the debate proceeded the strength of the support that came from both sides of the House. I thank the right hon. Member for Stoke-on-Trent, South (Mr. Ashley), my hon. Friend the Member for Eastleigh (Mr. Price) and the hon. Member for Eccles (Mr. Carter-Jones) for their moving speeches. I explained in Committee that under clause 77 of the Bill—I also explained how we were awaiting the report of the Manpower Services Commission—there is a provision whereby we have taken a general power to add to or to alter the statutory requirements of the directors' report by regulation.

    I explained that this power could be used to meet the intention of the new clause and I gave a strong assurance in Committee that upon the arrival of the Manpower Services Commission's study and recommendations I would be prepared to use the power in new clause 15 for the purpose of making that regulation.

    I further explained that I thought it best that I should await the report of the Manpower Services Commission. I also made it clear in Committee that I had every sympathy with the principle and sentiments of new clause 15. Having been affected by the arguments put forward, I would point out that clause 77 of the Bill enables me by regulation to alter or to add to the statutory requirements of the directors' report, and I undertook that that power would be used immediately to implement any recommendation of the Manpower Services Commission based on its report.

    In the light of the debate today, I am pleased to inform the House that I am prepared to go further on this point tonight. I can give an assurance on behalf of the Government that we will use our new powers under clause 77 as soon as the Bill is enacted to make regulations on this matter. I would propose to use the interval between now—it will be a short interval—and the passing of the Bill to consult the organisations concerned—in particular those organisations representing disabled persons—about the exact content of the regulations. These regulations will be subject to an affirmative resolution by the House and, therefore, the House will have an opportunity to debate the precise proposals of the Government.

    I hope that on the basis of this undertaking, which definitely advances the matter and which is the most hopeful proposition that I can bring forward, my hon. Friends and all those hon. Members who supported them will feel pleased that progress has been made and that it will be agreed that this new clause should be withdrawn.

    8 pm

    I now refer to the speech made by the right hon. Member for Lanarkshire, North, I appreciate that he has an interest in putting forward his amendment because it is similar to a proposal that was contained in the Green Paper "The Future of Company Reports" which was published my the previous Government in July 1977. In that report it was suggested that companies should publish in the annual report a statement on employment matters. The idea was that the statement should include information about the work force that was relevant not only to employees but also to the shareholders and other interested parties.

    Nearly all of the many bodies that submitted comments on that proposal were totally opposed to the inclusion of such information in company reports. One of the main arguments that was put forward against the idea was that the need for such information had not been identified or justified. When the present Government came to office, we also considered whether large companies should be required by law to publish such non-financial information. Our conclusions are to be found in another Green Paper, "Company Accounting and Disclosure", which was published in September of last year. Paragraph 2 of chapter III states that
    "no useful purpose would be served by introducing legislation requiring the inclusion of detailed employment and other non-financial information in company accounts."
    The reason for that is that it is already a requirement of employment legislation that companies should disclose to union representatives information that is relevant, particularly, as the right Member for Lanarkshire, North mentioned, to collective bargaining.

    My hon. Friend the Member for Dorset, North (Mr. Baker) made a good point in his speech when he said that the comparisons with other countries which the right hon. Gentleman made are not easy unless we can look at the whole picture of legislative obligation. He included not only company law but other forms of legislation which give rise to such obligation. While we welcome the voluntary moves that have been made by companies to provide employees with information about the financial position of the company and the experiments in the wider social reporting which are being undertaken by a growing number of companies, we do not consider that, for the present at least, legislation has a part to play in these developments.

    Indeed, the comments that we have received on our Green Paper hold us steadfast in that belief. My hon. Friend the Member for Kensington (Sir B. Rhys Williams) emphasised the importance of training in industry. I agree strongly with the emphasis that he placed on the importance of that. I listened with great care to what my hon. Friend the Member for Kidderminster (Mr. Bulmer) said on the subject because I greatly respect his knowledge and experience of industrial matters. However, I am not sure that the Bill and company law provision are necessarily the best way to meet such important points. Certainly, I shall bear the views of my hon. Friends in mind as we move on towards the preparation of the next Companies Bill. However, with regard to this Bill I ask my hon. Friends to accept that, while I recognise the importance of their points, I cannot help them on this occasion. I shall bear in mind all the points that they have made.

    In discussing the proposed clause, I do not wish to go into the finer drafting points. However, I shall make one or two points about what I consider to be important differences between this proposal and that put forward in the previous Government's Green Paper. The right hon. Member for Lanarkshire, North did not explain the differences that have developed. The Green Paper said that its proposals had been considered with large companies in mind. It suggested that only those with over 500 employees or a turnover of £5 million should produce all the information called for. This clause requires all companies with more than 100 employees to provide information, and, therefore, in effect, many smaller companies are required to disclose the full range of information called for in the clause. That goes considerably further than the previous Government's original proposal that only large companies should be required to produce an employment statement. Therefore, it would be yet another burden on the small company.

    I resist the measure strongly because our aim is to lessen the bureaucratic demands on small companies. Equally important, the proposal in "The Future of Company Reports" said:
    "It is not intended at the outset to lay down a full range of detailed requirements for the employment statement. This is a new departure and it is expected that the form that the statement will take will evolve over the next few years, once the broad requirement to publish an employment statement has been introduced."
    In this case, the Opposition seek to lay down a host of specific items for disclosure. In their original proposal they were meant to be examples of the sort of items that might be covered in the employment statement. I do not see how Opposition Members can seriously suggest that all the information should be included when they originally proposed that only some of it should be published, particularly when their original propoosal got minimal support.

    The present Government's view on disclosure generally—I stress this once again because it is relevant to the clause—is that every proposal put forward which would add to the amount of material required by law to be included in company reports should be subject to the closest scrutiny to see, first, whether there is intrinsic justification for it. If so, the question arises as to whether it adds yet another avoidable burden to industry.

    My hon. Friend the Member for Folkestone and Hythe (Mr. Costain) made some powerful points when he instanced an example which would be to the detriment of a company in the situation that he mentioned. The suggestion of art employment statement has been subject to extensive debate and close examination. Despite the arguments put forward from the Opposition Benches, we believe that the case for the statement does not even get past the first hurdle of justification. However, there is one aspect of the proposed clause with which we have some sympathy and to which I have made an exception—the disabled. I am glad to have been able to deal with the subject.

    I have pointed out that there are certain major differences in these industrial proposals as between what is now proposed by the Opposition and what they put forward in their Green Paper when they were in Government. The differences would have far-reaching consequences for a number of companies that would have to disclose information to the extent that would be required.

    Our Green Paper "Company Accounting and Disclosure", which envisages legislation and which will give effect to the European Community fourth directive in Session 1980–81, is the context in which discussion on the subject should now be raised. Section 18 of the Companies Act 1967 will have to be recast completely to meet the directive's requirement. Thus, I hope that Opposition Members will not seek to burden the legisation and, more important, to burden companies with what would be a transitory provision only. If they seek to press the new clause, I advise the House to vote against it.

    I will very briefly refer to new clause 6. I recognise that hon. Members have put this clause forward from the best of motives. The right hon Member for Lanarkshire, North considers, as do the Government, that companies should keep their employees properly informed about the affairs of the company for which they work. However, as the Government explained in the Green Paper "Company Accounting and Disclosure" published in September, we do not consider that the statutory annual accounts of a company will necessarily be the most appropriate means of presenting information to employees. This view has been reinforced by the comments we have received on the Green Paper.

    Indeed, there are those who also question whether the increasingly complex annual accounts of companies are the best way of communicating with shareholders. A considerable number of companies are making particular efforts to communicate essential financial and other information to their employees in the form of special employee reports. This is a development that should be welcomed and encouraged. To impose a statutory duty on companies to send the annual accounts to employees as well would cut across these welcome developments. Such a move could add nothing except expense to the process of communication with employees and, indeed, might serve largely to confuse the situation.

    Another suggestion that has been made is that both shareholders and employees might be sent a simplified form of financial statement with the full annual account being available upon request. The accountancy profession has done some research on the content of simplified financial statements and this work may, in due course, be of some assistance to those who are concerned with promoting effective communication with both shareholders and employees. But it would certainly not be right at present to contemplate legislation on the subject of simplified reports for companies generally.

    For the reasons that I have given, the Government are not able to support this clause. Although we strongly support the proposition that companies should provide financial information to employees, we do not believe that rigid statutory requirements would help to improve communications; they could well hinder them. But, as stated in the Green Paper, we would expect larger companies at least—those with, say, 250 employees or more—voluntarily to provide copies of their full company reports and accounts to their employees on request.

    I hope that the House will recognise that the process of research, experimentation and evaluation now being pursued by an increasing number of companies and the accountancy professsion is the best way of making progress in this area. The clause we are now considering would inhibit these welcome developments. If the proposers wish to press the matter, I strongly advise the House to vote against new clause 6.

    I have made clear the Government's opposition to new clause 4 and new clause 6 and I am pleased to give the undertaking to bring forward proposals for the assistance of the disabled which I mentioned in the earlier part of my speech.

    Perhaps I could tell the House a cautionary tale. When I was a new Member of Parliament I was involved with the Companies Bill in 1967. I moved an amendment to that Bill which had precisely the same effect as clause 46 of this Bill. A very persuasive and kind Minister, now my right hon. and noble Friend Lord Darling of Hillsborough, took me to one side and said "Look, John, this would embarrass the Government. But you will find it in the next Companies Bill that we shall see during Session 1967–68."

    I waited in vain until the end of the Labour Government's life, throughout the Tory Party Administration and for the last five years, but it was not until this Bill came before the House that I saw clause 46. The point of my tale is that if one has an opportunity to do something in the House or in Committee today, it is better to do it rather than be seduced by the argument that another Bill is on its way.

    8.15 pm

    New clause 4 and new clause 15 have a common theme, which is that the annual report of a company should not merely reflect the state of its balance sheet, profit and loss account and the contents of its books but should give an indication of the thinking, compassion and social and industrial policies of a company. I do not think that the Minister disagrees with that in terms of the disabled. However, exactly the same argument must apply to matters such as the recruitment of school leavers, policies for training, and so on.

    The Minister responded generously to the amendment. I had clear support throughout the House. Perhaps that is one of the reasons why he responded so generously to it. I do not think that I should detract from the way in which he did respond. My right hon. Friend the Member for Stoke-on-Trent, South (Mr. Ashley) said that the approach to the employment of disabled people is disgraceful. It is a conundrum that has defied the imagination of Governments of both parties.

    When I was an Employment Minister in 1974, I received a report on the employment of the disabled. As a junior Minister I read that report avidly because I had little else to do at the time. It was in that short period before Parliament begins to sit. I was fascinated by what I read. Clearly we wanted to do something, but in practice it proved far more difficult than one imagines. My right hon. Friend the Member for Doncaster (Mr. Walker) conscientiously went through a special exercise over the quota scheme, yet it still defied him; and now we have the Manpower Services Commission exercise.

    What is important is to provide information. That is why I am glad that the Minister responded as he did. What amazes me—it is the same when one talks about the employment of women or racial minorities—is that once one gets the information out in the open, one often finds that two firms, almost identical in size and making almost identical products, can have totally different policies about sex equality or disablement. It is quite extraordinary. The answer may well be nothing to do with malice; it may simply be because of a lack of forethought and being open to persuasion. But the moment such matters appear in the company report, and the thinking, compassion and approach of a company are revealed, perhaps a change of policy can be brought about.

    As my right hon. Friend says, perhaps the drafting of new clause 4 has not got it exactly right. It might be too detailed. It is possible that it would be difficult for some companies to produce information in exactly the way that the clause requires, but I do not believe that there should be a difference in principle about this information being required, because it is so important to the future of our country. For example, it is important that every company should address itself to the problem of the recruitment of school leavers and training. Everyone who has worked in the Department of Employment knows that, paradoxically, no matter how high the rate of unemployment, there are areas—even those with a high rate of unemployment—where there is a lack of skilled labour.

    It is true that companies as a whole have done too little about training and that very often the example has been set by local and public authorities. The principle of disclosure of this information, opening a company to persuasion, debate and, if need be, criticism, is the right principle to follow.

    Lastly, I think that the Minister gave the least sympathetic response to the simple proposition that is contained in new clause 6. That proposition is that a copy of the company's balance sheet, trading account and annual report should be seen by every employee. He said that perhaps it should be sent to the employees in a simplified form. If he thinks that, he should have tabled his own amendment to say that he would take power to require companies to send the annual report to employees in a simplified form. In the absence of that, we urge upon the House the simple proposition that each company should give an order to its printers to provide an extra number of reports, which could be sent to each employee. The success and sometimes the failure of a company depend on the performance of its employees.

    It seems only right that the employee should be informed. He should not be required to extract the information, which he is able to do under the employment protection legislation. The information should not have to be extracted for collective bargaining purposes. The company should provide the information as a voluntary and generous act. It should do so without being asked.

    There are two Opposition new clauses before the House. I understand that we have the opportunity to divide the House on only one of them. In the light of the debate that has taken place, it will be more appropriate to divide the House on new clause 6 than on new clause 4.

    The House is discussing new clause 4. Does the hon. Gentleman wish to ask leave to withdraw the clause?

    Division No. 196]

    AYES

    [8.20 pm

    Alton, DavidEwing, HarryMaclennan, Robert
    Anderson, DonaldField, FrankMcMahon, Andrew
    Bagier, Gordon A. T.Fletcher, L. R. (Ilkeston)McNamara, Kevin
    Beith, A. J.Fletcher, Ted (Darlington)Marshall, David (Gl'sgow, Shettles'n)
    Benn, Rt Hon Anthony WedgwoodFord, BenMarshall, Jim (Leicester South)
    Bennett, Andrew (Stockport N)Foster, DerekMason, Rt Hon Roy
    Booth, Rt Hon AlbertFoulkes, GeorgeMaxton, John
    Brown, Hugh D. (Provan)Fraser, John (Lambeth, Norwood)Maynard, Miss Joan
    Brown, Ron (Edinburgh, Leith)Freeson, Rt Hon ReginaldMikardo, Ian
    Buchan, NormanFreud, ClementMillan, Rt Hon Bruce
    Callaghan, Jim (Middleton & P)Gilbert, Rt Hon Dr JohnMiller, Dr M. S. (East Kilbride)
    Campbell-Savours, DaleGinsburg, DavidMitchell, R. C. (Soton, Itchen)
    Canavan, DennisGourlay, HarryMorris, Rt Hon Charles (Openshaw)
    Carmichael, NeilGraham, TedMorton, George
    Carter-Jones, LewisGrimond, Rt Hon J.Moyle, Rt Hon Roland
    Clark, Dr David (South Shields)Harrison, Rt Hon WalterOakes, Rt Hon Gordon
    Cocks, Rt Hon Michael (Bristol S)Haynes, FrankO'Neill, Martin
    Cohen, StanleyHealey, Rt Hon DenisOrme, Rt Hon Stanley
    Coleman, DonaldHeffer, Eric S.Palmer, Arthur
    Conlan, BernardHolland, Stuart (L'beth, Vauxhall)Parker, John
    Cowans, HarryHome Robertson, JohnPavitt, Laurie
    Craigen, J. M. (Glasgow, Maryhill)Homewood, WilliamPenhaligon, David
    Cryer, BobHooley, FrankPowell, Raymond (Ogmore)
    Cunliffe, LawrenceHoram, JohnRace, Reg
    Cunningham, George (Islington S)Howells, GeraintRees, Rt Hon Merlyn (Leeds South)
    Dalyell, TamHudson Davies, Gwilym EdnyfedRichardson, Jo
    Davies, Ifor (Gower)Hughes, Robert (Aberdeen North)Roberts, Ernest (Hackney North)
    Davis, Clinton (Hackney Central)Hughes, Roy (Newport)Robertson, George
    Davis, Terry (B'rm'ham, Stechford)Janner, Hon GrevilleRooker, J. W.
    Dean, Joseph (Leeds West)Jones, Rt Hon Alec (Rhondda)Ross, Ernest (Dundee West)
    Dempsey, JamesJones, Barry (East Flint)Ross, Stephen (Isle of Wight)
    Dewar, DonaldKilroy-Silk, RobertSever, John
    Dixon, DonaldLambie, DavidSheldon, Rt Hon Robert (A'ton-u
    Dobson, FrankLamborn, HarrySilkin, Rt Hon John (Deptford)
    Dormand, JackLamond, JamesSilverman, Julius
    Douglas, DickLeadbitter, TedSmith, Cyril (Rochdale)
    Duffy, A. E. P.Leighton, RonaldSmith, Rt Hon J. (North Lanarkshire)
    Dunn, James A. (Liverpool, Kirkdale)Lewis, Ron (Carlisle)Spearing, Nigel
    Dunnett, JackLofthouse, GeoffreySpriggs, Leslie
    Dunwoody, Mrs GwynethLyons, Edward (Bradford West)Stallard, A. W.
    Eadie, AlexMabon, Rt Hon Dr J. DicksonSteel, Rt Hon David
    Eastham, KenMcCartney, HughStewart, Rt Hon Donald (W Isles)
    Edwards, Robert (Wolv SE)McDonald, Dr OonaghStoddart, David
    Ellis, Raymond (NE Derbyshire)McGuire, Michael (Ince)Thomas, Dafydd (Merioneth)
    Ellis, Tom (Wrexham)McKay, Allen (Penistone)Thomas, Jeffrey (Abertillery)
    Evans, Ioan (Aberdare)McKelvey, WilliamThomas, Dr Roger (Carmarthen)
    Evans, John (Newton)MacKenzie, Rt Hon GregorWainwright, Edwin (Dearne Valley)

    In the circumstances, Mr. Deputy Speaker, I beg to ask leave to withdraw the motion.

    Motion and clause, by leave, withdrawn.

    New Clause 6

    Amendment Of Section 157(1) Of Companies Act 1948

    'There shall be added to section 157(1) of the Companies Act 1948 the following:

    "A public company shall also distribute to each of its employees the balance sheet and report described above.".'.—[Mr. John Smith.]

    Brought up, and read the First time.

    Motion made, and Question put, That the clause be read a Second time:—

    The House divided: Ayes 151, Noes 201.

    Wainwright, Richard (Colne Valley)Wilson, Rt Hon Sir Harold (Huyton)Young, David (Bolton East)
    Walker, Rt Hon Harold (Doncaster)Winnick, David
    Welsh, MichaelWoodall, AlecTELLERS FOR THE AYES
    White, Frank R. (Bury & Radcliffe)Woolmer, KennethMr. James Hamilton and
    Whitlock, WilliamMr. James Tinn.

    NOES

    Adley, RobertGorst, JohnMurphy, Christopher
    Aitken, JonathanGow, IanMyles, David
    Alexander, RichardGower, Sir RaymondNeedham, Richard
    Ancram, MichaelGray, HamishNelson, Anthony
    Arnold, TomGreenway, HarryNeubert, Michael
    Aspinwall, JackGriffiths, Peter (Portsmouth N)Newton, Tony
    Atkinson, David (B'mouth, East)Gummer, John SelwynNormanton, Tom
    Baker, Nicholas (North Dorset)Hamilton, Hon Archie (Eps'm&Ew'll)Page, Rt Hon Sir R. Graham
    Benyon, Thomas (Abingdon)Hamilton, Michael (Salisbury)Page, Richard (SW Hertfordshire)
    Berry, Hon AnthonyHannam, JohnParkinson, Cecil
    Best, KeithHaselhurst, AlanParris, Matthew
    Bevan, David GilroyHavers, Rt Hon Sir MichaelPatten, Christopher (Bath)
    Biggs-Davison, JohnHawkins, PaulPattie, Geoffrey
    Blackburn, JohnHawksley, WarrenPorter, George
    Blaker, PeterHeddle, JohnPowell, Rt Hon J. Enoch (S Down)
    Body, RichardHicks, RobertPrice, David (Eastleigh)
    Bonsor, Sir NicholasHill, JamesProctor, K. Harvey
    Braine, Sir BernardHogg, Hon Douglas (Grantham)Renton, Tim
    Bright, GrahamHolland, Philip (Carlton)Rhys Williams, Sir Brandon
    Brinton, TimHooson, TomRidsdale, Julian
    Brocklebank-Fowler, ChristopherHordern, PeterRifkind, Malcolm
    Brooke, Hon PeterHowell, Rt Hon David (Guildford)Roberts, Michael (Cardiff NW)
    Brotherton, MichaelHowell, Ralph (North Norfolk)Roberts, Wyn (Conway)
    Brown, Michael (Brigg & Sc'thorpe)Hunt, David (Wirral)Rossi, Hugh
    Bruce-Gardyne, JohnHunt, John (Ravensbourne)Sainsbury, Hon Timothy
    Buchanan-Smith, Hon AlickHurd, Hon DouglasSt. John-Stevas, Rt Hon Norman
    Buck, AntonyJessel, TobyShaw, Michael (Scarborough)
    Budgen, NickJopling, Rt Hon MichaelShepherd, Colin (Hereford)
    Bulmer, EsmondKaberry, Sir DonaldSilvester, Fred
    Burden, F. A.Kellett-Bowman, Mrs ElaineSkeet, T. H. H.
    Butler, Hon AdamKimball, MarcusSpeller, Tony
    Cadbury, JocelynKing, Rt Hon TomSpicer, Jim (West Dorset)
    Carlisle, John (Luton West)Knight, Mrs JillSpicer, Michael (S Worcestershire)
    Chalker, Mrs LyndaKnox, DavidSproat, Iain
    Channon, PaulLamont, NormanSquire, Robin
    Churchill, W. S.Lang, IanStainton, Keith
    Clark, Hon Alan (Plymouth, Sutton)Lawrence, IvanStanley, John
    Clark, Sir William (Croydon South)Lawson, NigelStewart, Ian (Hitchin)
    Clarke, Kenneth (Rushcliffe)Le Marchant, SpencerStewart, John (East Renfrewshire)
    Cockeram, EricLennox-Boyd, Hon MarkStradling Thomas, J.
    Costain, A. P.Lloyd, Peter (Fareham)Tebbit, Norman
    Cranborne, ViscountLoveridge, JohnThomas, Rt Hon Peter (Hendon S)
    Critchley, JulianLyell, NicholasThompson, Donald
    Crouch, DavidMcCrindle, RobertThorne, Neil (Ilford South)
    Dean, Paul (North Somerset)Macfarlane, NeilThornton, Malcolm
    Dickens, GeoffreyMacGregor, JohnTownend, John (Bridlington)
    Dorrell, StephenMacKay, John (Argyll)Trippier, David
    Douglas-Hamilton, Lord JamesMcQuarrie, AlbertVaughan, Dr Gerard
    Dover, DenshoreMates, MichaelWaddington, David
    Dunn, Robert (Dartford)Mather, CarolWakeham, John
    Eden, Rt Hon Sir JohnMawby, RayWalker, Rt Hon Peter (Worcester)
    Eggar, TimothyMawhinney, Dr BrianWalker, Bill (Perth & E Perthshire)
    Eyre, ReginaldMellor, DavidWalker-Smith, Rt Hon Sir Derek
    Fairbairn, NicholasMeyer, Sir AnthonyWaller, Gary
    Fairgrieve, RussellMiller, Hal (Bromsgrove & Redditch)Ward, John
    Faith, Mrs SheilaMills, Iain (Meriden)Wells, Bowen (Hert'rd & Stev'nage)
    Fenner, Mrs PeggyMills, Peter (West Devon)Wheeler, John
    Finsberg, GeoffreyMiscampbell, NormanWickenden, Keith
    Fisher, Sir NigelMitchell, David (Basingstoke)Wilkinson, John
    Fletcher-Cooke, CharlesMoate, RogerWilliams, Delwyn (Montgomery)
    Fowler, Rt Hon NormanMolyneaux, JamesWinterton, Nicholas
    Fraser, Peter (South Angus)Montgomery, FergusWolfson, Mark
    Fry, PeterMoore, JohnYoung, Sir George (Acton)
    Gardner, Edward (South Fylde)Morgan, GeraintYounger, Rt Hon George
    Garel-Jones, TristanMorris, Michael (Northampton, Sth)
    Gilmour, Rt Hon Sir IanMorrison, Hon Charles (Devizes)TELLERS FOR THE NOES
    Glyn, Dr AlanMorrison, Hon Peter (City of Chester)Mr. John Cope and
    Goodhew, VictorMudd, DavidMr. Robert Boscawen
    Goodlad, Alastair

    Question accordingly negatived.

    New Clause 7

    Liability Of Holding Company For Defaulting Subsidiary

    '(1) Subject to subsection (3) below, if any sum required by any judgment or order to be paid by a company which is a subsidiary of a holding company is not paid by the company concerned within the period of fourteen days beginning on the date on which the judgment or order becomes enforceable by execution or (in Scotland) by diligence, the holding company shall be liable to pay that sum and that judgment or order shall be enforceable against the holding company accordingly.

    (2) Where any such sum as is referred to in subsection (1) above is required to be paid in respect of a liability arising under a contract made by the defaulting company, the cause of action shall be regarded, for the purposes of this section, as having arisen at the time when the contract was made.

    (3) Subsection (1) above shall apply only if the holding company or the subsidiary company has not given notice in writing to the creditor of the subsidiary company prior to the inception of the liability on which the judgment or order is based.

    (4) For the purpose of subsection (1) above the expression "holding" shall mean any company which is the holder of one quarter or more of the shares of the subsidiary company or of the shares of any company which holds a quarter or more of the shares in the subsidiary company'.—[ Mr. Clinton Davis.]

    Brought up, and read the First time.

    8.30 pm

    New clause 8— Liability of related companies:

    '(1) Subject to subsections (2) and (3) of this section if any sum required by any judgment or order to be paid to any creditor by a company is not so paid within the period of fourteen days beginning on the date on which the judgment or order becomes enforceable by execution or (in Scotland) by diligence, every related company shall be jointly and severally liable to pay that sum, and that judgment or order shall be enforceable against any related company accordingly.

    (2) In the event of a related company being wound up, nothing in subsection (1) of this section shall entitle the creditor to recover any part of the sum until the claims of the other creditors have been satisfied.

    (3) Subsection (1) above shall apply in the case of a debt arising out of a contract only if the related company has not given to the creditor notice to exclude the operation of this section prior to the making of the con- tract on which the judgment or order is founded.

    (4) For the purpose of this section, "related company" in relation to any company means any body corporate which is that company's subsidiary or holding company, or a subsidiary of that company's holding company, but for the purpose of this subsection no company shall be deemed to be the holding company of a subsidiary unless it is the holder of one quarter of the shares of that subsidiary, and the expression "subsidiary" shall be construed accordingly.'.

    New clause 9— Liability of holding company in case of fraud:

    '(1) If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose the court, on the application of the official receiver, or the liquidator or any creditor or contributory of the company, may if it thinks proper so to do, declare that any holding company shall be responsible without any limitation of liability, for all or any of the debts or other liabilities of the company as the court may direct.

    (2) For the purpose of subsection (1) above the expression "holding company" shall mean any company which is the holder of one quarter or more of the shares of the company which is the subject of the winding up, or of the shares of any company which holds any shares in the company which is the subject of the winding up.'.

    This series of new clauses seeks to provide that a holding company should, in certain circumstances, be liable for a subsidiary of that holding company which defaults in its legal obligations. We sought to provide a number of alternative routes which the Government might be able to consider. In essence, the clause provides that the holding company would be liable for the defaulting subsidiary, unless the holding company had given notice to the creditor to exclude the operation of the clause before the inception of liability on which a judgment order is founded. I should like to return to the details later.

    I acknowledge that this is a difficult concept, especially for an Opposition, to draft into legislative form, and I have no doubt that the Minister will be able to point to certain defects of draftsmanship. Previously he was able to point out that he could embrace an idea that the Opposition put forward and improve on it. Perhaps he will be able to do the same here. The Minister is a fair man. He would concede this point as we are discussing the principle involved.

    The basic principle that the current state of the law establishes is that a holding company and its subsidiaries must be regarded as separate entities. That is sometimes a difficult concept when one translates it into practice. It can lead to abuse. If the law insists on always treating each company as a wholly distinct legal entity, ignoring the fact that the group is a true economic unit, the results can be palpably absurd. The situation may result in a total lack of realistic information, and possibly misleading information being forthcoming.

    Where a holding company has two subsidiaries one of which makes a loss of £50,000 and the other a profit of £10,000 and that profit is wholly distributed by way of dividends to the holding company, the holding company's individual accounts will show a profit of £10,000, unless there are expenses, although the group as a whole made a loss of £40,000. That is an example where mischief can arise. Where there is a deliberate holding out by the holding company, the principle that I have adumbrated is qualified in respect of group accounts, for example. There can be no doubt that the whole question of control with which we seek to grapple is very difficult. The law has constantly had great difficulties in this respect.

    The concept does not necessarily mean that one has to have a majority of the shares. Control can exist without majority shareholding. An extreme example of that situation occurred in 1935 in the case of Investment Trust Corporation v. Singapore Traction Company, where a £1 management share was able to outvote the remaining 399,999 shares. That is a somewhat extreme example. It nevertheless found its way into the Chancery Division.

    Section 154 of the 1948 Act seeks to define a holding company. But it contains certain anomalies in relation to that definition, particularly in a control situation where a person holds more than half the equity share capital in a company. The Jenkins committee of 1962 recommended that the anomalies that arose out of that situation should be abolished. We have not yet dealt with that.

    The anxiety that has arisen about the ability of a holding company to distance itself from a subsidiary has been expres- sed on numerous occasions over a long period. The Jenkins committee reflected on the inadequacies of section 332 of the Companies Act 1948 and recommended that it should be extended to cover the situation where reckless behaviour resulted in creditors being defrauded.

    Part of our case is that the burden of proof of a creditor seeking remedy under section 332 is far too heavy and operates as an effective deterrent to the search for such a remedy. The plaintiff, under subsection (1) of section 332, has to establish actual knowledge. Taking into account the fact that he is pursuing a case against a powerful and financially well endowed defendant, that can be not only evidentially difficult but enormously costly. This represents a deterrent.

    The judiciary expressed recently some grave doubts about the current position at law. In the course of an application to stay execution of an order for damages in the recent Esperanza case now settled, Mr. Justice Parker, in granting the application, said that it was the right of a holding company to stand aside from its subsidiary, but he added:
    "It may well be that it is an attitude which is unfortunate."
    I agree with that proposition. The Opposition say that this situation needs to be rectified. The Government concede, interestingly enough, that section 332 needs to be re-examined. But the Government say that the timing of our proposals must be challenged. They pray in aid the Cork committee which the previous Labour Government established to look at the whole scope of insolvency law. The Government say that they do not want to engage in piecemeal reform. The trouble with that argument is that we know that the Cork report is not due to be presented to the Government until about the end of 1980. The Government will then have to consider it. They will no doubt present it to the House of Commons and then engage in detailed consultation.

    The Government will have to consider what Cork has reported in relation to the insolvency law of other European countries because they would seek to harmonise bankruptcy law. It is difficult to expect that there will be any legislation on the insolvency front in this Parliament. The issue to which we are addressing ourselves should not wait for several years to be remedied. It is an abuse which has caused considerable anxiety, because there seems to be an increasing tendency on the part of holding companies to refuse to honour debts of their subsidiaries.

    I have studied the clause with considerable interest. Am I not right in saying that if the clause became law a holding company could become liable without there being any misfeasance or culpability on the part of the holding company?

    That is right. We provide a qualification in new clause 7(3) which is repeated in new clause 8. Some people say that effectively the rule of caveat emptor should prevail, but I believe that that is too simplistic. It ignores what happens all too often in everyday practice. That is why the Government concede that there is a case for reform.

    Small firms become impressed by the connection of a subsidiary with a substantial, highly prestigious holding company, a connection that is often mercilessly exploited by the subsidiary for its own commercial purposes to give the impression that it has backing from the parent company. It is only when that subsidiary is unable or refuses to meet its obligations and the holding company disclaims any responsibility that the full hideous truth dawns on the small business man, and this may be accompanied by disastrous effects on his business.

    I am able to cite some recent examples which have thrown the issue into sharp relief. One is the case of George Hensher Ltd. In the early 1970s, a company called Hensher (Furniture Trades) Ltd. appointed a receiver to a major subsidiary, George Hencher Ltd. A sum of £100,000 had been lent to the subsidiary by the parent company. Eventually, the parent company appointed a receiver to recover that money, but no intention was ever evinced on the part of the holding company to assist the trade creditors in any way. I believe that those trade creditors still have debts totalling about £400,000 outstanding to them.

    I have already referred to the case of Esperanza. There, an award of $2·1 million in damages was made against a company called Kaleb Brett and Son Ltd., a subsidiary of Esperanza. As soon as that happened, the holding company sought to wind up the subsidiary on the ground that it had a duty to the shareholders to avoid incurring responsibility to pay the money due unless there were overwhelming commercial considerations for so doing. Business morality did not intrude into those considerations. Yet there was a time when it was thought that such considerations had some validity and that creditors, particularly small business men, should not be placed in this position. That case was eventually settled because of the enormous moral pressure that was brought on Esperanza. Public enterprises are expected to apply the same mores in this respect as are private enterprises, and rightly so. Several statements have been made recently in the House about the liability of British Leyland for its subsidiaries and so on.

    I would argue that, whatever defects the Government might find in the new clauses, there is an overwhelming case for using the Bill as a means of remedying an abuse which can so severely prejudice the interests of the small business man, about which both sides of the House—the Government in particular—rightly profess concern. This is their opportunity to show that that is not merely election verbiage on their part. They have to overcome the hurdles of 15 per cent. VAT and 17 per cent. bank rate.

    The Government have a chance to make some compensation in a small way. I hope that they will respond to the debate in a positive manner. Let them choose from the new clauses. I do not mind what permutation they take. Let them produce ther own remedy, but they must not use the argument that we should wait for Cork.

    8.45 pm

    I hope that the hon. Gentleman will comment on the proposition that his new clause would prevent established large companies from going into high-risk activities, knowing that there was a risk of failure. It would tend to diminish the flow of risk capital.

    I do not accept that argument. There is a strong case for lifting the veil, as company lawyers would say, in this instance. I do not accept the proposition that damage to risk capital would result. We are providing for a qualification—to which the hon. Gentleman does not appear to have addressed his mind—that the holding company would be able to give notice that it was not liable for the debts and other obligations of its subsidiary. The hon. Gentleman can make his own speech about that.

    New clauses 7 and 8 owe much of their parentage—it is a little reticent to announce its parentage, because it might destroy the case—to the Government's British Aerospace Bill. Despite that, it has some respectability. New clause 7(1) provides for the time from which the availability of the remedy will flow. Subsection (2) deals with the time from which liability will run. Subsection (3) provides for the point that I have made in answer to the hon. Member for Wolverhampton, South-West (Mr. Budgen), namely, the question of notice.

    Subsection (4) provides for a definition of the holding company. I concede that there are no hard and fast rules. It may be that if the Government are prepared to embrace the new clause in principle they will wish to qualify the way in which we define the holding company.

    New clause 8 is not very different. It refers to a related company. New clause 9 repeats the new clause that we introduced in Committee.

    I have the misfortune to dissent from the hon. Member for Hackney, Central (Mr. Davis) on all three new clauses. I oppose the new clauses for a variety of reasons.

    I wish to deal with new clause 9. It is objectionable for two basic reasons. First, should it become part of the statute, it could be oppressive to the holding company. Secondly, there is no need for it.

    On the first point, namely, that the provision of new clause 9 as presently formulated could cause injustice to the holding company, I wish to make five points. First, if one looks at the definition of the holding company, one sees that it is a company for the purposes of the new clause if it holds a quarter or more of the shares in the relevant company. That is not a high threshold. It means that many companies which will be regarded as holding companies are, in practice, in no way in control of, or able to supervise, the practice of a company in which they hold shares.

    Secondly, it takes the principles of vicarious liability too far. Under new clause 9, the holding company, at least in theory, can be liable for the fraudulent acts of officers who were never appointed by the holding company and who were perhaps people whom the holding company itself was unable to dismiss. A further objection to the new clause is that the discretion given to the courts is very wide. I think that the word that is used is "proper". That word does not mean the same as the word "just". I suspect that if the courts were to interpret the word "proper" in a fairly broad way—and there is nothing to prevent them from so doing—they could use that word in order to impose a liability upon a holding company when the holding company was guilty of no negligence or culpability, simply in order to make an example—let us say an object lesson—of holding companies.

    That brings me to my two final points in relation to the new clause. Holding companies under new clause 9 can be made liable for fraudulent trading when in no sense are they to blame. In principle, I find that a worrying extension of the law. There is a further point which I suspect the hon. Member for Hackney, Central has not really turned his mind to. It seems from a careful look at new clause 9 that the liability on the part of the holding company can also apply to acts of fraudulent trading which pre-date the time when the holding company acquired any shares in the company with which we are concerned. Therefore, if new clause 9 becomes law, I suggest that its effect could be, and probably would be, to cause considerable injustice to a number of holding companies.

    There is the related point that I have suggested, namely, that the new clause is unnecessary. That point was touched on by the hon. Member for Hackney, Central, but it was hastily departed from. As the hon. Gentleman well knows, there are provisions within the company laws which make fraudulent trading by officers of a company not merely a criminal offence but also an act which gives rise to civil liability, in the sense that officers guilty of fraudulent trading can be ordered to compensate those of the company's creditors who have suffered loss thereby. Therefore, one must ask whether, when we already have the existing provisions under the 1948 Act, it is necessary to introduce new clause 9. I therefore oppose the new clause on the grounds that it is unnecessary and unjust.

    I turn briefly to new clauses 7 and 8. The objections to those new clauses are very similar to the objections to new clause 9. Once again, one asks to which companies these new clauses apply. They are defined as being holding companies and related companies. When one asks "What is a related company?", one finds the same kind of threshold of shareholders, namely, one-quarter. That gives rise to precisely the same point as I previously made, which is that related companies may find themselves liable for judgment debts when in no sense have they been in control of the defaulting company or, in practice, able to supervise.

    That is an objectionable principle to advance. Moreover—again, this applies to both new clauses—it is hard to make anyone, even if it is a corporation, liable for acts not merely which it did not control but in respect of which it is in no sense culpable. In that case there is no requirement that those seeking to make the holding or related company liable should establish negligence, culpability or misfeasance.

    I find it objectionable that this concept of absolute liability should be imported into this rather esoteric area of company law.

    I make one final point, which applies to judgment debts. It would seem, if we look at the new clauses carefully, that, notwithstanding the points made by the hon. Member for Hackney, Central, who introduced the new clauses, the liability of the holding company could be a liability in respect of judgment debts arising from debts that pre-dated the time when it entered into a relationship with a defaulting company. In practice and in principle, that must be highly offensive to hon. Members. I hope that the House does not endorse any of the new clauses.

    In putting forward new clauses 7, 8 and 9, my hon. Friend the Member for Hackney, Central (Mr. Davis) is providing a basis of protection for small businesses. The hon. Member for Grantham (Mr. Hogg), who said that this may stop risk capital being injected into companies, must bear in mind that small companies are risking all their capital and losing it all as a result of the effects of major companies not facing their responsibilities.

    It is reported in the financial press that a growing number of businesses are failing due to bad debts—debts owed in many cases by the subsidiaries of parent companies. Generally, businesses that fail are small businesses. The Government claim to support small businesses, and this is the time for them to show their support.

    Hon. Members have referred to the National Enterprise Board. In some cases it has been responsible for the collapse of companies such as British Tanners Ltd. and a number of other small leather companies. The companies that supply British Leyland are also becoming concerned lest the NEB leaves them holding the baby and because of the possibility of a cutback in financing British Leyland.

    There should be a moral and legal obligation on the parent company to be responsible for its subsidiaries, just as a parent is expected to be responsible for his children and for the acts of his children. Some subsidiary companies build their businesses on the well-known name of the holding company, which then refuses to accept responsibility for any debts that may be incurred. That is a loophole for dishonest dealing in the same way as insider dealing is a loophole. Small and weak companies must be given protection by the Government in the Bill. Incidentally, the strong holding company enjoys the benefits and the values from the subsidiaries. Why should it not share the losses incurred by its subsidiaries?

    I hope that the hon. Member for Hackney, North and Stoke Newington (Mr. Roberts) will forgive me if I begin by saying that I know that my hon. Friend the Member for Grantham (Mr. Hogg) wished to be present to hear his speech, but unfortunately he was asked to leave the Chamber a moment ago, and he had to do so immediately.

    However, the hon. Member for Hackney, Central (Mr. Davis) will understand that I disagree fundamentally with the way in which he put his point of view. He does not understand the nature of risk in company finance. The hon. Gentleman talks about a subsidiary's relationship to its holding company as though it were a young child relating to its parent. Even in the most paternalistic societies, there is some limitation on the obligations that the parent feels towards its child. The hon. Gentleman is speaking of a subsidiary company as though it were able to call upon the parent company to a total and unlimited extent, as though in every instance the son were able to call upon the father to the total limit of his capacity, wealth and honour.

    9 pm

    The reality is this. If these new clauses were put into the Bill, we should be putting holding companies in a completely different position from that of individuals. We should be telling individuals that they may invest their money in a company on the basis of limited liability, knowing the extent of their potential losses, but we should be telling a holding company that, once it put its money into a subsidiary company, there might be no limit to its liability.

    However the hon. Member for Hackney, Central puts his point of view, there must be disincentive to investment of risk capital if these new clauses are enacted. I am sure that I do not carry the hon. Gentleman with me, but let me assume for a moment that in different circumstances I agreed with him. For the sake of argument, let us concede that the system by which large companies tend to proliferate subsidiaries has got out of hand in recent years. That is a disagreeable product of our present tax system. If, for the sake of argument, GEC finds itself sitting on a cash mountain, it will be extremely difficult to distribute that cash mountain, because of the shareholders' potential liability for capital gains tax.

    I hope that the Chancellor will abolish capital gains tax in the next Budget. It may be that he will not. I hope also that British companies in general will be moving into a more profitable period, but in the past shareholders' rights have been undermined by dividend restraint. Once again, it has been difficult for large companies to rid themselves of cash in such a way that it is tax-effective for shareholders.

    It is, therefore, almost inevitable that the present system drives companies into becoming what they should not be, which is really something like merchant banks. Instead of distributing their cash to shareholders, they set themselves up as punters in their own right, investing limited sums in subsidiary companies. I regret that, but the system will not be changed overnight. As long as the system has that disadvantageous effect, it is important that subsidiary companies should be able to trade on the same limited liability basis as companies that receive investments from private individuals.

    Is the conclusion that we are to draw from the hon. Gentleman's remarks that it is hard cheese as far as the small creditors of subsidiaries are concerned?

    No, it is not hard cheese. The point to which the hon. Gentleman does not attack proper importance is that when these large companies invest money in smaller subsidiaries they wish to retain their good name. The hon. Gentleman a moment ago gave an instance of a large holding company that settled as a result of pressures put upon it. Indeed, I would argue that the probability is that large holding companies that diversify into subsidiary companies are much more likely to be a soft touch than, for instance, an individual who invests in a small company, because they have their good name to uphold.

    I hope that the hon. Gentleman will not persist with these proposals. They will only cause large and respectable companies to become reluctant to risk cash sums in businesses about which they know little.

    Perhaps my next remarks are contrary to the ethos of my party. However, it is inevitable that some of those who start small businesses will take substantial risks. Those who are engaged in small businesses do not always dot the "i"s and cross all the "t"s of legal requirements. They still need risk capital. If these proposals are enacted, small companies will not get risk capital from large organisations. We should therefore enforce the principle that people should risk capital in the hope of gaining proper reward in the market place.

    I do not wish to repeat the arguments that were put forward in Committee between the hon. Member for Hackney, Central (Mr. Davis) and me. Conservative Members disagree with the change in company law structure and with the trading principle that lies behind these three clauses.

    I shall take up some of the points raised by the hon. Gentleman. The Jenkins committee simply recommended a change in the definition of holding companies. That does not affect the substance of the debate. The hon. Gentleman referred to a case that involved a furniture subsidiary company that had gone into liquidation. The liquidator of the subsidiary company found that the company was owed money by the holding company. It could therefore make a claim against the holding company. Consequently, the example that the hon. Gentleman gave does not support his case.

    Subsidiary companies do not use the name of parent companies; they are careful not to. There is a legal reason for that. If a subsidiary company uses the name of a holding company, the holding company may become legally liable for its debts. Therefore, subsidiary companies are at pains to explain the distinction. The major weakness of the Opposition's argument is apparent. They have thrown three inadequately drafted clauses at us. They hope that by spraying their fire they will meet the target.

    I have sat opposite the hon. Member for Hackney, Central (Mr. Davis) for many weeks in the Standing Committee and during debates in the House. I think that he has approached these clauses in a diffident manner. I hold a good opinion of the abilities of the hon. Gentleman. He earlier acknowledged that there might well be defects in the drafting of these clauses. He was absolutely correct to have that reservation. I am sure that he recognises that serious difficulties are involved in drafting. Great difficulties of principle are involved. If a proper examination of these clauses is made, all reasonable hon. Members will become convinced that the clauses are unsuitable and should not be enacted.

    The intention of the new clause is evidently to make holding companies responsible for the debts of their sub- sidiaries. I have noticed a certain similarity between the wording of this clause and the wording of section 53 of the Aircraft and Shipbuilding Industries Act 1977. Quite apart from the difference between the provision governing two nationalised industries and a provision regulating all holding companies and subsidiaries, the section of the 1977 Act was continued to wholly owned subsidiaries of the new corporation.

    The present amendment seeks to legislate to ensure that holding companies pick up the tab for any companies in which they hold a quarter or more of the shares. There is scope there for an interesting discussion on the relations between a company and its subsidiaries. Indeed, this is the subject of continuing debate in the commercial world. To make a company responsible for the debts of another company merely because it has a holding of 25 per cent. or more in that company would go well beyond the generally accepted relations between companies.

    It is significant that the clause seeks to introduce into our company law a completely new definition of "holding company" and "subsidiary", although the latter term is not in itself defined. The definition used elsewhere in the Companies Acts is that contained in,section 154 of the 1948 Act, which deems a company to be a subsidiary of another only if the other company
    "controls the composition of its board of directors; or holds more than half in nominal value of its equity share capital".
    Section 154 also contains a number of further provisions that ensure that, in effect, a subsidiary is under the control of the holding company. It is surely wrong that we should contemplate treating holding companies as responsible for the debts of companies in which they may have a significant shareholding but over which they are not in a position to exercise control. Indeed, they may well have little relevant information about the subsidiary. For example, a company may feel no obligation to inform another company, which simply holds 25 per cent. of its shares, about the details of its creditors. A similar point arises on subsection (3). How can the holding company give notice if it does not know who the creditors are? Why should the subsidiary give notice?

    Unlike section 154 of the 1948 Act, the clause is weak on definition. What is meant by "shares" in subsection (4)? Does it include all share capital or only equity shares? Certainly it would be penal to put a contingency liability of this nature on a preference shareholder. In any case, what does "holder" mean? Does it mean the holder of more than 25 per cent. by number or by nominal value?

    A further point arises on subsection (2), which provides that where payment is required by a holding company in respect of liabilities under a contract made by a defaulting company, the liability in effect arises when the contract is made. But subsection (1) refers to judgments or orders in general and is not confined to judgments or orders in respect of contracts. There is no provision in the clause in respect of judgments in the event of fraudulent misrepresentation, for example. I have demonstrated that the clause is misguided in principle and defective in drafting. If the matter is pressed to a vote, I must ask the House to reject the new clause.

    I am very much strengthened in this view by the powerful criticisms advanced by my hon. Friends the Members for Grantham (Mr. Hogg), for Wolverhampton, South-West (Mr. Budgen) and for Dorset, North (Mr. Baker). I am grateful for their comments.

    I turn now to new clause 8, since I think that it would be for the convenience of the House if I referred especially to that clause. It follows the same theme as the clause that we have just discussed, and my general observations about this clause are similar to the ones I made on the previous clause.

    9.15 pm

    The purpose of the clause appears to be to introduce into commercial relationships a draconian interpretation of the relations between companies linked by ownership of a proportion of the shares. Responsibility would be placed on businesses that might have had no control whatever on the commercial activities of a company in which it had, say, a 25 per cent. holding. That would go far beyond what would be generally recogconsiderations of good name, reputation, nised as reasonable.

    As I have already explained, the definitions provided of a holding company and a subsidiary are in any event completely inadequate in themselves and are incompatible with the definitions of these terms used elsewhere in the Companies Act 1948.

    It would be illogical to introduce a new definition confined to a specific provision, particularly when that definition does not bear close examination. There are some intriguing differences between this clause and the previous one. That is an indication of the complexity of provisions of this nature.

    For example, we have here a different definition of a holding company from that in the previous clause. Whereas the previous clause imposed responsibility for the debts of the subsidiary on the parent company, this clause leaves responsibility at the first generation. The clause would, therefore, not apply to the wholly owned subsidiary of a wholly owned subsidiary.

    Perhaps those who drafted the clause realised that the same flaws existed in subsection (2) of the previous clause to which I drew attention. At any rate, the provisions of that clause are not carried over into this clause. More seriously, in this clause only the related company can give notice under subsection (3), but, as I indicated earlier, a related company will often be in no position to know of any transactions of a company in which it has a shareholding. For all these reasons, I strongly urge the House to reject this new clause.

    I turn now to new clause 9, the last of the three clauses introduced by the hon. Member for Hackney, Central. As I have said, the relationship between the holding company and the subsidiary company as defined, for the sake of argument, n the Companes Act 1948 is a subject of continuing debate. The position of a holding company when a subsidiary is forced to cease trading has been a significant element in the debate, and I appreciate the concern felt about that.

    The position in law has been that subsidiaries are separate from their holding companies. Whether or not in practice a holding company stands behind its subsidiary in the event of its being unable to meet its debts has been regarded as a matter of commercial practice involving and so on.

    The present law governing fraudulent trading is contained in section 332 of the Companies Act 1948. In that section the court may
    "declare that any persons who were knowingly parties"
    to fraudulent trading
    "shall be personally responsible, without any limitation or liability, for…the debts or other liabilities of the company."
    Section 332, therefore, already applies to a holding company whether or not the company is considered by the court to have been knowingly a party to the carrying on of the business of its subsidiary with intention to defraud its creditors. The new clause would extend the potential liability of the holding company to situations in which it was not knowingly a party to fraudulent trading.

    The definitions of a holding company and subsidiary in subsection (2) are as unsatisfactory for this clause as for the previous clause. The clause therefore contemplates a potentially very severe penalty for a company that simply has a significant holding in another company, over which it can have no control and about which it will have no means of ensuring that it is fully informed. I could not, therefore, commend this clause to the House.

    The hon. Member for Hackney, Central quoted a number of cases which give rise to cause for concern. However, the defects in the new clauses are serious and there is potential unfair damage that could be caused by them. There are difficult problems involving the relationship of holding companies and their subsidiaries. Those problems deserve serious and measured consideration. The hon. Member for Hackney, North and Stoke Newington (Mr. Roberts) spoke of the problems of small companies in that respect. I am well aware of those problems, but I assure him that the clauses are not the proper way by which to protect the valid interests of small businesses.

    In that case, does the Minister have a method in mind for solving the problems?

    As the House and the hon. Gentleman know, a comprehensive review of the law relating to insolvency is being conducted by a distinguished com- mittee under the chairmanship of Sir Kenneth Cork. It would be wrong to pass new legislation in that area piecemeal in advance of the committee's report, which is expected to be published later this year. I assure the hon. Gentleman that some of the problems that he has raised will be considered carefully. I urge the House that it is entirely right and responsible for us to await the report. We shall then be in a much better position to produce proper solutions.

    The hon. Gentleman is judging it against the time scale of the inaction of his Government. When he was in the Department of Trade in charge of company law, he did not act for about four years on company matters.

    That is quite wrong. There were Companies Bills in 1976 and 1978. The 1978 Bill was frustrated by the will of the House as a whole. I could never understand why it did not want the Bill enacted rather than have an election. That seemed totally absurd. The Minister was wrong to suggest that there will be a shorter time scale in this case. By virtue of the difficult concepts that will be embraced by the Cork committee, it will take a long time for the matter to be considered.

    As the Minister reacted so vigorously to the suggestion that this will take five years, will he assist the House by giving an indication of when the report is expected, let alone when there will be legislation based upon it?

    I am pleased to tell the House that the report is expected later this year. It is my intention that there should be legislation to deal with certain outstanding problems, and I believe that we will be helped by the committee's report on those matters. Certainly the legislation will take place in less than five years.

    I do not wish to be unfair to the hon. Member for Hackney, Central, because what he said illustrated the complexity of dealing with these matters. To get the important legislation right, we must have regard to the reports of expert committees. It is important that proper consideration should be given to the terms of those reports and that proper consultation with all the parties affected by the legislation should be held. We shall do that as quickly as we can to deal with certain problems. In the meantime, I recommend hon. Members to resist and reject the proposals in the new clauses.

    A profound change came over the debate literally in the closing minutes. At the end of the Under-Secretary's speech it became clear that there was just one individual on the Government Benches who had grappled with the problem. Not one other speech from the Government Benches gave any indication that anyone else had appreciated the problem to which we are addressing our minds. The problem is that there are companies which trade through subsidiaries; the subsidiaries accumulate mountainous debts and the holding company then departs, leaving the company to go into liquidation and the creditors to grieve for their losses. That is the problem.

    If an individual does that, he may, in certain circumstances, at least be disqualified from acting as a director in future. But we cannot apply that sanction to companies. If an individual has been guilty of fraud he may be dealt with, but we may not be discussing fraud. We may not even be discussing culpability. The objection is to holding companies being prepared to accept whatever proportion of profits they can lay their hands on while seeking an avenue of escape from any of the risk.

    We had a succession of objections from Government Members to our proposals. The hon. Member for Grantham (Mr. Hogg) said that our proposals were oppressive to holding companies because, as he said, they might become liable for debts over which they had exercised no control and for which they were not to blame. I fully accept that. Our proposals do not rest on control or culpability. They rest on the fact that a holding company is prepared to take profits without risk but seeks to impose a limit on its losses.

    I take the point of the hon. Member for Grantham that our proposals might entail a holding company being liable for debts that had been incurred before the date on which the holding company acquired its interest. That is a fair point and we are certainly prepared to listen to any solution that might emerge. But one does not eject the baby with the bathwater. Because that problem exists, it does not follow that the whole of our proposals should be scrapped.

    I wonder whether the right hon. and learned Gentleman could explain how a holding company could be said—in the words he has just used—to be taking all the profit out of a company where, for example, it owns only 25 per cent. of the shares.

    I thought that what I said—I was listening to myself, at least, and we can check it in Hansard—was that a holding company takes all the profits which it can lay its hands on. Of course, it cannot take a higher proportion of the profits than the proportion it has of the equity capital. But holding companies are prepared to take all the profits they can lay their hands on while seeking an avenue of escape from the risk of losses. That is the point that I was making.

    As to the objection of the hon. Member for Grantham, we would be prepared to listen to solutions to that problem.

    The right hon. and learned Gentleman is wrong. There could be an agreement between the said holding company and the subsidiary company in respect of the shareholding. By that process the holding company could take the bulk of, if not all, the profits. That illustrates and underlines the complexity of the matter to which my hon. Friend the Minister drew attention and the need to move with great caution and deliberation.

    I should have thought that that underlined the force of our argument. We could perhaps argue about the relevance of the perfectly proper point made by the hon. Member for Sudbury and Woodbridge (Mr. Stainton). Clearly, all sorts of deals can be done behind the backs not only of the shareholders but of the creditors, and we are particularly concerned here with the creditors. The very fact that such deals can be done behind the creditors' backs emphasises the need to protect them.

    The hon. Member for Wolverhampton, South-West (Mr. Budgen) had another objection. He said that this proposal would discourage a company from investing risk capital. I fully accept that. However, I thought that the question put by my hon. Friend the Member for Hackney, North and Stoke Newington (Mr. Roberts) was very relevant. It is easy to talk about risk capital, but whose risk are we talking about? We are talking about the risk to the creditors. It is easy for us all to take risks with other people's money.

    We really come back to the concept of limited liability. We discussed this on Second Reading. Limited liability is a substantial concession, an inroad on the basic rule of law that people are responsible for the debts that they incur. Limited liability says that in certain circumstances people may try for the profits, but if debts are incurred in the process they will not be liable up to the limit for those debts. In certain circumstances they can leave the creditors to whistle.

    9.30 pm

    I am not objecting to the concession being made. It is a fundamental part of our law and it exists for good reasons. However, we are entitled to make it subject to proper safeguards. The hon. Gentleman's objection is that people will not be prepared to take risks with other people's money if they may have to meet the consequences out of their own pockets. Surely, there is nothing basically wrong with that.

    The creditors that we are speaking about may not be wealthy financiers or large companies. They may be individual customers who have answered an advertisement in the evening newspapers. They may be small companies which are not in a position to lose their money.

    The hon. Gentleman produced another objection. He said that the provision is not needed because an honourable holding company will pay without any such provision. The answer to that is "In those circumstances, why should we not include the provision?" If we are talking about honourable holding companies which will pay in any event, surely they will not object to such a provision. If we are talking about dishonourable holding companies, or companies which claim that they are entitled to evade their obligations as a matter of law, it is for such companies that we are legislating.

    My hon. Friend the Member for Hackney, Central (Mr. Davis) was taken to task for the example that he gave. It was argued that the holding company coughed up under pressure. The important words were "under pressure". In my hon. Friend's example, a great deal of pressure had to be applied before the money was disgorged by the holding company.

    If I may say so, the hon. Member for Dorset, North (Mr. Baker) fell below the standards that we have come to expect from him.

    Indeed. However, on this occasion I think that he fell below his usual standard. His basic argument was "Because you were not sure of getting one clause right, you stuck three in." That is not true as a matter of fact. We offered three possible solutions to the problem. If the Government had said "We do not like this solution and that solution but we accept your third one", we would have been happy. Surely, we cannot be criticised for offering three possible solutions.

    I am not sure that the Under-Secretary of State met our arguments head on as he is accustomed normally to do. He took refuge in defective draftsmanship. We are prepared for our draftsmanship to be corrected, though if we are to swap allegations of that sort the Government's record throughout the Bill's passage is not beyond criticism. I am not sure why they should have a monopoly of defective draftsmanship.

    The Minister argued that we did not provide for the situation in which deficiencies stem from a subsidiary of a subsidiary. That was not something that we overlooked. We did not want to make the debate too complicated. We knew that if we managed to persuade the House of our case the draftsmen would be able to meet us subsequently.

    The Minister advanced two real objections to our proposals. First, he said that it would not help to talk about giving notice in relation to contractual obligations because the holding company would not know about every contract that the subsidiary made. That may be so. We thought that we would give it an oportunity where it was aware that there was a contractual obligation. If the holding company is happy to accept profits when it has not directed its mind to the contracts, it can hardly complain if it is landed with the losses that are sometimes incurred. If it is prepared to benefit from its ignorance, it can hardly plead its ignorance as a defence against being landed with the losses.

    I do not believe that the Government think that there are no difficulties. If I had not turned over three or four pages of my notes at once, I was going to quote what the Minister of State said in Committee on 11 December. I did not have the quotation before me because I had turned over three pages at once. At that stage the Minister of State said that section 332 had its problems. I am sure that he would not seek to resile from that comment. My attention has now been drawn to the passage to which I referred. As I paraphrased it, I do not need to delay the House by reading it.

    The other objection advanced by the Minister was that the threshold was too low. He said that we should not land a holding company with all the debts of the subsidiary if the holding company owned only 25 per cent. of the equity capital and received only 25 per cent. of any profits. I do not think that we would go to the wall on 25 per cent. We could probably do a deal about the appropriate proportion if the Government said what proportion of the profits a person should be able to claim before he should bear the losses and not leave the creditors with them. We could probably meet that halfway.

    "We are waiting for the Cork report." This is not the first time that we have heard those magic words. Let more creditors meanwhile be left to stew in their own juice until Cork reports. I am not sure that that is a complete answer to every problem. All Governments do it. They wait for whatever it is—the Royal Commission, the inquiry, the interdepartmental committee report. This is not a complete solution to every problem.

    New clause 8 represents what is reported to be the solution preferred by Sir Kenneth himself. I am not sure whether the report is accurate. We attempted to paraphrase what was reported as his preferred solution.

    We do not complain that we have been taken to task for defects of which we may have been guilty. We complain that the contributions by Government supporters did not show any appreciation of the problem. If they demonstrated that they appreciated the problem, perhaps we could discuss the solution. As they did not do so, we must agree to differ and let it be so recorded.

    Question put and negatived.

    New Clause 10

    Disgorgement

    'Any person who contravenes the provisions of sections 65 or 66 of the Act shall be deemed to be a trustee of the company in respect of any profit which he may take as a result of such contravention'.—[Mr. Archer.]

    Brought up, and read the First time.

    With this it will be convenient to take the following amendments:

    No. 114, in clause 68, page 81, line 39, leave out subsection (3).

    No. 115, in page 81, line 41, at end insert

    'but the obligation to comply with these sections are duties owed to any person who may suffer loss by a contravention of them and any breach of such duty is actionable accordingly subject to the defences and other incidents applying to actions for breach of statutory duty'.

    We have on occasion debated, as we shall debate tomorrow, provisions that make it a criminal offence to make an improper profit by insider dealing. However, the question arises whether the offender should be permitted to bury his ill-gotten gains so that when his sentence is served and the heat is off he may return, dig them up and enjoy them. The Opposition believe that if the offender and gains are identified he should be made to disgorge them. It is not a unique proposal. There are many situations in which the criminal courts have power, after a conviction, to order restitution of the loot.

    In Committee my hon. Friend the Member for Swansea, East (Mr. Anderson) pointed to section 35(2) of the Restrictive Trade Practices Act 1976, which provides that
    "the obligation to comply with that paragraph is a duty owed to any person who may be affected by a contravention of it and any breach of that duty is actionable accordingly subject to the defences and other incidents applying to actions for breach of statutory duty."
    The author of an article on insider trading in the Law Society's Gazette of 6 February argues that as the real purpose of the insider provisions is to prevent a general undermining of confidence among investors, the question of restitution to the individual who suffered is of secondary importance. I am not sure that I follow that argument, even given the premise. One way of bolstering the confidence of investors, surely, is to assure them that they will not be left, directly or indirectly, to bear their individual losses. One way to deter wrongdoers from undermining these operations is to persuade them that they will not be allowed to retain their profits.

    The principle appears to us to be so clearly what justice requires that we waited to see what was the Government's objection to our proposals. The explanation of the Minister of State in Committee was admittedly rather different from the objection advanced by the learned author of the Law Society's Gazette article. The Minister said that the difficulty was to link the person who made the profit with the person who made the loss. The question that the hon. Gentleman asked was, how does one show that a person is poorer by the amount represented by the profit?

    Our first answer is fairly simple and obvious. Why not permit the victim to recover if he can establish that he has suffered a loss and that it is related to the wrongdoer's gain? When such a relationship cannot be established, there need be no cause of action. The Government seemed to go out of their way to reject that solution even where a relationship could be established between the loss and the gain. In Clause 68(3) the Government provide that
    "No transaction shall be void or voidable by reason only that it was entered into in contravention of section 65 or 66 above".
    Our amendment No. 114 proposes simply to delete those words and, having provided a clean sheet, to substitute the words in our amendment No. 115. That is one possible solution to the difficulty. We would want to provide that if someone can establish that there is a wrong by an indentifiable wrongdoer, that there is a loss suffered by an indentifiable victim and that there is a clear relationship between them, the wrongdoer should have to disgorge his loss to the victim. We accept that if he cannot relate the loss to the profit, that provision will not apply. Not everyone in every situation will be able to establish a cause of action. That does not seem to be a reason for denying the remedy to someone who can establish it. Often, the victims of accidents leading to personal injuries find difficulty in establishing a right to compensation. No one suggests that the answer to the problem is to abolish the right of action for damages for personal injury.

    If that solution does not commend itself to the Government, we are not dismayed. As in the last debate, we have an alternative solution. I hope that we shall not be criticised again for putting forward alternative solutions and that it will not be suggested that this represents a weakness in either of them. Our alternative solution is to suggest that the wrongdoer should be compelled to disgorge his loot to the company. That is the purpose of new clause 10, which we see as an alternative to amendments No. 114 and No. 115.

    In Committee the Minister of State objected that the company might not have suffered any identifiable loss. He said that disgorgement would simply be a windfall to the company. We make two answers to that argument. First, we believe that the company is always damaged by insider dealing. It is damaged in its reputation and in its future dealings. It is damaged in the credit that people are prepared to offer to it and the confidence that they are prepared to repose in it.

    We are comforted by the support of the New York court of appeal in the case of Diamond and Oreamund in 1969 quoted in Committee by my hon. Friend the Member for Hackney Central (Mr. Davis). In that case, it was said, admittedly obiter, that insider dealing inevitably undermined public regard for a company's shares. A company simply would not be receiving a clear profit or an undeserved windfall. It would be compensated for a loss even if it were not a readily quantifiable loss.

    9.45 pm

    Secondly, if the offender is seen as a trustee for the company, it does not matter much whether or not the company has suffered a loss. If a trustee uses his position to make a profit for himself, normally the beneficiary is entitled to that profit. It is not a question of compensating the beneficiary for a loss. The question is, who should benefit from the profit? We are fortified by the fact that that was pointed out in Committee by the right hon. Member for Crosby (Sir G. Page). That is what the clause seeks to provide.

    If someone offends against the insider provisions, we see no reason why he should pay the penalty but still retain his swag. Those are our arguments. We have not yet heard the arguments against.

    As the right hon. and learned Member for Warley, West (Mr. Archer) said, we debated these subjects in Committee. I expressed the view in Committee that I was not opposed to sensible, workable, civil remedies if they could be properly defined, but I pointed out that the Government had decided that insider dealing was a public wrong and that the right remedy lay in making it a criminal offence and seeking punishment through the criminal law.

    I did not offer my statement about sensible, workable remedies as a way of getting out of the Committee stage; I made it as an offer to the right hon. and learned Gentleman and I looked forward to seeing how he and his colleagues would respond to it on Report. Their attempt to produce sensible, workable remedies has strengthened my conviction that we are right to treat insider dealing as a criminal offence, because I do not think that the remedies proposed by the right hon. and learned Gentleman are sensible. By the time I have explained my reasons for that remark, I hope that he will agree with me.

    I know that in some countries there has been an attempt to link civil remedies with the criminal law in this area. While we must not turn our backs on the experience of other countries, I do not think that because other people do it it is necessarily right or valid in the circumstances of our company law.

    The main case is clause 65, which covers insider dealing in relation to stock exchange transactions. As I said in Committee, in practical terms it is not possible to link buyers and sellers in a meaningful way so as to provide for civil remedies. In stock exchange transactions it is the jobber who makes the market and people are dealing not directly with each other but through the jobber. It is therefore difficult to forge a direct link between the person who sold a block of shares and the person who bought that block of shares, because the shares have been through the market and through the jobber's hands in the interval. That is one of the difficulties of linking up the two parties to the transaction in clause 65.

    The Goverment's approach to the problem is to say that they agree that this should be a criminal offence and the punishment should be, first, the possibility of prison and, secondly, the possibility of a substantial fine, so that there is a way of robbing the person who makes the profit and of putting the proceeds into the Exchequer for the benefit of the public, because we believe that it is an offence against the public rather than against the individual.

    That is the heart of the matter. The legislation contains all the powers needed to make criminal sanctions an effective penalty. The person who makes a gain—which will become an illegal gain if the Bill becomes law—cannot put away his profits and serve his time in gaol in the happy knowledge that the profits are waiting for him. We have built into the law the ability for the courts to strip him of that profit and to ensure that he does not benefit financially from his activities.

    There is a difficulty in linking the criminal with the person from whom he has made the gains. The way round the problem is to treat it as a criminal offence and to take away the profit by means of a fine.

    It is against that background that I turn to the new clause. It operates as an extension of the existing equitable rules. It is established in cases such as Boardman v. Phipps that those who have a fiduciary duty of good faith to a company, such as directors, employees and certain professional advisers, have to account to the company for any profit that they make by reason of the information belonging to the company that they possess, and that it is a duty to account for profits made and not a liability to pay damages for loss.

    Frequently, in insider dealing cases the company will suffer no loss as it cannot deal in its own shares. The hon. Member for Hackney, Central (Mr. Davis) attempted to argue in Committee that the company suffers a loss because an insider deal damages the company's name and reputation and undermines public regard for the company's securities. He demonstrated the extent of his knowledge by quoting an obiter dictum in the New York court of appeal in 1969.

    There have been more solid foundations on which to build a major case for a change in the law. A chance remark made in a relatively minor court in New York 11 years ago, which nobody else has seen fit to take up or develop, was held up by the hon. Gentleman as a major reason why we should make a change in our law. I have found more convincing cases.

    The Minister's extraordinary arrogance is quite uncharacteristic of him. It is an impertinence. A reputable court of appeal in New York considered the matter. It was not a chance remark but a highly considered judgment. The hon. Gentleman should not get away with that sort of rubbish.

    One of my hon. Friends put his finger on the matter by saying that the hon. Member for Hackney, Central was showing off. I am sure that it was an earth-shattering event when the judge made his obiter dictum 11 years ago, but no one other than the hon. Gentleman appears to have been moved by it.

    If my hon. Friend the Member for Hackney, Central (Mr. Davis) and I withdraw the reference to the New York court of appeal, will the Minister accept that our statement was patently, self-evidently, obvious?

    The hon. Gentlemen deny themselves the only support that they have found to date. The new clause is based on the present law, but it goes far beyond that. It talks of a "trustee for the company" without specifying which company.

    I cite a simple case that could arise under clause 65(2). A person connected with company A—perhaps its managing director—knows that it is about to make a takeover bid, well above the market price, for company B. He buys shares in company B to make an improper profit for himself. Is he to be a trustee for company A, the company with which he is connected, or company B, the company in whose securities he dealt? Th new clause is silent on that question. I suggest that that is a major defect in it.

    Again, the new clause covers contraventions of clause 66, which deals with Crown servants. Let us suppose that a Crown servant knows that certain duties are to be removed from, say, tobacco and he buys the shares of a tobacco company before the announcement. The new clause would make him a trustee of his profits, not for the Crown whose information he had misused but for the company whose shares he had bought. That cannot be right.

    The new clause talks of
    "profit which he may take".
    But what happens if he is dealing as an agent for a family trust of which he is not a beneficiary? Is there to be no obligation to account because he himself has taken no profit? Again, the new clause seems to have no application if he counsels a person to deal, although counselling is an offence. Similar arguments apply in the case of procuring and passing information.

    I suggest that the right hon. and learned Gentleman forgets about the New York court of appeal and realises that, even if one strips him of that most valuable evidence and support, the new clause is defective for the reasons that I have just given.

    Amendment No. 114 proposes the omission of clause 68(3). That subsection provides:
    "No transaction shall be void or voidable by reason only that it was entered into in contravention of section 65 or 66 above."
    We thought very carefully about the amendment, but we think that it would cause total and utter chaos in the markets. I should like to explain why. Person A sells shares to person B. Person B does not know that any offence has been committed, person A being the insider. He passes on the shares to person C. That person has quite legitimately dealt in the shares. If the amendment were to be accepted, the whole transaction would have to be unscrambled, and person C, a bona fide purchaser for value, could, through no fault of his own, find himself involved in a voidable transaction. I suggest that such uncertainty introduced into the markets would cause chaos and confusion. In truth, that is why subsection (3) was inserted.

    We believe that it is wrong that an innocent third party should be affected if he has made a perfectly straightforward transaction. Therefore, we believe that subsection (3) was properly inserted in the Bill and that if it were omitted it would do considerable damage. From the way in which the right hon. and learned Gentleman is nodding—I hope that I read him right—I take it that our objections are valid.

    As the hon. Gentleman has referred to the way in which I was inclining my head, I should point out that we could restore subsection (3) without affecting the validity of the rest of our argument.

    As the amendment seeks to remove subsection (3)—and that is the issue which we are debating—I am glad to have the right hon. and learned Gentleman's agreement that it should stay in the Bill.

    As a result, I can move on to amendment No. 115, which is the final amendment in this group. It arises from a point which the hon. Member for Swansea, East (Mr. Anderson) raised in the debate when he talked at some length and interestingly about the provisions of section 35(2) of the Restrictive Trade Practices Act 1977. I have already explained why we feel that this attempt to introduce civil remedies into this area of insider dealing is one of which we do not approve.

    However, I should like to deal with the specific point which I regard as a major defect in the hon. Gentleman's thinking and in his trying to equate the restrictive practices legislation with the insider dealing legislation. On conviction, the court has the power to impose an unlimited fine. Thus, there is a clear, effective means for ensuring that the insider is deprived of his illicit profits.

    By contrast, section 35(2) of the Restrictive Trade Practices Act provides civil remedies for breach of duty, after specifically ruling out criminal sanctions. That underlines the major difference between those two cases. Under the restrictive practices legislation, criminal sanctions are ruled out and civil law is pointed to as the right course for seeking a remedy.

    It being Ten o'clock, the debate stood adjourned.

    Ordered,

    That, at this day's sitting, the Companies Bill [Lords] may be proceeded with, though opposed, until any hour.—[Mr. Berry.]

    Question again proposed, That the clause be read a Second time.

    We have specifically said that criminal sanctions should be the right approach. We have pointed in that direction. To that extent, the two cases are different, and I do not think that the restrictive practices legislation is as relevant as the hon. Member for Swansea, East indicated in Committee.

    For the reasons that I have explained, we have firmly reached the conclusion that insider dealing is an offence against the public and, therefore, the correct penalty for it is a criminal sanction and conviction in serious cases, with substantial fines. We believe that there are practical difficulties of the sort that I have outlined in seeking to line up civil sanctions and civil rights with those criminal sanctions. I urge the House to reject the Opposition's proposal.

    The Minister concluded his remarks by citing my attempt to import the formula into the Restrictive Trade Practices Act 1976 in an attempt to find a proper formula for civil remedy. He said that it was inappropriate, because criminal sanctions were expressly ruled out in that Act. In his view there were adequate criminal remedies under the insider trading provisions put forward by the Government. I suggest that that is not so, and I hope to show that the formula on which the Government rely—that there are adequate criminal remedies available—is open to doubt.

    The Committee then discussed the general area of disgorgement and civil remedies, and the question of whether civil remedies might have been even more appropriate and more effective than the criminal remedies that the Government proposed. In clause 68 (3), the Government have expressly ruled out civil remedies by making such transactions neither void nor voidable. One might almost say that the Government do not accept that there is a problem in respect of civil remedies. By contrast, the Opposition have sought to provide for civil remedies by way of assistance by every possible formula—either by way of the Restrictive Trade Practices Act, by using the formula of breach of statutory duty from that Act, or by using the concept of a trustee, which the Minister has expressly excluded.

    Essentially, the Minister's argument was that the offence of insider dealing is by its nature a public offence, and therefore the remedy must be via criminal law. We must therefore ask ourselves whether the criminal sanctions that are proposed by the Government are sufficient to make insider dealing a practice that is not worthwhile.

    The whole basis of the Government's approach rests on their assumption that criminal sanctions are an effective remedy. I hope to show that there are considerable deficiencies in compensation in criminal cases, which might lead one to suspect that the Government have not properly thought through the difficulties.

    For example, if an offence of insider dealing is committed on many occasions there may in a criminal indictment be a specimen count. One knows that compensation has to be linked to a specific offence that is proved or admitted. Hence, if there are several counts in an indictment, some of which will almost certainly be stronger than others, leading counsel may well advise that a plea be accepted perhaps to one of these counts, particularly when the Government have created an enormous obstacle race towards the possibility of any successful criminal prosecution. With that offer, leading counsel, seeing the possibility of a plea on the most strong of several counts that may be in the indictment, will almost certainly heave a mighty sigh of relief and accept the one, feeling that the chance of succeeding on the others is remote and that he might possibly even not succeed on that one if he pressed ahead with the prosecution. It may suit the Crown to do so, if only to obtain at least one conviction. The unlikelihood of a conviction was mentioned earlier, given the extremely technical nature of the offence that the Government have set out and the general desire to simplify proceedings.

    A further difficulty, which I suspect the Government have not thought through in their total reliance on criminal proceedings, is that the defendant may not accept offences to be taken into consideration, or the evidence may well not be sufficient for such offences to stick. If that is so, and since compensation in criminal cases must relate specifically to offences that are proved or admitted, there will be no possibility of compensation in respect of those matters that might well have been taken into consideration.

    A further factor, which again I suspect the Government have not properly thought through, is the difficulty of obtaining compensation in the criminal courts in any event. I do not need to underline the problem at length, but on numerous occasions the Court of Appeal has said that the criminal courts are not the proper courts for compensation, save in the most straightforward of cases. Powers are available under the Powers of Criminal Courts Act 1973, section 35.

    However, it has been underlined again and again by the Court of Appeal that these powers of compensation in criminal cases are a quick and simple machinery that should only be used when dealing with claims in straightforward cases. There is ample authority to support that, and I rely on the case of Daly, reported in 1974, 1 All England, at page 290, and the case of Lester, reported in the Criminal Appeal Reports 144, at page 146.

    Further, the Court of Appeal has said that the loss or damage must fairly stem from the offence, and the court should hesitate to embark on any investigation of complicated issues of fact. The authority for that is the case of Kneeshaw, reported in 1973, 1 All England, at page 89.

    By their nature these prosecutions in respect of insider dealing must be complicated issues of fact. That underlines the shaky basis on which the Government rest in suggesting that compensation can adequately be dealt with by means of the criminal law. We should therefore conclude that compensation cannot be pursued as effectively as the Government have maintained through the criminal courts.

    What are the positive advantages of a civil remedy? The very nature of the standard of proof in civil proceedings is an advantage. One need look only at the clauses that follow clause 65 in order to realise the virtual impossibility of successful prosecution. In criminal cases the burden of proof means that the case must be proved beyond all reasonable doubt. That will scupper any chance of success in the criminal courts. However, in civil proceedings the standard of proof falls upon the balance of probabilities. It is therefore more likely that a defaulter will have to disgorge that which he has improperly obtained.

    Civil proceedings are more appropriate to the insider trading provisions. That is emphasised by the self-interest factor. The only appropriate trigger mechanism for bringing a case of insider dealing to the attention of the courts is that of the aggrieved individual's self-interest. If he finds that he may gain as a result of bringing it to the attention of the authorities he will do so. He will recognise the impossibility of successful prosecution under criminal law. He is likely to cooperate with the authorities only if civil proceedings are involved, where a different standard of proof is used.

    Does the hon. Gentleman agree that civil remedy might give rise to an excess of highly undesirable litigation?

    That is a possible objection. One does not know. If litigation were vexatious or frivolous the court would have remedies to stop it. However, if insider dealing is wrong, it should be stopped. We should therefore provide a proper remedy. The Government have not provided a proper remedy with which to attack this practice.

    If the Minister wishes to look at the balance of consideration between civil and criminal proceedings, he should examine sections 48 and 49 of the Companies Act 1948. I also commend him to examine section 54 of that Act. That section refers to purchasing shares. There is a civil remedy that a director must recoup the company for any loss. If we say, as we do, that insider dealing is wrong, why should there not be a civil sanction?

    The Minister was very scathing about the United States court of appeal.

    Is the Canadian Parliament worthy of any more respect? I only pray that the the term of office of the previous Conservative Government in Canada will be reflected in Britain.

    10.15 pm

    The Canadian Dominion Companies Act 1952 makes it an offence for a director to speculate in any of the company's securities. I accept that it is not wholly clear whether a civil remedy is available in those circumstances, but in Canada it was accepted that these provisions were inadequate. The Kimber committee was appointed, which recommended that it was improper for an insider to use confidential information in order to make profits by trading in his company's securities. The committee recommended that there should be full and public disclosure of all transactions effected by insiders in their companies' securities, and, more important, that there should be remedies for failure to make disclosures, and rights of action for the company concerned and the shareholders in respect of certain improper transactions.

    These recommendations of the Kimber committee were enacted by the Securities Act 1966 and, in the province of Ontario, by similar provisions in the Ontario Corporations Act. Thus, in addition to disclosure provisions comparable to those in the Companies Act 1967, the Canadian Act provides that if an insider makes use of any confidential information for his own benefit or advantage, which, if generally known, might reasonably be expected to affect the price of the shares, he must compensate any person or company for loss suffered as a result of that transaction, unless that person knew or should have known of the information. In addition—and this is the relevant aspect of our new clause concerning the trustee provision—he is accountable to his company for any benefit or advantage that he has gained through the use of such information. Having been so scathing about a New York appellate court, perhaps the Minister, who is a Commonwealth man, will have more respect for a Dominion court in this case.

    Who should have the benefit? One accepts that there are real difficulties in civil remedies. One must consider the effect of saying whether the company as such has suffered a loss, and the danger that the offending insider might be a substantial shareholder in the company and therefore might indirectly gain from any compensation that might be obtained from the company. There are difficulties too, following the rule in Foss and Harbottle, of shareholders taking action. This is a real problem, which the Government have not fully taken on board. The problem has not been solved by the Government's proposals, which rely wholly on the criminal remedy. We believe that they have not fully thought through the drawbacks that inevitably result from that dependence.

    I wish to give limited support to the proposal made by the hon. Member for Swansea, East (Mr. Anderson). If one looks at the concept of insider dealing one sees at once that the objectionable aspect of such dealing is that it is an abuse of a fiduciary relationship. If one looks at section 66 one sees that what is described is essentially a fiduciary relationship.

    The courts have long recognised that people who abuse a fiduciary relationship should have to account for what the law calls their secret profit. This arises in many fields. For example, if an employee misuses his employer's money and makes a secret profit he is liable at law to account for that profit to his employer. Similar considerations apply to a trustee who misuses a beneficiary's money and makes a secret profit. He is liable to account to the trust. Therefore, there are very good precedents. I find it rather difficult to distinguish between the principles advanced by Labour Members on this matter and the principle that the courts have long applied to cases where a fiduciary relationship has been abused.

    Does my hon. Friend agree that there is a difficulty in deciding what is a fiduciary relationship? In suggesting that the person in question should be a trustee of the company, new clause 10 is not anywhere near touching the core of the problem.

    I do not agree with that, though it is an interesting point. If one examines the categories of people who may not embark on what we have described as insider dealing, I think that with all of them the relationship that exists between them and the company to whose information they are privy is essentially a fiduciary relationship. Therefore, I believe that it is unwise to ignore existing precedent which justifies the proposals being made by Labour Members. I must also say—

    Has my hon. Friend read the proposals being made by the Opposition? We are not discussing the general question whether we ought to be thinking of making changes. We are discussing specific proposals on Report for changing the Bill. None of the three suggestions that have been outlined stands up. I hope that that is the point to which my hon. Friend will address his mind.

    My hon. Friend the Minister is getting a little impatient. The point that I am making is that we must recognise that there is merit in what Labour Members are saying. We must look at the precedent and consider the likely effects and then decide whether the proposals are good or bad.

    I believe that there is a great deal of merit in the proposals, and what I was about to say to my hon. Friend was not that I will vote against him today but rather that he would be wise to look at this matter afresh. I find the argument attractive. I was about to conclude, before I was interruped, by saying that one of the most attractive features of the argument put forward by the Opposition is the deterrent effect. I entirely agree with the hon Member for Swansea, East on that point.

    I entirely adopt the remarks of the hon. Member for Grantham (Mr. Hogg). There is a real issue here and it was incumbent upon the Government to grapple with it. They have declined to do so and are relying upon criminal sanctions exclusively. My hon. Friend the Member for Swansea, East (Mr. Anderson) has already explored that argument and dealt most effectively with the difficulty about whether such sanctions are an appropriate deterrent.

    The Minister was uncharacteristically arrogant and dismissive about these points, which were also made emphatically in Committee by the right hon. member for Crosby (Sir G. Page). By implication, therefore, the Minister was being dismissive of the remarks of his right hon. Friend as well. That attitude is without justification. There is a problem here, and it is no use the Minister's

    Division No. 197]

    AYES

    [10.24 pm

    Anderson, DonaldDouglas-Mann, BruceHoram, John
    Archer, Rt Hon PeterDuffy, A. E. P.Howells, Geraint
    Beith, A. J.Dunn, James A. (Liverpool, Kirkdale)Hudson Davies, Gwilym Ednyfed
    Benn, Rt Hon Anthony WedgwoodDunnett, JackHughes, Robert (Aberdeen North)
    Bennett, Andrew (Stockport N)Dunwoody, Mrs GwynethHughes, Roy (Newport)
    Booth, Rt Hon AlbertEadie, AlexJanner, Hon Greville
    Brown, Hugh D. (Proven)Eastham, KenJones, Rt Hon Alec (Rhondda)
    Brown, Ron (Edinburgh, Leith)Edwards, Robert (Wolv SE)Jones, Barry (East Flint)
    Callaghan, Jim (Middleton & P)Ellis, Raymond (NE Derbyshire)Kilroy-Silk, Robert
    Campbell-Savours, DaleEllis, Tom (Wrexham)Lambie, David
    Carmichael, NeilEvans, Ioan (Aberdare)Lamborn, Harry
    Carter-Jones, LewisEvans, John (Newton)Lamond, James
    Clark, Dr David (South Shields)Ewing, HarryLeighton, Ronald
    Cocks, Rt Hon Michael (Bristol S)Field, FrankLewis, Ron (Carlisle)
    Cohen, StanleyFletcher, L. R. (Ilkeston)Lofthouse, Geoffrey
    Conlan, BernardFletcher, Ted (Darlington)Lyons, Edward (Bradford West)
    Cook, Robin F.Foster, DerekMabon, Rt Hon Dr J. Dickson
    Cowans, HarryFoulkes, GeorgeMcCartney, Hugh
    Craigen, J. M. (Glasgow, Maryhill)Fraser, John (Lambeth, Norwood)McGuire, Michael (Ince)
    Cryer, BobFreeson, Rt Hon ReginaldMcKay, Allen (Penistone)
    Cunliffe, LawrenceGilbert, Rt Hon Dr JohnMcKelvey, William
    Cunningham, George (Islington S)Ginsburg, DavidMacKenzie, Rt Hon Gregor
    Dalyell, TamGourlay, HarryMaclennan, Robert
    Davies, Ifor (Gower)Graham, TedMcMahon, Andrew
    Davis, Clinton (Hackney Central)Hamilton, James (Bothwell)McNamara, Kevin
    Davis, Terry (B'rm'ham, Stechford)Hamilton, W. W. (Central Fife)Marshall, David (Gl'sgow, Shettles'n)
    Dean, Joseph (Leeds West)Harrison, Rt Hon WalterMarshall, Jim (Leicester South)
    Dempsey, JamesHaynes, FrankMason, Rt Hon Roy
    Dewar, DonaldHeffer, Eric S.Maynard, Miss Joan
    Dixon, DonaldHolland, Stuart (L'beth, Vauxhall)Mikardo, Ian
    Dobson, FrankHome Robertson, JohnMillan, Rt Hon Bruce
    Dormand, JackHomewood, WilliamMiller, Dr M. S. (East Kilbride)
    Douglas, DickHooley, FrankMitchell, R. C. (Soton, Itchen)

    hiding behind the argument of defective draftsmanship.

    The Government should put forward their own propositions. The situation demands that the Government should act but the Minister has been so idle and inert over this problem—or too busy with the 150 amendments correcting his own mistakes—that he has missed this important issue altogether. In view of the totally unsatisfactory way in which the Government have dealt with this argument the Minister has earned our contempt for the way in which he has dealt with the matter and his dismissive attitude towards the New York court of appeal. There will be another obiter dicta dealing with that in due course.

    The Minister totally ignores the experience of United States federal law, the Canadian experience and the New South Wales Securities Industry Act, all of which have dealt with these matters. Perhaps there were difficulties, but we tried to deal with them. The Government have chosen not to try at all. For that reason we believe that we are right in seeking to force a Division on this matter.

    Question put:

    The House divided: Ayes 140, Noes 194.

    Morris, Rt Hon Charles (Openshaw)Robertson, GeorgeThomas, Jeffrey (Abertillery)
    Morton, GeorgeRooker, J. W.Thomas, Dr Roger (Carmarthen)
    Moyle, Rt Hon RolandRoss, Ernest (Dundee West)Wainwright, Edwin (Dearne Valley)
    Oakes, Rt Hon GordonRoss, Stephen (Isle of Wight)Walker, Rt Hon Harold (Doncaster)
    Orme, Rt Hon StanleySever, JohnWelsh, Michael
    Palmer, ArthurSilkin, Rt Hon John (Deptford)White, Frank R. (Bury & Radcliffe)
    Parker, JohnSilverman, JuliusWilliams, Rt Hon Alan (Swansea W)
    Parry, RobertSmith, Cyril (Rochdale)Wilson, Rt Hon Sir Harold (Huyton)
    Pavitt, LaurieSmith, Rt Hon J. (North Lanarkshire)Winnick, David
    Penhaligon, DavidSoley, CliveWoodall, Alec
    Powell, Raymond (Ogmore)Spearing, NigelWoolmer, Kenneth
    Prescott, JohnSpriggs, LeslieYoung, David (Bolton East)
    Race, RegStallard, A. W.
    Rees, Rt Hon Merlyn (Leeds South)Steel, Rt Hon DavidTELLERS FOR THE AYES:
    Richardson, JoStoddart, DavidMr. Donald Coleman and
    Roberts, Ernest (Hackney North)Thomas, Dafydd (Merioneth)Mr. James Tinn.

    NOES

    Adley, RobertGoodhew, VictorMudd, David
    Aitken, JonathanGoodlad, AlastairMurphy, Christopher
    Alexander, RichardGorst, JohnMyles, David
    Ancram, MichaelGow, IanNeale, Gerrard
    Arnold, TomGower, Sir RaymondNeedham, Richard
    Aspinwall, JackGray, HamishNelson, Anthony
    Atkinson, David (B'mouth, East)Grieve, PercyNeubert, Michael
    Baker, Nicholas (North Dorset)Griffiths, Peter (Portsmouth N)Newton, Tony
    Benyon, Thomas (Abingdon)Gummer, John SelwynNormanton, Tom
    Berry, Hon AnthonyHamilton, Hon Archie (Eps'm&Ew'll)Page, Rt Hon Sir R. Graham
    Best, KeithHamilton, Michael (Salisbury)Page, Richard (SW Hertfordshire)
    Bevan, David GilroyHampson, Dr KeithParkinson, Cecil
    Biggs-Davison, JohnHaselhurst, AlanPatten, Christopher (Bath)
    Blackburn, JohnHavers, Rt Hon Sir MichaelPattie, Geoffrey
    Blaker, PeterHawkins, PaulPercival, Sir Ian
    Body, RichardHeddle, JohnPorter, George
    Bonsor, Sir NicholasHicks, RobertPowell, Rt Hon J. Enoch (S Down)
    Boscawen, Hon RobertHiggins, Rt Hon Terence L.Price, David (Eastleigh)
    Braine, Sir BernardHogg, Hon Douglas (Grantham)Proctor, K. Harvey
    Bright, GrahamHooson, TomRenton, Tim
    Brinton, TimHordern, PeterRhys Williams, Sir Brandon
    Brocklebank-Fowler, ChristopherHowell, Ralph (North Norfolk)Ridsdale, Julian
    Brotherton, MichaelHunt, David (Wirral)Rifkind, Malcolm
    Brown, Michael (Brigg & Sc'thorpe)Hunt, John (Ravensbourne)Roberts, Michael (Cardiff NW)
    Browne, John (Winchester)Hurd, Hon DouglasRoberts, Wyn (Conway)
    Bruce-Gardyne, JohnJessel, TobyRossi, Hugh
    Buchanan-Smith, Hon AlickJopling, Rt Hon MichaelSainsbury, Hon Timothy
    Buck, AntonyKaberry, Sir DonaldSt. John-Stevas, Rt Hon Norman
    Budgen, NickKellett-Bowman, Mrs ElaineShaw, Michael (Scarborough)
    Bulmer, EsmondKimball, MarcusShepherd, Colin (Hereford)
    Butler, Hon AdamKing, Rt Hon TomSilvester, Fred
    Cadbury, JocelynKnight, Mrs JillSkeet, T. H. H.
    Carlisle, John (Luton West)Knox, DavidSpeed, Keith
    Chalker, Mrs LyndaLamont, NormanSpeller, Tony
    Channon, PaulLang, IanSpicer, Jim (West Dorset)
    Clark, Hon Alan (Plymouth, Sutton)Lawrence, IvanSpicer, Michael (S Worcestershire)
    Clarke, Kenneth (Rushcliffe)Lawson, NigelSproat, Iain
    Cockeram, EricLe Marchant, SpencerSquire, Robin
    Cope, JohnLennox-Boyd, Hon MarkStainton, Keith
    Costain, A. P.Lester, Jim (Beeston)Stanley, John
    Cranborne, ViscountLloyd, Peter (Fareham)Stevens, Martin
    Critchley, JulianLoveridge, JohnStewart, Ian (Hitchin)
    Crouch, DavidLyell, NicholasStradling Thomas, J.
    Dean, Paul (North Somerset)McCrindle, RobertTebbit, Norman
    Dickens, GeoffreyMacfarlane, NeilThompson, Donald
    Dorrell, StephenMacGregor, JohnThornton, Malcolm
    Douglas-Hamilton, Lord JamesMacKay, John (Argyll)Townend, John (Bridlington)
    Dover, DenshoreMarlow, TonyTrippier, David
    Dunn, Robert (Dartford)Mates, MichaelVaughan, Dr Gerard
    Dykes, HughMather, CarolWakeham, John
    Eggar, TimothyMawby, RayWalker, Rt Hon Peter (Worcester)
    Eyre, ReginaldMawhinney, Dr BrianWalker, Bill (Perth & E Perthshire)
    Fairbairn, NicholasMellor, DavidWaller, Gary
    Fairgrieve, RussellMeyer, Sir AnthonyWard, John
    Faith, Mrs SheilaMiller, Hal (Bromsgrove & Redditch)Wells, Bowen (Hert'rd & Stev'nage)
    Fenner, Mrs PeggyMills, Iain (Meriden)Wheeler, John
    Finsberg, GeoffreyMiscampbell, NormanWickenden, Keith
    Fisher, Sir NigelMitchell, David (Basingstoke)Wilkinson, John
    Fletcher-Cooke, CharlesMoate, RogerWinterton, Nicholas
    Fowler, Rt Hon NormanMolyneaux, JamesWolfson, Mark
    Fraser, Peter (South Angus)Montgomery, FergusYoung, Sir George (Acton)
    Fry, PeterMoore, JohnYounger, Rt Hon George
    Gardner, Edward (South Fylde)Morgan, Geraint
    Garel-Jones, TristanMorris, Michael (Northampton, Sth)TELLERS FOR THE NOES:
    Gilmour, Rt Hon Sir IanMorrison, Hon Charles (Devizes)Mr. David Waddington and
    Glyn, Dr AlanMorrison, Hon Peter (City of Chester)Mr. Peter Brooke.

    Question accordingly negatived.

    New Clause 12

    Insider Dealing On A Recognised Stock Exchange: Investigations, Etc

    '(1) If it appears to the Secretary of State that there are circumstances suggesting that there may have been a contravention of sections 65, 66 or 67 above, he may appoint one or more competent inspectors to carry out such investigations as are requisite to establish whether or not any such contravention has occurred and to report the results of their investigations to him.

    (2) The appointment under this section of an inspector may limit the period to which his investigation is to extend or confine it to particular matters.

    (3) If the inspectors consider that a person to whom this subsection applies is or may be able to give information concerning any matter relevant for establishing whether or not any suspected contravention of section 65, 66 or 67 above in relation to securities of any company has occurred, they may require that person—

  • (a) to produce to them any books or documents in his custody or power relating to the company or its securities;
  • (b) to attend before them; and
  • (c) otherwise to give them all assistance in connection with the investigation that he is reasonably able to give;
  • and it shall be the duty of that person to comply with that requirement.

    (4) Subsection (3) above applies to any person who—

  • (a) is connected with the company in relation to whose securities the contravention is suspected to have occurred or was connected with it at the time of the suspected contravention or at any time during the preceding six months; or
  • (b) is connected with one of two companies (one of which is the company in relation to whose securities the contravention is suspected to have occurred) or was so connected at the time of the suspected contravention or at any time during the preceding six months and in the opinion of the inspectors would while so connected have had information relating to a transaction (actual or contemplated) involving both companies or involving one of them and the securities of the other.
  • (c) if the suspected contravention is of section 66 above, is or, at the time of that contravention, was holding office under or employed by the Crown;
  • (d) is a member of a recognised stock exchange or of a recognised association of dealers in securities who is an individual, or an officer (past as well as present) of a member of such an exchange or association who is a body corporate; or
  • (e) is the holder of a licence granted under section 3 of the Prevention of Fraud (Investments) Act 1958 who is an individual, or an officer (past as well as present) or the holder of a licence so granted who is a body corporate; or
  • (f) is an individual declared by an order of the Secretary of State for the time being in force to be an exempted dealer for the purposes of that Act and to an officer (past as well as present) of any body corporate so declared to be such a dealer; or
  • (g) is an officer (past as well as present) of in investment exchange.
  • (5) An inspector may examine on oath any person to whom subsection (3) above applies in relation to any matter relevant for establishing whether or not any suspected contravention has occurred and may administer an oath accordingly.

    (6) If any person to whom subsection (3) above applies—

  • (a) refuses to produce to the inspectors any book or document which it is his duty under this section so to produce;
  • (b) refuses to attend before the inspectors when required to do so; or
  • (c) refuses to answer any question which is put to him by the inspectors with respect to any matter relevant for establishing whether or not any susected contravention has occurred, the inspectors may certify the refusal tinder their hand to the court, and the court may thereupon inquire into the case, and, after hearing any witnesses who may be produced against or on behalf of the alleged offender and after hearing any statement which may be offered in defence, punish the offender in like manner as if he had been guilty of contempt of the court.
  • (7) Subsections (4), (5) and (6) of section 32 of the 1967 Act (interim and final reports of inspectors, printing and publication of reports, and saving for solicitors and bankers) and section 167(4) of the 1948 Act (examination of persons whom inspector has no power to examine on oath) shall apply in relation to an investigation under this section as they apply in relation to an investigation under the said section 32 or under sections 164 to 166 of the 1948 Act, as the case may be.'.—[ Mr. Clinton Davis.]

    Brought up, and read the First time.

    I beg to move, That the clause be read a Second time.

    It is abundantly plain from the remarks that have already been adduced by my hon. Friend the Member for Swansea, East (Mr. Anderson) that the task of establishing that the criminal offence of insider dealing has been committed will be immensely difficult. It follows that the task of investigating the alleged offence will be immensely difficult, too. That is why my right hon. Friend the former Secretary of State—my right hon. Friend the Member for Lanarkshire, North (Mr. Smith)—and I believed that it was right that those invested with the task of seeking to detect such offences should have an expertise that was acquired because they were dealing with the specific matter and that was additional to that which is already provided by the companies investigation branch. That is in no way to deride the activities of the branch. It has multifarious duties to undertake. It is a hard-working branch of the Department of Trade, and it needs the extra assistance.

    If the Government's provisions for meeting insider dealing are to be taken seriously—I am not sure that they are—I think that the Government must establish that they are providing the resources and legislative powers to give effect to that intention. Ministers have not been convincing in that respect. We shall be dealing with the offence in much more detail on Report.

    The Minister says, in relation to the powers that appeared in the Labour Government's Companies Bill, that he does not think it right to provide such far-reaching powers which, as he puts it, can threaten individual rights. Therefore, he proposes to do nothing. He argues that if such powers are not generally needed for the investigation of crime they should not be needed in this area. I cannot believe that that was the advice tendered to the Minister for effecting detection and for the policing of these provisions by his officials, who at one stage felt that the Department and the police needed backup powers. I should like to know from the Minister whether the advice has changed and why he feels that extra legislative powers are no longer necessary.

    It cannot be that to recruit a small body of extra staff would impose a public expenditure burden. The Government have not found it impossible to recruit 1,000 inspectors to deal with allegations of fraud on the Department of Health and Social Security. On a liberal estimate, they can turn up with another £50 million over three years, to cite the Minister who is dealing with that matter.

    It is interesting that in respect of that kind of abuse the Government are full of activity, but in the case of abuses in the City and offences of the character that we are currently considering the Government are strangely inert. There are special powers. There are 1,000 extra inspectors to deal with social security abuses. I do not say that that is not important. Social security abuse is an offence. It must be dealt with. But why is there this disparity of approach between the two kinds of offence? We know that the Government are making substantial cuts in the staff dealing with Inland Revenue matters, and Customs and Excise cargo and passenger controls, but on the matter that we are discussing the Government are strangely inert.

    Does the hon. Gentleman agree that the Opposition seem to be minimising the gravity of the penalties that we are discussing? Surely the existence of a criminal offence is the most powerful deterrent.

    I agree with that. The law must be capable of being implemented, or it will be regarded as unworkable and will no longer operate as a deterrent. Is not that correct? I do not see the hon. Gentleman seeking to disagree with that conclusion.

    The Government must establish that what they seek to do in this area is workable. I want it to be so. That was the purpose of our previous proposals. The Government have made them inordinately more complex. We are now dealing not simply with the offence but with the ability to detect the offence. Here the Government show a strange reticence. I do not think that they have a new-found reticence about civil liberties, but they are selective about that subject.

    It is not right to appoint 1,000 new people—with the Minister for Social Security as the new virility symbol—as the scourge of the people committing the abuse, who mostly come from the bottom pile of society. They are mostly deprived and neglected people. They are mostly carrying out frauds of insubstantial amounts. They are to be dealt with and subjected to the full rigour of the criminal law. A substantial amount of public expenditure is to be committed to deal with their offences. However, when it comes to the offences that we are discussing there will be nothing.

    I hope that the Minister will not say, as he did in Committee, that this is unimportant and that he can rely totally on the ability of the companies investigation branch. We are dealing with a new branch of the criminal law. The branch does not have expertise. No doubt it will acquire it. Special attention should be paid to the matter, especially in the initial stages of the implementation of the proposals, These resources must be made available to the Government. It will help to bolster the Government's credibility in seeking to implement these proposals in a sensible way.

    I hope that the Government will not pursue the line that they pursued in Committee, will recognise that there is a case for the proposal, and will not show their previous selectivity of approach.

    The hon. Gentleman raised a serious point. He asked whether the Government were serious in wishing to enforce these criminal sanctions. It has seemed to me, since I first thought about the idea of criminal sanctions against insider trading, that it raised important questions about what were the condition precedents before Parliament created a criminal offence.

    10.45 pm

    The first necessity is widespread public consent for the proposition that the mischief at which the criminal offence is aimed should be designated by Parliament as a criminal offence. Although now, at this late stage, agreement has been reached between the Front Benches that insider trading should be a criminal offence, that agreement has been noticeably absent for many years. Indeed, the Tory Party has only recently become reconciled to the idea of there being a criminal offence of insider trading.

    To say that we are now all agreed is to disregard the fact that until recently the stock exchange and the professional bodies of the City were opposed to the idea of there being a criminal offence against insider trading. They took the view that it was likely to inhibit trading by directors in the shares of their own company and that it would once again be a distortion against risk-taking in particular fields of commercial activity.

    Perhaps a second consideration before Parliament makes a certain mischief a criminal offence is to ask whether it is enforceable. The hon. Member for Hackney Central (Mr. Davis) says that the Government are not serious in enforcing these provisions. Perhaps he is right. It may be the case—I do not know, and I am sure that the Government would not tell me—that the Government regard these criminal sanctions as no more than cosmetic. I hope not, very much. If these are brought forward as mere sanctions they do not merely damage this Bill; they damage the criminal law generally.

    It is exactly the same case as for those who persistently support legislation such as that on race relations, which they know to be unenforceable, in the main, but which they bring forward as a way of demonstrating public opinion generally. It is a most dangerous and damaging way to fiddle around with the criminal law. The essence of the criminal law is that it should be easily and clearly enforceable.

    A third criteria that I respectfully suggest should be applied before Parliament makes a certain mischief a criminal offence is that it should be capable of being precisely defined. For a mischief to be precisely defined, it is necessary to have a relatively static state of affairs to which the criteria can be applied. This is a serious problem in relation to the activities of the City. Those activities are immensely mobile, entrepreneurial and highly fluid, and involve going into markets and out of markets and changing methods of dealing overnight. For instance, two years beforehand no one could have foreseen the market that arose in Euro-currencies. No one could have foreseen that there would be activities in the Euro-markets that might be regarded by some as potential activities in respect of which criminal sanctions could be applied.

    So it is that there cannot be those stable circumstances that would allow Parliament to consider City activities carefully and slowly and, if necessary, change the law to make a new mischief a criminal offence.

    We shall have to choose between general legislation—which will be uncertain and therefore lack the public support that it should have—and rigid legislation, which will allow certain mischiefs to go unattacked by the criminal law. I suspect that the result will be that we shall undermine general respect for the criminal law by producing a political cosmetic and, more seriously perhaps, distorting the process of risk-taking in our capital markets.

    Some entrepreneurs who wish to be both managers and investors in their companies will say that they do not mind managing a company but are not prepared to hold a substantial shareholding in a public company if there is a risk, albeit an outside risk, that they might be subject to the sanctions of the criminal law if, for the sake of argument, they have to sell a large shareholding to become a Member of Parliament or, to take an extreme example, to become the Deputy Speaker of the House of Commons.

    There are people who will not be prepared to invest their money in a large public company and at the same time be a director of that company. I suspect that it will be another way of distorting capital markets unintentionally to make it more advantageous for people to invest in private companies. I fear that these measures may be cosmetic. If they are, I much regret them.

    The clause in effect gives teeth to the action against insider dealing. It is widely accepted that insider dealing is wrong and should be penalised. The size of the reports on Peachey Properties, certain investment corporations, banks and other companies shows the extent of the investigations that had to be made.

    The discussion in the Chamber and in Committee has shown the difficulty in defining exactly what is insider dealing. In the United States of America it is put quite simply that an insider is one who has insider information.

    It is obvious that the problem cannot be left to self-regulation by the City. The fact that the problem still exists shows that the City has not been able to deal with it in the past.

    There is a lack of inspectors to deal with the problem, which costs individuals and the public purse hundreds of millions of pounds. We should have inspectors to safeguard both the public and public funds. It has already been said that we are prepared to engage 1,000 investigators to sort out £3 million worth of frauds in the DHSS. Even greater frauds are perpetrated as a result of insider dealing. We ought not to consider excluding certain categories of persons, such as shareholders, stock exchange jobbers, or trustees.

    Insider dealing legislation, and making the present legal practices illegal, are major problems. To buy cheap and sell dear is quite legal. To make a profit is legal. To make massive profits is legal. To make oneself very rich and, as a consequence, others very poor is legal. After all, business is business.

    The Bill, if unamended, will ensure that the Government do not interfere too much with the rules of the game. Speculators buy and sell shares to make a quick profit. It is a case of catch-as-catchcan. The clause is essential to ensure that there are stricter investigations, more inspectors, and tighter controls.

    I am not too happy about the size of the penalties that will be inflicted. We talk of heavy and strong penalties. Others who commit lesser crimes in our society receive heavier penalties. The penalties are by no means too high. All these measures are needed to deal with the problem of insider dealing.

    I am sure that the hon. Member for Hackney, Central (Mr. Davis), like myself, has the feeling that we have been here before. In digging up this new clause—old clause 62 of the 1978 Bill—he was arguing a case in which he patently believes. Had he been the Minister he would have ensured that it was included in company law.

    He asked what has happened in the Department. If he thinks of where he used to sit and where he sits now he will understand what happened. There was a change of Government. The people decided that. The net result is that where there was a difference of opinion—and there were many differences of opinion made openly and honestly—we are now in a position to suggest that the way for which we argued in opposition is the way in which things should be done now that we are the Government. We believe then, as we believe now, that old clause 62 was ill-conceived.

    I say to my hon. Friend the Member for Wolverhampton, South-West (Mr. Budgen) that we do not think that this part of the Bill is a cosmetic operation. We have taken a great deal of trouble with the definitions and clauses to try to make them effective. We believe that insider dealing is a crime and that those who indulge in it should be aware that they run the risk of going to gaol, and that they face substantial fines. There is nothing cosmetic about these clauses.

    11 pm

    There is no fundamental disagreement between the hon. Gentleman and myself about the way in which enforcement should be organised. We both feel that it should be carried out by people who are experienced in criminal investigation and in looking into allegations of a type similar to the allegations that will need to be investigated under this legislation. I believe that that work can effectively be carried out by the prosecutions branch of the Department of Trade and by the police, both of them working in close collaboration with the stock exchange, the takeover panel and others possessing the relevant information.

    Where we differ is over the question of special powers. If the hon. Gentleman had his way the investigators would be designated as inspectors and given the right to question specified categories of people, with the possibility of the court's requiring those people to answer any questions that they have not answered voluntarily. The court could also decide which questions must be answered by people falling outside the specified categories. As the House will appreciate, powers of that kind are far reaching. Because of their implications for the liberty of the individual, in existing legislation they have been confined to situations in which it was considered that they were absolutely necessary to the carrying out of an effective investigation. As the hon. Gentleman said, for the investigation of most criminal offences no such powers are available.

    I rise in support of what my hon. Friend has just said. He spoke of the wide powers given to inspectors to require people to answer questions. Does not he agree that powers that are as wide as that derogate from the fundamental proposition that people should not be required to answer questions that might incriminate them?

    I entirely agree with my hon. Friend. That is the basic point of argument between myself and the hon. Member for Hackney, Central. We believe that the people who will look into the questions raised by this new legislation will have sufficient powers. We believe that there is a strong argument that in some instances, where the far-reaching powers that the hon. Gentleman seeks have been given, there is a case for a re-examination of those powers.

    Of course, the hon. Gentleman has impeccable credentials as a person who has the scantest possible regard for the liberty of the subject. He was the cheerful supporter of a Government who gave tax inspectors the powers to break into the taxpayer's home and to question the wives and children of the taxpayers. He feels that anything that one does to the individual in one's search for what he would call "social justice" is entirely justifiable. Therefore, he is behaving entirely in character in seeking swingeing powers in this case.

    Does my hon. Friend also agree that the whole system of investigations is a concept that comes from Continental law rather than British law, with an equal fight between prosecution and defence and no element of quasi-judicial investigation?

    I should like notice of that question. I should like to have the opportunity of taking advice before answering it.

    If the hon. Gentleman is stuck for an answer, it might occur to him to tell his hon. Friend that there is no such thing as British law. Can I ask him to stop being a narrow Englishman?

    I heard the right hon. Gentleman's sedentary intervention, but I did not think that it was worth repeating. I should like to wind up this short debate. There is a fundamental difference of approach between us. The hon. Member for Hackney, Central and I have aired this difference on a number of occasions. We believe that it would be wrong to give the investigators the wide powers that new clause 12 seeks to give them, and I urge my hon. Friends to resist it.

    The Minister is again being extraordinarily selective in his arguments. He waxes indignant about the offences that I am supposed to have created against civil liberties by supporting the previous Labour Government in the powers that were given to tax inspectors. His Government are appointing 1,000 additional inspectors. How does he justify that? Why does he not leave it to the police to investigate social security frauds? Do not those inspectors question neighbours and friends of people who are alleged to have committed offences? Do they not rely upon hearsay evidence?

    I should like to draw the attention of the hon. Member for Hackney, Central (Mr. Davis) to the considerable expertise that resides in the City of London fraud squad in investigating fraud. I should be happy to know that he feels confident in relying on that squad rather than on his new batch of inspectors.

    Of course, there is some expertise, but I do not believe that the Metropolitan Police have the resources and the expertise to the degree that the hon. Member for Dorset, North (Mr. Baker) claims. He will know from his experience that the delay that already occurs in prosecuting white-collar crime is intolerable. Apart from the fact that people have to wait so long to undergo their trial, it is intolerable from the point of view of the witnesses. There are massive delays in investigating that sort of offence.

    I believe that when a new and highly complex offence is introduced, it is necessary to recruit a new form of expertise. The Government seek to prosecute those people who abuse social security, but on matters that create infinitely more damage to the reputation of the City and to the commercial integrity of Britain they seem to think that it is no longer important. The proof of the pudding will be in the eating. It will remain to be seen whether the Government have been able to rely satisfactorily upon the expertise available.

    The Minister will be the first to agree that the Department of Trade's company investigation branch is a very small unit. It is already heavily over-worked. Now it is having to assume this additional work. The hon. Member for Wolverhampton, South-West (Mr. Budgen) has already poured scorn on the Government's proposals in their entirety. I do not go as far as that. However, I believe that we have a difficult series of new prosecutable offences and that they will require this additional expertise.

    The Minister says that there are far-reaching powers that threaten individual rights. There are also far-reaching powers in connection with the "fit and proper person" procedures under the insurance Acts. Does he intend to replace those Acts? Substantial powers are available to inspectors appointed by the Department under section 109 of the 1967 Act. Extensive powers are provided under sections 164 to 168 and 172 of the 1948 Act. These powers are invoked because it is felt necessary to provide inspectors with the ability to look swifty into the documents that may relate to various matters germane to their inquiries.

    Will the hon. Gentleman confirm that as a general proposition he is in favour of the police cautioning a person who is being questioned to the effect that he is not obliged to answer questions? If he is, will he explain why these rules and powers given to inspectors will not provide for an analogous warning being given to the person being inquired into?

    By and large, I agree, but I believe that there are exceptions. The hon. Gentleman may well have a point in connection with the criminal offences that we are considering. He will recognise that many Conservative Members are not in favour of the privileges of silence, which he obviously supports and, by and large, I support. It may be something in respect of which we should be prepared to make a concession. I am impressed by the hon. Gentleman's point.

    We must deal with the principle as well as the detail. The Government are throwing out the whole principle of having a special force with special powers to deal with the situation. They could have thrown out our proposals, but I believe that it was inept of them to throw out all proposals. I believe that they are making a mistake, but only time will tell.

    Revenue frauds have been mentioned. They were involved in the Rossminster matter. It is noteworthy that on 27 March last year, Sir William Pile, the chairman of the Inland Revenue, said that the total earnings that evade tax might amount to as much as 7½per cent. of the gross domestic product, which would be about £10 billion to £l1 billion at that time. That is a strong allegation, made by a reputable source, yet the Government are diminishing their powers by casting out some of the people involved in that form of inquiry and saying that they do not need them. I believe that that is a mistaken view. The selectivity of the argument is quite abhorrent.

    Question put and negatived.

    New Clause 13

    Review Committee

    '(1) There shall be a Committee appointed by the Secretary of State to keep company law under review and to make recommendations to the Secretary of State as to any changes in company law that may from time to time appear to the Committee to be desirable.

    (2) The Committee shall consist of not less than eight and not more than ten persons appointed by the Secretary of State in accordance with subsections (4) and (5) below.

    (3) Before appointing the members of the Committee (other than the chairman) the Secretary of State shall—

  • (a) as to two of them, consult such organisations representing employers as he considers appropriate;
  • (b) as to two others, consult such organisations representing employees as he considers appropriate.
  • (4) The remaining members of the Committee shall consist of:

  • (a) a practising barrister;
  • (b) a practising solicitor;
  • (c) a practising accountant;
  • (d) a practising banker; and
  • (e) any persons appearing to the Secretary of State to have qualifications or experience that would be of value to the Committee in considering any matter with which it is concerned.
  • (5) The Secretary of State shall appoint one member of the Committee to be its chairman.

    (6) It shall be the duty of the Committee:

  • (a) to prepare and publish, as soon as possible after 31st March in each year, a report on the performance of its functions during the period of 12 months ending with that date; and
  • (b) to deliver a copy of the report to the Secretary of State before it is published; and it shall he the duty of the Secretary of State to lay before Parliament copies of each report of which he receives a copy in pursuance of this section.'.—-[Mr. John Smith.]
  • Brought up, and read the First time.

    With this it will be con- venient to take new clause 32—Committee on company law—

    '(1) There shall be a Committee appointed by the Secretary of State to keep company law under review and to make recommendations to the Secretary of State as to any changes in company law that may from time to time appear to the Committee to be desirable.
    (2) The Committee shall include not fewer than four members who are currently engaged as directors or managers of public companies.
    (3) The Committee shall consist of not more than twelve members:.

    The purpose of new clause 13 is to set up a committee to advise the Secretary of State on the review of company law. I wish not only to argue the proposition but to make a small complaint about the Government departing from an excelltn idea, which announced on Second Reading of our Companies Bill.

    When one looks at the grave iniquities committed by this divided and dispirited Government in these nine short months one sees that this departure is not their most wicked act. None the less, it was an excellent idea to have a review committee. When it was announced I do not believe that there was a word of objection from the Conservative Party or from any of the bodies that would be affected. By and large, it seemed a good idea all round.

    When this Government came to office, the idea was departed from. Instead of a committee being set up to review company law and advise the Secretary of State in an open manner, the idea of a panel of advisers crept in, to be chaired by a professor of company law. He may be an excellent professor of company law. I believe that he is. However, the whole idea of a panel of advisers is less attractive than that of having a review committee.

    11.15 pm

    A panel of advisers to advise the Department is a very cosy arrangement. No doubt it will have interesting chats with the Department of Trade about any reform of company law. There is much to be said for not having a cosy arrangement. There is much to be said for having a proper committee, with independent experts. The Secretary of State could consult such independent experts and they, in turn, could bring things to the notice of the Secretary of State. Interested bodies could also communicate with it.

    If we have an open, public debate about possible changes in company law, all those who are interested will be able to contribute. That cannot be carried out as effectively by a panel of advisers, who are in a cosy relationship with the Secretary of State and with officials in the Department. The present Government have an enormous bias against any advisory body. It is almost a reflex action. However, when the Government went through their primal hunting exercise they discovered that many of the bodies had a distinct and useful value. Very often those people give their services without pay. They do so in the interest of developing the law and of making it more effective.

    I therefore suggest that the Government were wrong to dispense with the idea of a review committee. There is a great deal of merit in bringing in outside experts to advise the Secretary of State. There is much to be said for stimulating public debate about changes in company law. We should face some of the practical difficulties. In Committee objection was raised that the amendment would confer an obligation on the Secretary of State to consult a review committee. However, the Minister will have noticed that that obligation does not appear in this new clause. That shows how reasonable we have been about meeting the Government's objections.

    I hope that the Minister is prepared to think again about this issue. Everyone agreed that the review committee was an excellent idea. It has been the innocent victim of the Government's anti-quango drive. The Government may therefore be guilty of throwing out the baby with the bath water. This is not the most revolutionary proposal of modern times. Nor is it the greatest iniquity that the Government have committed. However, it is a small iniquity that needs to be put right.

    By my vote in Committee I helped to keep an eye on the idea of a review committee. I hope that the Government will take that idea seriously. So many changes take place in company law—or should take place—and so many changes occur in our thinking about the future of private enterprise that it is probably unreasonable to ask the Department to embrace all the different aspects. Those aspects should be studied, and the Government will inevitably need to take advice.

    I shall not list all the aspects of company law reform, as I have referred to them previously in Committee, at conferences, and during debate. However, there is a general feeling that the 1948 Act has been left behind by social and economic changes. Of course, it is still a landmark. Company law is no longer relevant to present times, or to the 1980s. Tomorrow we may deal with the clauses that follow clause 46. That puts a new emphasis on the role of directors. Many people have campaigned for that. However, when the clause is on the statute book it will give rise to a great change in attitude. It will accelerate the pace at which the 1948 Act becomes obsolete.

    I hope that we shall end the games of Normans and Saxons. Such games are still played between management and workers. The background of company law envisages that directors work only for the investors and that they do not have responsibilities to the workers. That background is rapidly coming to an end.

    There is a developing concern for small businesses, not just on the Government Benches. All over the country people know that small business is important but that it is being crushed because it cannot be adapted to bear the burdens which are placed on larger companies under company law. We need people to advise the Department on the whole future relationship between company law and the small business.

    In one of his inspired moments—and he has many—my hon. Friend the Under-Secretary suggested that we should consider splitting table A so that we have one set of standards for large public companies and a different set of standards for small businesses. I think that that is exceedingly important and urgent, and I wonder whether the Department, left to itself, could go to work quickly and produce some vital suggestions for Parliament to consider and the nation to follow.

    I could touch on many other aspects of company law reform which should be taken into new areas. We are coming to the end of the cult of the equity. Trade union pressure, social forces and inflation have acted on public companies in such a way that the great majority of them are not in a position to pay a dividend. If they had taken current cost accounting principles seriously they would have stopped paying dividends, because they are at the point where their margins are too narrow even to replace existing assets, let alone re-equip themselves for more highly capitalised competition in the future.

    Table A does not envisage the possibility that equity will receive no share of the turnover. We must look ahead to the needs of institutional investors called upon to provide new capital for companies that are not in a position to meet their equity dividend. I do not think that this is disastrous—it is a challenge, and I wonder whether the Department has ideas ready for the new classes of capital that will be needed, which perhaps have a prior claim on the turnover and will enable investment to continue in the situation where the directors have fully accepted their responsibility to the employees. These are speculations that we could keep making all night. I am sure that the arguments will continue for at least another 10 years.

    Will we have an advisory committee or review body supporting the Department which will consist of people of practical experience, or will it consist only of people who have learnt about industry out of books and magazines? This is important, because many experts on company law have never actually earned their living in companies that have to compete in the real world. They have served in an advisory capacity to companies. They have learnt about companies through public relations, through law, or through other very important functions that are part of the creation of wealth, I admit. But I believe that the provision in my new clause that the Minister should seek to be advised by people who are currently directing or managing companies is worthy of consideration.

    I do not know whether Labour Members intend to press this matter to a vote. If they do, I do not think that I shall be able to support them. I am not happy with the composition of the review body that the Opposition recommend. My own suggestion is only a sketch. Nevertheless, I hope that in this debate we shall have sown the seeds that may grow into something useful to help modernise our company law over the next few years.

    I wonder whether we get very far by setting up bodies that have a continuous and undefined desire to make proposals and to press changes. I noted carefully what my hon. Friend the Member for Kensington (Sir B. Rhys Williams) said about the changes in company law, but there are many other areas of life in which changes are likely to be made and in which all kinds of alterations come about. I do not suggest that the whole world should be in commission—the concept of a series of committees, constantly concerned to press forward alterations. I suggest that the committee would—as it does—contain a whole series of people who may or may not have a real understanding of the way in which companies work in actuality. The committee would be of less value and importance than almost any suggested in recent propositions by the Opposition.

    The members are to be a practising barrister, a practising solicitor, a practising accountant, a practising banker, two persons who will arise from consultations with employers' organisations or other appropriate people and two persons who will arise from consultations with employees or other appropriate people. Out of that, I suggest that we will have a collection of practising people and no real exponents. I should be happier if I felt that the Department was being advised by those people who do the job and by the House.

    It is that which has caused me to comment on the new clause. The proposition that it is improper for the House to take the information from outside and press the Government to make such changes as become appropriate cannot be right. There must be some other committee—

    Why are the two things mutually exclusive? It would be a committee of experts. The Government are seeking to enrol a panel of experts who will be closeted within the Department of Trade to advise. Obviously, they do not feel that they are getting sufficient stimulus—for the perfectly good reason that it is overworked—from the Department.

    There is a clear distinction between the Government's drawing to themselves a series of experts—indeed, there is a distinction between experts and the list proposed here—for internal advice and the concept of an exterior committee. The point made by the Opposition is that the committee would be seen in public, so that it was constantly kept under review, but there is a fundamental difference. The people who should be keeping constantly under review the question of company law, as, indeed, the question of law in general, are the Members of this House. The fewer other bodies who have a statutory base in no man's land, constantly to keep change and pressure under review, the better.

    We need a company law that is informed by those who are active within companies—both employers and employees. We need those people to have ready access to the Government through the House. In so far as we are able to change the mechanisms of this House to do that job, we shall do the nation a good. In so far as we obfuscate and cover up the real purposes of Parliament by the production of synthetic committees that provide jobs for persons who clearly have not run businesses we do the country ill.

    I do not propose to delay the House long with comments on the clause. It was discussed at some length in the Standing Committee. I note that the right hon. Member for Lanarkshire, North (Mr. Smith) has made a small change to the clause that his hon. Friend the Member for Hackney, Central (Mr. Davis) proposed in Committee. The right hon. Gentleman recognised the force of our previous arguments and dropped his subsection (2), which quite unreasonably required the Secretary of State to consult his suggested review committee before proposing any changes in company law.

    New clause 13 requires the establishment of a new body of fixed composition with full independent powers of review, replete with the power to publish recommendations. As right hon. and hon. Gentlemen know, the Government already consult widely on proposals for changing company law. I shall shortly come to the points that my hon. Friend the Member for Eye (Mr. Gummer) raised.

    We do not consider that the role of an advisory body should be to replace the existing process of consultation. It cannot, for example, replace the detailed comment which the Department typically receives from the broad spread of interests which it consults. The Green Paper on company accounting and disclosure, for example, published last September, has so far attracted comment from more than 100 different bodies and individuals. I should like my hon. Friend the Member for Eye to study those views, because I think that such study would temper his confidence that every Member of Parliament necessarily understands and is aware of the implications of some of these problems.

    11.30 pm

    Will the Minister please explain why his party, when in opposition, pressed the case for an insolvency rules committee to be established comprising a wide variety of people? Will he explain why his party persists in having the Criminal Law Revision Committee, and why it insists on retaining the Lord Chancellor's Legal Aid Advisory Committee? Further, will he explain why his own Department only recently insisted on retaining the Pilotage Commission? What is the distinction?