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Power Of Court To Grant Relief Against Company Where Members Unfairly Prejudiced

Volume 980: debated on Monday 3 March 1980

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I beg to move amendment No. 125, in page 85, line 1, after 'member', insert

'debenture holder, creditor, director or officer'.

No. 126, in page 85, line 1, after 'member', insert

'or an employee or recognised trade union acting on behalf of an employee'.

No. 128, in page 85, line 5, after 'embers', insert

'debenture holders, creditors, directors or officers'.

No. 130, in page 85, line 16, after 'members', insert

'debenture holders, creditors, directors of officers'.

No. 131, in page 85, line 16, after 'members', insert 'or any employees'.

The new provision which we seek to import would be of some value, I suggest, in avoiding of reversing the restrictive interpretation which is currently placed on section 210 by the courts. In our view, the clause as drafted will of itself do nothing expressly to that effect.

The mischief which we seek to cure is that the conduct complained of has to affect members in their capacity as members, and that is why we wish to import this selection of persons—"debenture holders, creditors, directors or officers".

Although this is by no means decisive, some encouragement that the courts might take a less rigid view than was the case in the past was expressed by the House of Lords in in re Westbourne Galleries Limited, which was a case of winding up on the just and equitable ground. However, that was simply obiter dictum, and unless the Government are prepared to do something it would seem that the court would continue to hold that an order cannot be made unless the conduct or action is unfairly prejudicial to members qua members and not qua directors or creditors.

There is a good precedent for what we suggest in the Canadian Business Corporation Act 1975, section 234 (2) of which enables petitions to be brought in respect of conduct which
"unfairly disregards the interests of any security holder, creditor, director or officer".
Our proposal is very much based on that precedent.

That deals with our amendment No. 125. I hope that the Government will accept it. I do not see that it could do any harm to their intentions. Indeed, it would reinforce them.

I turn now to amendment No. 126. We take the view that it would be right for clause 71 to encompass within the term "member" an employee to give the employee or recognised trade union acting on behalf of an employee the same sort of rights as are enjoyed by members. I need not rehearse the argument at length because we have debated the point substantially in the past. We believe that the Government were wrong to reject our view on that occasion, but there it is.

I recognise that the Government are not likely to accept amendment No. 126, but we hope that they will take a constructive view of the point that we make in amendment No. 125.

The effect of the amendments would be to extend clause 71 from a clause which permits the court to provide relief when the interests of some part of the members of a company are being unfairly prejudiced to one which provides such relief when the interests of some part of the debenture holders, creditors, directors or officers or employees are being unfairly prejudiced.

The present clause follows closely from the recommendations of the Jenkins committee on company law in 1962, and is intended to remedy the deficiencies that have come to light in section 210 of the 1948 Act. The objective was to strengthen the position of minority shareholders, especially in a private company, to resist oppression by the majority. The problem faced by minorities was and is a consequence of the broad rule that it is the majority which controls the company. As a means of resolving legitimate differences between shareholders, it has obvious attractions, but it can, if unrestrained, be taken to extremes.

Section 210 was devised to deal with those extremes. It has not lived up to its expectations, and, therefore, we have clause 71. But this is an attempt to deal with the worst excesses of the rule that the majority should prevail among shareholders. The policy is to put the matter to the court, which means the companies court or any other courts with jurisdiction to wind up the company, and the court is given as wide a freedom as possible to decide on the merits of the case once it has established that there has been unfairly prejudicial conduct.

The amendments closely follow the provisions of section 234 of Canada's Business Corporation Act 1975 and will extend the jurisdiction to cases where debenture holders, creditors, directors, officers or indeed, employees, claim that the interests of some part of the group of people have been unfairly prejudiced. I have noted carefully what the hon. Gentleman has said about amendment No. 125, but the later amendment included the reference to employees.

provisions of section 234 of Canada's concede is unacceptable, is the hon. Gentleman prepared to go along in the same direction as the Canadia nstatute, which, as I understand it, has in no sense proved to be harmful? Indeed, it has been beneficial.

I appreciate that, but I am not able to go along with the hon. Gentleman to that extent. I should like to explain why not, and also what we hope to do, because I think the hon. Gentleman will find it interesting.

Any such disputes would, therefore, be for the courts to decide at large. There is no clear indication of how the provisions would work. Within the narrow confines of disputes between shareholders, the companies court is given very wide powers to settle the dispute by making such orders as it thinks fit.

It is entirely a different matter to give to the companies court such a wide discretion when employees complain of conduct that is unfairly prejudicial to any employees. That is concerned with discrimination against a minority of employees in favour of the majority, as is the case with shareholders. Perhaps the hon. Gentleman will consider what the TUC and recognised trade unions would think about the prospects of employees who support unrecognised unions—

For the sake of time, I am prepared to concede the whole argument about employees. I merely want the hon. Gentleman to deal with amend No. 125.

I shall try to relate more closely to that amendment. The hon. Gentleman will appreciate that it would not be possible to involve the court in so many of those cases.

I am aware that certain Canadian jurisdictions have adopted the broad approach embodied in the amendments. They represent a radical departure from the broad measure of agreement in this country which has prevailed on the strengthening of section 210. The Jenkins committee analysis has been accepted by successive Governments, and what is clause 71 was clause 65 in the previous Administration's Companies Bill in 1978. Indeed, the Opposition in another place added the present clause to the Bill.

There has been no public discussion of the merits of the amendments, and I doubt whether many people who consider themselves expert in this sphere are au fait with the Canadian legislation in theory and practice. As I have said, there appear to be strong arguments against the amendments. For those reasons, I must advise the House to reject amendment No. 125. I appreciate that the issues underlying the amendment merit further consideration and discussion. We should acknowledge a debt to the hon. Gentleman, especially for drawing on a wide knowledge of comparative company law, for bringing this matter before the House.

I undertake that the Government, as part of their consideration of legislative proposals for the companies Bill in the next Session, will consult on the merits of the proposals and discuss them with a wide range of interested parties. The hon. Gentleman will understand that I enter into no commitment about eventual conclusions. Clearly this is a matter where the divisions of opinion do not fall along party political lines. In the meanwhile, we shall seek to discover how the Canadian provisions are working in practice.

No doubt Labour Members will wish to contribute to the general discussion. I need hardly say that the agenda for discussion is not dictated by the Government. Labour Members are skilled and persistent in raising matters that they consider important.

In the light of the assurances that I have given, I hope that the hon. Gentleman will agree to seek to withdraw the amendment.

I am not satisfied with the rationale adduced by the Minister for rejecting the amendment. However, I am grateful to him for saying that he will consult widely. When he says that this is not a party political issue, I must stress that my party has intense feelings about it. However, we shall not press the amendment to a Division. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

I beg to move amendment No. 127, in page 85, line 3, after 'being', insert 'or have been'.

With this it will be convenient to discuss Government amendment No. 129.

The amendments ensure that a member of a company will be able to apply to the court for relief on the ground that the affairs of the company have been conducted in an unfairly prejudicial manner as well as when they are being so conducted.

Amendment agreed to.

Amendment made: No. 129, in page 85, line 15, after 'being' insert 'or have been'.—[ Mr. Eyre.]

I beg to move amendment No. 135, in page 85, line 42, at end insert—

'4(A) An order under subsection 4(a) above may be made notwithstanding that the acts, omission or course of conduct in respect of which such civil proceedings are to be brought is or involves a breach of duty by a director which was or could be ratified by a general meeting of the company.'.

With this it will be convenient to discuss the following amendments: No. 136, in page 86, line 17, at end insert—

'(7A) A petition and order may be made under this section in respect of any breach of duty by any director, manager or other officer of a company whether or not the company is in course of being wound up.'.
No. 137, in page 86, line 17, at end insert—
'(7A) An act, omission or course of conduct may be prejudicial within the meaning of subsection (1) above if, as a consequence of it, any director or other officer of the company acquires, directly or indirectly, unfair emoluments or other unfair advantages at the expense of the company.'.

The amendment featured, in a sense, in a previous debate when we were talking about breaches of fiduciary duties affecting employees. Certain breaches of fiduciary duty on the part of directors cannot, as I have said, be validated by ordinary resolution in general meeting. Such breaches fall into the category of abuse of power comparable to the misuse of a fiduciary position. There are a number of examples in the authorities, but I do not propose to take the time of the House by going through them. The overwhelming majority of breaches of fiduciary duty can be validated.

Perhaps the line is drawn between misappropriating the property of a company and merely making an incidental profit for which directors are liable to account to the company. Whatever the line, we feel that there is an anomaly in the law which needs to be cured by the provision that we propose in amendment No. 135, the effect of which would be to allow a prejudiced shareholder or creditor, or other individuals, to attack directors who are in breach of duty where directors control the voting, as they might do by proxies at general meetings. I hope that the Government will be able to meet us on that point.

9.45 pm

Amendment No. 136 would have the effect of remedying what we see as a defect in section 333 of the Companies Act 1948. That section applies where any promoter, director, manager or officer of a company, or the liquidator himself, has misapplied, or retained or become liable or accountable for, any money or property of the company or has been guilty of any misfeasance or breach of trust in relation to the company.

That has been held to cover breaches of fiduciary duties but not common law negligence. The authority for that is in re B. Johnson & Co. (Builders) Ltd., 1955, Chancery Division at page 634, which was a case in the Court of Appeal.

Furthermore, the Jenkins report recommended that for "breach of trust" in the section there should be substituted a reference to any breach of duty, thus affording a remedy for negligence as well. I draw paragraph 503(d) to the Minister's attention.

Amendment No. 137 also follows a recommendation of the Jenkins report in paragraph 205 and a recommendation of the more ancient Cohen report of 1943 at paragraphs 58 to 59. Jenkins thought that an action under section 210 might be appropriate where, for example, directors appointed themselves to paid posts with a company at excessive rates of remuneration, thereby depriving the complaining members of any dividend or adequate dividend on their shares, or where, for example, directors in exercise of their powers refused to register personal representatives in connection with shares that devolved on them in that capacity, and were enabled thereby to force the personal representatives to sell shares to the directors at an inadequate price.

Those are some of the examples cited by Jenkins. Others are also cited.

The matter was considered in re Jermyn Street Turkish Baths Ltd. I cite that case because inevitably Conservative Members in their sweatier moments will be familiar with it.

I am told by my right hon. Friend the Member for Lanarkshire, North (Mr. Smith) that he is an esteemed member.

The two recommendations in the Jenkins report are worthy of reasonable consideration by the Government. They have been made over a long period, and I hope that the Minister can offer us some hope.

On all three amendments I appreciate that the hon. Member for Hackney, Central (Mr. Davis) is seeking to make clear beyond doubt that clause 71 will deal satisfactorily with specific problems. We entirely agree that those specific cases need to come within the clause, but we differ on mechanics.

We believe that it is dangerous to add specific provisions to the clause. It will implicitly cast doubt on its generality. The proposal could be counter-productive. Cases falling just outside the amendments may be held to fall outside the clause.

I can develop a great number of detailed reasons why we resist the amendments, and I should be grateful if the hon. Gentleman does not press them.

Clause 71 in its present form has been long awaited. Will the hon. Gentleman agree to wait and see how the measures work in practice? We shall bear his thoughts in mind.

All I am asking is that the hon. Gentleman does what Ministers in trouble often do. Will he say that he will consult widely?

Amendment negatived.