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Substantial Property Transactions Involving Directors, Etc

Volume 980: debated on Monday 3 March 1980

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I beg to move amendment No. 404, in page 58, leave out lines 13 to 20 and insert—

  • (a) whereby a director of the company or its holding company or a person connected with such a director is to acquire one or more non-cash assets of the requisite value from the company; or
  • (b) whereby the company acquires one or more non-cash assets of the requisite value from such a director or a person so connected;
  • With this it will be convenient to discuss also Government amendments Nos. 401, 276, 277, 278 and 285.

    This group of amendments deals with the definition of a non-cash asset for the purpose of clause 48. The original clause was criticised on the grounds that, because certain transactions were created rather than transferred, an asset would escape the scope of the clause. On reviewing the clause, we agreed with the substance of those criticisms. Amendment No. 404 sets out a simpler redraft of clause 40(1)(a) and (b).

    Amendment agreed to.

    On a point of order, Mr. Deputy Speaker. If amendment No. 67 is not moved, may I move No. 378, which is grouped with it?

    I beg to move amendment No. 378, in page 59, line 1, after 'voidable', insert 'within a reasonable period'. This should be taken with amendment No. 69, in page 59, line 13, leave out 'within a reasonable period'.

    The effect of the subsection as it appears in the Bill is that the arrangements there referred to would remain voidable notwithstanding that they had been affirmed in general meeting if the affirmation took place after the expiration of a reasonable period. By the amendments, the right of rescission would be exercised within a reasonable period. The right drafting to overcome that difficulty should be that the words "within a reasonable period" should be deleted from line 11—that is, amendment No. 378—and inserted in line I after the word "voidable".

    The effect of amendments Nos. 67, 88 and 378 would be to limit the right of the company to set aside transactions whatever the circumstances and whether or not those who had retained the property transferred were knowingly in contravention of the relevant sections. If, for example, a director had manipulated offers so that he had obtained for a derisory price, without approval under clause 48, a lucrative income-producing property which he retained after the expiry of the period for the exercise of the company's right of avoidance—that is, six months under amendment No. 67 or "a reasonable period" under amendment No. 378—why should he not be compelled to restore it to the company in exchange for the money he paid for it? The company should surely have the option of suing for an indemnity or an account of profits, or for restitution of the property.

    As clauses 48 and 52 stand, restitution is possible only if bona fide rights of innocent third parties have not intervened. If, for example, the property acquired by the director is consequently sold to a purchaser who is unaware of the nature of the dealings between the director and the company, the company will be unable to recover the property and would be left with an action against the director.

    These amendments are therefore not needed in order to protect innocent third parties: we have already further ensured such protection by the insertion of the word "actual" before "notice" in clause 48(3)(b) and in clause 52(1)(b). In practice, therefore, these amendments would severely restrict the remedies available to the company without increasing the protection of the innocent third party. I therefore urge the House to reject the amendments.

    With respect, I am not in the least concerned with amendment No. 67, which would only mess the whole thing up if it were accepted. I am concerned with amendments Nos. 378 and 69. If they are not accepted, nobody knows when this arrangement becomes affirmed and valid and, for ever, anybody dealing with that arrangement in the background will never know when his own arrangements are confirmed. The arrangement will remain for ever rescindable. That is not something that should be allowed.

    These are simple amendments and I urge my hon. Friend to look at them again. My amendment No. 378, combined with that which was already on the Amendment Paper—No. 69—would simplify the clause, would, with great respect to my hon. Friend, give protection to third parties, and would make some sense of the clause. Otherwise, it will be extremely difficult for anyone to deal with these matters after such an arrangement, even though it has been approved and confirmed by the company in general meeting. If the company has not confirmed it in a specific time, the arrangement remains voidable for ever.

    I press my hon. Friend to look again at this to see whether he can accept the amendments here and now to correct an error in the clause.

    I believe that I have answered my right hon. Friend in the main, but of course I will look at the matter again to make sure that we have got it right.

    Amendment negatived.

    Amendment made: No. 273, in page 59, line 10, at beginning insert 'actual'.

    Amendment proposed: No. 286, in page 59, line 21, after 'subsection', insert 'but subject to subsection (4A) below'.—[ Mr. Eyre.]

    Government amendment No. 287.

    Amendment No. 379, in page 59, line 39, at end add

    and he may apply to the court for such relief (which the court shall have power to grant to him) as the court might grant him in proceedings under the foregoing provisions of this section'.

    Government amendments Nos. 288 and 289.

    8 pm

    Amendment No. 379, which stands in my name, gives certain rights under clause 48. The amendment is reasonable and everybody seems to want to save time by not explaining amendments. I shall not detain the House by explaining the amendment, but I ask my hon. Friend to explain why he believes that it is unreasonable.

    The intention behind amendment No. 379 is similar to the intention behind the Government amendments. However, the effect of amendment No. 379 is unclear. It seeks to extend protection for the directors authorising prohibited transactions and for connected persons by empowering them to apply to the court for relief. We have produced the same result by ensuring that such people will not be liable unless there is knowledge of the relevant circumstances which constitute the contravention. The amendment does not appear to extend protection to a director who is involved in the transaction either directly or through a connected person. It would be unjust to impose a liability on such a director if he has taken all practical steps to prevent such prohibited transactions from taking place. Our amendments are in accord with the intentions behind amendment No. 379, but our amendments are more effective and complete. I hope that my right hon. Friend will not press his amendment.

    Amendment agreed to.

    Amendments made:

    No. 290, in page 59, line 21, leave out 'or transaction'.

    No. 276, in page 59, line 22, leave out 'or a person nominated by it'.

    No. 291, in page 59, line 26, leave out 'or transaction' and insert:

    'or any transaction entered into in pursuance of such an arrangement'.

    No. 277, in page 59, line 29, leave out

    'or the person so nominated'.

    No. 245, in page 59, line 32, after 'any', insert 'other'.

    No. 278, in page 59, line 33, leave out:

    'and any person so nominated'.

    No. 287, in page 59, leave out line 36 and insert—

    . (4A) Where an arrangement is entered into by a company and a person connected with a director of the company or its holding company in contravention of this section, that director shall not be liable under subsection (4) above if he shows that he took all reasonable steps to secure the company's compliance with this section, and, in any case, a person so connected and any such other director as is mentioned in that subsection shall not'.—[Mr. Eyre.]