Companies (Beneficial Interests) Bill

– in the House of Commons at 11:30 pm on 11 July 1983.

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Order for Second Reading read.

Photo of Mr Alexander Fletcher Mr Alexander Fletcher , Edinburgh Central 11:57, 11 July 1983

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

I welcome the hon. Member for St. Helens, South (Mr. Bermingham) to the Opposition Front Bench. I am sure that his early elevation to that position is due entirely to his ability and not to the lateness of the hour. I look forward to hearing him on this important issue.

I am conscious of the fact that the House is owed an explanation for the short notice of the Bill and for our wish that the House should carry all stages of the Bill this evening.

The object of the Bill dictates the exceptional procedure, as I shall seek to explain. In essence, the Bill deals with a problem which, once publicly exposed, must be remedied without delay, and only legislation can provide that remedy.

The purpose of this short, technical Bill is therefore to enable people to continue doing what has been done without question for many years, and to avoid penalising well-intentioned common practices which until recently were thought to be in order.

As the title suggests, the Bill is about beneficial interests under company law, and concerns, as clause I shows, only a handful of company law provisions. The need for the Bill has arisen because the legal profession—initially learned counsel—has exposed the fact that many parent companies have had unsuspected, unidentified beneficial interests in their shares when held on trust — for example, for a pension or employees' share scheme. These interests, remote and minor in character though they are, take companies outside exceptions provided in the relevant provisions of the Acts for shares held on trust.

Under those provisions only exceptionally can a company's subsidiary be a member of the company and can shares in a public company be acquired on its behalf. Company law has since 1948 frowned on companies being able to control themselves. Section 27 of the Companies Act 1948 frowns so severely on such a practice that the penalty that it imposes for a breach of its rule that a company cannot be a member of itself is that transfers and acquisitions of shares in a company to a subsidiary of the company are void if the parent company is beneficially interested in the shares, even if they are held on trust.

Bearing that in mind, I refer to the common practice whereby companies establish subsidiaries to act as trustee of their pension schemes and to the common practice of pension schemes holding shares in the parent companies. I am well aware that there is a lively current debate in the context of pensions policy about so-called self-investment and about the legal framework for pension schemes. But it has never been suggested that the combination of a subsidiary trustee of a self-investing pension scheme is contrary to company law, or that it is contrary to the policy of company law. That is because no one has imagined that the parent company has a beneficial interest in the shares held by the scheme.

What has now happened, to precipitate the need for this Bill, is the identification of unsuspected beneficial interests of the parent company or other subsidiaries. Those interests are described in clauses 2 to 4. All derive from standard terms of trust deeds, which no one would have provided or entered into if he had had the slightest suspicion that he risked investing the assets of the trust in void transactions. Those interests are remote and contingent or minor. I am unaware of any suggestion that they have given rise to malpractice. Accordingly, in the Government's view, it is right and proper not only to validate transactions in the past that would otherwise be void, but to enable past practices to continue in future.

I have concentrated on section 27 of the 1948 Act and used pension schemes as an illustration. In practice, the problem applies more widely, including to employees' share schemes and in respect of provisions introduced in the Companies Act 1980. The effect of the Bill is to require, for the application of the provisions specified in clause 1, a limited number of specified interests to be disregarded for the purposes of establishing whether a company has a beneficial interest in shares. The Bill also provides for the so-called residual interest described in clause 2 to cease to be disregarded when it ceases to be remote and contingent.

As the House will have recognised, the Bill, although short, is technical. I have sought to convey its necessity and its effect as simply as possible. The Bill reflects intense confidential discussions which my Department has had with several outside experts, to whom I am grateful.

Photo of Mr Gerry Bermingham Mr Gerry Bermingham , St Helens South 12:04, 11 July 1983

I thank the Minister for his kind comment. It shows that speed, when necessary, can be achieved by the House. In several other cases the Opposition will use equal speed if the Government give us the chance to do so.

The Opposition do not disagree with the Bill, which is not concerned to revolutionise the law, but seeks to legitimise what we all believed to be the case. Although we would normally object to retrospective legislation on principle, there are cases where it is justified, and this is one of them. No one seeks to remove anything from anyone or to remove rights which we believed they had.

The Bill could be summed up by saying that it wishes to re-enact the legal position as everyone believed it to be. It is fair to say that when such a case arises speed is necessary, but one must ask why the matter was not spotted before. Had the mistake not been rectified, some people might have been dancing in the streets at the thought of all their ill-gotten gains. However, because the House has moved at such speed, those who could have danced have been deprived of their chance before the tune even began. The House can congratulate itself on the fact that the matter has been rectified so speedily. The Opposition support the Bill.

Photo of Mr Nicholas Baker Mr Nicholas Baker , North Dorset 12:06, 11 July 1983

I congratulate the hon. Member for St. Helens, South (Mr. Bermingham), whose speed in arriving at the Dispatch Box has matched that of the Government in introducing the Bill. We have had an explanation for the speed which worried many of us, especially on the Conservative Benches.

The only point that I wish to make is about consolidation. I would have expected and hoped that the Bill would be part of a consolidation of company legislation for which we have been waiting for many months. I hope that the Minister, when he replies, will be able to say when we can expect some consolidation of the legislation on company law.

Photo of Mr Anthony Nelson Mr Anthony Nelson , Chichester 12:07, 11 July 1983

I should like to add a short welcome to the Bill which has been so ably introduced by my hon. Friend the Minister and welcomed by the Opposition spokesman.

It is proper, however, that we should pause for a second when we have a Bill that undergoes such an expedited procedure—to put it at its most generous—and consider the background, as was done in the introductory speech.

I regard measures which introduce a degree of retrospection with some circumspection, but in this circumstance it is right, because we are simply implementing what for some time people understood to be the case.

I served on the Standing Committee on what is now the Companies Act 1980 and it is clear that the drafting of legislation is not always accurate and despite prolonged scrutiny by Standing Committees and others, mistakes slip by. Although the House is prepared, rightly, this evening to pass this legislation without too much contention, I sound a note of caution. We should not treat it as a precedent. We should be cautious about having such an expedited procedure for Bills of this kind.

My hon. Friend the Minister, in moving the Bill, said that there were a number of other tangential matters that were raised, including the accountability of pension funds. This is not the occasion to make a lengthy speech about that, but I should like to put a marker down, which I believe is shared by many colleagues on both sides of the House, about the lack of accountability of pension funds and the extent to which we are storing a major future problem—the number of pension funds which will be unable to mee app t their actuarial obligations. Although we have been fortunate in not having a major default so far, that possibility would be put off permanently, or at least for a long time, were we to implement some fairly inexpensive but sensible improvements in the degree of accountability of pension funds; in particular, appointments to pension funds' ++boards and the range of information that is made available to beneficiaries.

With those cautionary words, which I hope the Minister will not take as being in any way derogatory, I believe that the Bill is necessary, but I hope that we will not make a habit of introducing important and complex legislation and passing it on the same night.

Photo of Mr Tim Smith Mr Tim Smith , Beaconsfield 12:09, 11 July 1983

I do not question the merits of or the need for the Bill, but I question strongly the way in which it has been dealt with. The Bill was published on Friday morning and is now passing through all its Commons' stages late on Monday evening. I do not understand the need for such speed. We have heard no explanation from my hon. Friend the Minister as to why it is necessary.

The Bill remedies a defect which has been in the Companies Act 1948 for 35 years. Section 27 was deemed to be satisfactory until recently. Now we find a technical defect. It was raised with the Department of Trade in November last year. There have been discussions on and off since then. At one point it was suggested that it might be remedied by the Finance Bill. If it had been, there would be no question of publishing the Bill on one day and putting it through the House in all its stages on the next.

The Government have treated the House with a certain degree of contempt. It is very unfortunate that it has not been possible to have adequate consultations with people outside the House, and that even those who are technically qualified to comment have not had time to digest the Bill's contents and be able to say whether it achieves its aims. Therefore, I still regard the way in which the Bill has been dealt with as very unsatisfactory.

The Bill also raises the question of the Department's legislative priorities. We were recently told that it was not possible for the Department of Trade and Industry to do anything about the Cork report, because the Department was reviewing its legislative priorities. I tabled a question for answer on Thursday, asking exactly what the Department's legislative priorities were. The only major Bill that it has on the stocks at present—of course it is very important—is the Telecommunications Bill. I am not aware of any other proposed legislation. The. Court report is a matter of considerable urgency. It is now a year since it was published, but we have not had any adequate response from the Government. Indeed, there seems to have been a step backwards. The previous Minister had at least set out some urgent issues that he regarded as having priority, but we now seem to have taken one step backwards instead of forwards.

I do not understand why the Government have introduced this Bill, when we could have been dealing with something much more significant. I support what my hon. Friend the Member for Dorset, North (Mr. Baker) said about consolidation. There were Companies Acts in 1948, 1967, 1980, and 1981, and this Bill will become another Companies Act. It merely heightens the urgent need for consolidation, and I very much support what my hon. Friend said.

Photo of Mr Alexander Fletcher Mr Alexander Fletcher , Edinburgh Central 12:14, 11 July 1983

I am grateful to the hon. Member for St. Helens, South (Mr. Bermingham) for his understanding of the need to expedite the Bill. I noted his comment, on coming fresh to the Opposition Dispatch Box, that there are other matters that the House might consider just as expeditiously.

My hon. Friends the Members for Dorset, North (Mr. Baker) and for Beaconsfield (Mr. Smith) mentioned consolidation, and the Bill will, of course, be included in the consolidation of the Companies Acts, which we are now working on. The progress being made is quite satisfactory, and I know that several of my hon. Friends have awaited that consolidation for a long time. Draft Bills were sent to various representative bodies in May 1983 for scrutiny and comment by those who will have to use the new legislation, and the Department looks forward to receiving their comments in the coming months.

My hon. Friend the Member for Chichester (Mr. Nelson) mentioned the Bill's introduction. We are dealing with an exceptional matter. I refer to an error in a very important piece of legislation in Companies Acts, which has been in existence for about 35 years. It was only because of the seriousness of the matter that the Government felt obliged to move.

Photo of Mr Anthony Nelson Mr Anthony Nelson , Chichester

I do not wish to detain my hon. Friend, but I understand that the measure was brought forward because of a legal opinion, or an opinion given by counsel, about the defects in the existing law. Did the Government hear about that legal opinion and then get their own legal advisers to certify that it was correct? It is a little odd that primary legislation should be introduced on the basis of a legal opinion that was given to a private firm.

Photo of Mr Alexander Fletcher Mr Alexander Fletcher , Edinburgh Central

I understand that the error was discovered by a practitioner, who sought legal advice from a leading firm of solicitors, who in turn took counsel's advice. The Department then took separate advice and confirmed the finding. It was the result of some practical work, presumably on a pension fund or something similar, and it is remarkable that it was not discovered before. However, it has now been discovered. Because of the importance of the pension schemes and the many millions of people who depend on them, the Government had to act in this way.

In answer to the other matter that my hon. Friend raised about accountability or regulation of pension funds, I note that he has put down his marker. No doubt we shall hear more about this subject.

My hon. Friend the Member for Beaconsfield asked why the matter was urgent. Without the Bill there would be widespread confusion about the title of shares, and the Government were worried about that. There could be considerable difficulty in tracing the true ownership of shares and uncertainty about the recovery of money paid for shares. Trustees would have to act on the basis that schemes did not have the assets that they were thought to have, shareholders generally would have to consider whether shares that they acquired had been passed to them with valid title, and, as I have already said, pension schemes could well suffer.

My hon. Friend rightly asked why this measure was not included in the Finance Bill. I understand that it is outside the scope of the Finance Bill because it is essentially a matter of company law that we are amending, and primary legislation of this kind is the only course open to us.

Photo of Mr Tim Smith Mr Tim Smith , Beaconsfield

I accept that, but why was it necessary to publish the Bill on Friday and take all its stages on the following Monday? I do not understand that.

Photo of Mr Alexander Fletcher Mr Alexander Fletcher , Edinburgh Central

It was because of what would happen as soon as the errors were publicly revealed with the publication of the Bill. There has been considerable consultation on the matter. There has been a healthy secretiveness about it, because of the dangers that could have ensued if the error in the legislation had become public knowledge. The Government therefore decided to publish the Bill and ask the House to go through all the stages of the Bill as quickly and expeditiously as possible.

I started with an apology to the House for the fact that the business had to be conducted in this manner. I repeat it now to my hon. Friend and to all hon. Members who are present. It is not a satisfactory way in which to do business, but the Government felt—to use a time-worn expression, but with the utmost sympathy—that it was in the public interest that the matter should be handled in this way.

The Government take the Cork report seriously, and following an election and the fact that we have new Ministers in the Department, a new Secretary of State and myself, we are looking at the total priorities of the Department, including how to deal with the Cork report. We could not wait for the decisions that are to be made in the coming months on the Cork report before dealing with this matter.

Question put and agreed to.

Bill accordingly read a Second time.

Bill committed to a Committee of the whole House. —[Mr. Lang.]

Bill immediately considered in Committee; reported, without amendment.

Motion made, and Question, That the Bill be now read the Third Time,put forthwith pursuant to Standing Order No. 58 (Third Reading), and agreed to.

Bill accordingly read the Third time, and passed.