§ 3.4 p.m.
§ Lord Mackay of Clashfern
My Lords, I beg to move that this Bill be now read a second time. This Bill has 983 been brought forward to deal with an acute legal difficulty that has come to light in the application of company law to certain shares held on trust. The problem is this: Section 27 of the 1948 Companies Act introduced the rule—an important company law rule—that a subsidiary may not be a member of its holding company. Allotments or transfers of shares in breach of the rule are void, a very severe penalty. The section already provides an exception to the general rule where shares are held by a subsidiary as trustee—provided that neither the company nor any subsidiary is beneficially interested under the trust.
Turning to practice, it is well known that in many groups a subsidiary acts as trustee of the group pension scheme. It is also very common for such schemes to hold at least some shares in the parent company. Whatever the wider arguments about so-called self-investment, with which this Bill is not concerned, it has clearly never been thought that there was any possibility that an acquisition of the parent company's shares by a subsidiary trustee in these circumstances might be void. No trustee of a pension scheme would risk that outcome, yet that is indeed the position without this Bill, given that the parent company or any other subsidiary has the interests or rights, which it typically will have, described in Clauses 2 to 4. The most typical of these is the right to receive any balance of the trust property when liabilities under the scheme have been satisfied or provided for. A similar problem arises under Section 37 of the 1980 Act and under the other provisions listed in Clause 1 of the Bill.
A failure to legislate would, now that this problem has come to light, cause severe and widespread practical and legal problems which it has never been the intention of the existing legislation to create. We are not talking here of unsuccessful attempts to avoid company law but we are dealing with the unsuspected application of company law in a practical situation which has existed for a considerable time without, so far as we know, any detriment to anybody.
The interests and rights to be disregarded, as described in Clauses 2 to 4, are either remote or minor, and most of them depend on the occurrence of events which will rarely occur. It is perhaps significant that, although for the most part they derive from standand terms of trusts and schemes, they have not previously been recognised as creating a beneficial interest in the trust assets. None of them can be considered to provide a company with the means to control itself through the acquisition of its shares by a subsidiary or some other person on its behalf, and that is essentially what the company law provisions seek to prevent. The Bill does, however, make appropriate provisions in Clause 2, together with the Schedule, for the situation where one of the interests to be disregarded—the residual interest—vests in possession and accordingly ceases to be remote.
To sum up, the Bill is very technical, but the difficulty which it seeks to resolve is very real and practical. Without this legislation, the title to very many shares held in trust now or in the past, particularly by pension and employees' share schemes, would be in doubt. Very many schemes, trustees and shareholders would be put in an extremely difficult situation. Once this situation is advertised by publica- 984 tion of a Bill, as it now has been, it cannot be allowed to remain unremedied for long. It also seems right in these exceptional circumstances that the difficulties should be removed retrospectively. I beg to move that the Bill be now read a second time.
§ Moved, That the Bill be now read a second time.—(Lord Mackay of Clashfern.)
§ 3.8 p.m.
Lord Bruce of Donington
My Lords, we on this side of the House would support the general purport of this Bill, which has been adequately explained by the noble and learned Lord. This House, in common with another place, rather frowns upon retrospective legislation, and very rightly so; but in the circumstances described by the noble and learned Lord it is quite proper that this House should give a Second Reading to this Bill and, indeed, should expedite its progress to the statute book.
There are a number of questions arising. One can quite understand, following the passing of the 1948 Act, that a particular clause of the 1948 Act, now interpreted, probably escaped notice for some time, because the development of these particular types of trusts proceeded only very slowly during those years but has accelerated more in recent years. Now there are a very large number indeed of trusts that are affected by the provisions of this Bill.
I should like to know, and I am sure the House would similarly like to know, just how this discovery took place. After all, the 1980 Act had a fairly detailed examination in this House, and we on this side then complained that the Government seemed most reluctant to accept any amendments to that Bill. Indeed, they wanted to rush it through. I should like to know why it was that the particular sections of the 1980 Act, which were subjected to very thorough examination by parliamentary counsel, to whom the noble and learned Lord has very often referred, escaped their attention then. That is the second point that I want to make.
Thirdly, does this Bill mean that the process of consolidation of the Companies Acts, the necessity for which has been repeatedly referred to on all sides of the House, is indefinitely postponed, or does it mean that counsel, having got to Clause 34, will presently arrive at Part V of the Act, Sections 68 and 69, which are notoriously ambiguous, and will then bring forward another Bill in connection with the interpretation of those sections, which attracted very considerable comment in this House, as the noble Lord knows? Are we to have a piecemeal development? Are we to have a whole series of little Bills as the provisions of the 1980 Act are subjected to the same critical examination? We should like to be reassured on this, because it is in the interests of industry and commerce generally, as well as of the professions, that consolidation takes place with the minimum of delay.
Finally, although I am quite sure that the noble and learned Lord will be able to give me an answer in the affirmative, is he quite sure that there are no taxation implications in any part of the Bill? The Inland Revenue have a tendency to examine these matters in very great detail, and I hope that the noble and learned Lord is able to give us a reassurance on that matter. Those are the only questions that I have to ask, and I 985 reiterate that we on this side of the House should like to ensure the speediest possible passage of the Bill on to the statute book.
§ 3.13 p.m.
§ Lord Lloyd of Kilgerran
My Lords, I must first apologise to the House because my name does not appear on the list of speakers, which is entirely my fault due to a hitch in the usual channels. Nevertheless, I shall be very brief. I also welcome this Bill, and I should like to congratulate the Government on bringing it forward so quickly, having discovered the lacuna that exists dating right back to the Companies Act 1948. The noble and learned Lord the Lord Advocate has explained the necessity for this Bill. As the noble Lord, Lord Bruce of Donington, said, if a Bill with retrospective provisions were brought to this House we—certainly we on these Benches—would oppose it strongly. Nevertheless, as this is such an exceptional case I feel sure that the passage of this Bill will not he taken as a precedent for introducing Bills with retrospective effect.
As I said, this lacuna has existed since the Companies Act 1948, and since then we have had at least four or five Companies Acts. Even in the discussions in your Lordships' House on Sections 36 and 37 of the Companies Act 1980 this lacuna was not discovered. It means that this new Bill is adding another burden, particularly to small companies and small trust funds, as well as to certain firms that have introduced schemes for partnership and shareholding for their employees. I should like to have from the noble and learned Lord an assurance that the promises already made for the consolidation of company law in this country will be brought forward with greater urgency now that this Bill is to be added to the list of Companies Acts.
§ 3.15 p.m.
§ Lord Mackay of Clashfern
My Lords, I am grateful for the general thrust of the remarks of both the noble Lord, Lord Bruce of Donington, and the noble Lord, Lord Lloyd of Kilgerran. May I say that I am also grateful to the noble Lord, Lord Lloyd, for intimating to me that he intended to speak, notwithstanding that his name was not on the list. Of course, I welcomed the knowledge that he was going to speak, knowing that he would add to the distinction of this very short debate.
As regards the questions put by the noble Lord, Lord Bruce, I think the answer to the first one will do a good deal to dispose of some of the later ones. I think the situation was that somebody looking at a pension scheme questioned whether it was in accordance with the provisions of the Act of 1948, and, as is usual in these matters when a difficult question arises, it ultimately landed up with learned counsel. Then, learned counsel, having compared the proposed scheme with the Act of 1948, concluded that the scheme fell foul of the provisions of the 1948 Act to which I have referred. Of course, those familiar with these matters then realised that this was not an isolated example but was, in fact, a very general situation, and, accordingly, that it was one which should be remedied.
That shows that the problem was highlighted by the discovery of the application of a long-established provision to trust deeds, which have also been in existence for some time—though, as the noble Lord, 986 Lord Bruce, has said, the number of these has increased quite considerably and properly in recent years. So it is not so much a defect in the legislation as that in applying the legislation to practical matters those with experience did not think that they fell foul of the legislation but on very close examination, and on a narrow reading of the legislation, it appeared that they did. Accordingly, it is right that what was the understood and perceived practice should now be made the effect of the legislation.
That also answers the question of the noble Lord, Lord Lloyd of Kilgerran, about an additional burden for small companies. On the contrary, this difficulty in their trust schemes having been discovered, there would have been a tremendous burden on them unless the legislature had stepped in to prevent that burden arising, and that is precisely what we seek to do now. So, again, I suggest that the fact that the 1980 Act or the 1981 Act did not specially provide for this problem arose from the fact that those dealing with these matters in practice did not see that the 1948 Act held this problem for them. Now that that has been appreciated, legislation immediately appears to be called for; and I think I have also answered the point that it is a fairly general problem that has arisen.
So far as consolidation is concerned, we are determined to press on with that as rapidly as possible. This Bill will not in any sense impede that process, which is very well advanced. I am hopeful that in the course of the present Session some, at least, of the results of these labours on consolidation will become apparent and will give your Lordships satisfaction.
So far as taxation is concerned, the situation is that this Bill, if enacted, will bring the position in law to what it has been understood to be in practice for some time. Therefore, there are no tax implications in the sense of changing what has hitherto been understood to be the tax position.
§ On Question, Bill read a second time: Committee negatived.
§ Then, Standing Order No. 43 having been dispensed with (pursuant to Resolution), Bill read a third time, and passed.