§ 164A The Lord Williams of Elvel to move, That this House do disagree with the Commons in their Amendment No. 164.1002
§ Lord Williams of Elvel
My Lords, I beg to move the Motion standing in my name. I have tabled this Motion not necessarily because I wish to divide your Lordships' House on the issue but because it merits a certain amount of discussion. The new clause which is the object of Amendment No. 164 gives the Secretary of State power to make by regulation through statutory instrument,such amendments of the provisions of the Companies Act 1985 relating to orders imposing restrictions on shares as appear to him necessary or expedient",for certain purposes. In other words, the law can be rewritten as regards the restriction on shares.
As the noble Lord, Lord Lloyd or Kilgerran, has pointed out on a number of occasions, it is not only very important that your Lordships should comprehend what the Government have in mind in making this legislation but that the professional operators in the market and others should also comprehend what they intend. I have no idea what is the intention of the Government and what the Secretary of State in the future might, by regulation, impose as restrictions on shares protecting the rights of third parties and others. I wonder whether when the Minister is replying he can give some idea what this matter is about. It appears to be a very sweeping power for the Secretary of State and I wish to know in what manner it is to be applied.
Moved, That the House do disagree with the Commons in the said amendment. —(Lord Williams of Elvel.)
§ Lord Lloyd of Kilgerran
My Lords, as the noble Lord, Lord Williams of Elvel, has pointed out, we on these Benches always become suspicious and proceed with some caution when we see that there are powers for the Secretary of State to make regulations without indicating the objective of those regulations. However, I am a little consoled concerning this amendment and the powers of the Secretary of State because of subsection (4) of the Commons amendment, which states:Regulations under this section shall not be made unless a draft of the regulations has been laid before Parliament and approved by Resolution of each House of Parliament".It is perhaps an esoteric question whether the matter can be debated and rejected. That question cannot be answered. I simply wish to add my doubts as regards the amendment and to support the noble Lord, Lord Williams, in what he said.
§ Lord Trefgarne
My Lords, I shall first answer the question raised by the noble Lord, Lord Lloyd of Kilgerran. Yes, of course regulations laid in draft which are subject to the affirmative resolution procedure can be rejected by either House where the relevant Act so provides.
I recognise that the granting of new powers to the Secretary of State in this area of the law is a sensitive matter. But I hope that noble Lords will agree that the powers in Amendment No. 164 concern an objective that we all share. The amendment deals with the important subject of the disclosure of interests in shares. I think there is agreement that there should be proper disclosure of interests in shares and that, indeed, the existing provisions of the Companies Act 1003 1985 should be strengthened. There may be some differences of opinion as to how far we should go, but the general principle is not at issue.
The objective of Amendment No. 164 is to support that principle. Following the recent judgment of Mr. Justice Gibson in the case of Re Lonrho plc, there is a real danger that the courts might become reluctant to make orders under Section 216 of the 1985 Act restricting the rights attached to shares in circumstances where innocent third parties have interests in the shares concerned. Freezing orders are an essential sanction to ensure compliance with investigations by companies under Section 212 of the 1985 Act into interests in their shares. Any diminution in the use of freezing orders would undermine the ability of companies to use Section 212 to discover the beneficial owners of shares held by nominees. I do not imagine that that is an outcome that noble Lords would wish to see.
In the case of Re Lonrho, the company was applying for an order to be made under Section 216 of the Companies Act restricting the rights attached to shares in the company. The reason for the application for a freezing order was that there had been a failure to comply with notices issued by Lonrho under Section 212 of the Act inquiring into the ownership of its shares.
The application was subsequently withdrawn. But before this was done, Mr. Justice Gibson was asked to rule on the question of whether the court making an order under Section 216 had the discretion to qualify the order so that only some of the restrictions in Part XV of the Act would apply or so that specified persons would be excluded from the effect of the restrictions. Two banks had taken some of the shares as security for loans. All parties, including Lonrho, agreed that the banks should be excluded from the effect of any order. They were innocent third parties who had not been responsible for any failure to comply with Section 212 notices. If the restrictions of Part XV had been applied without qualification, the banks would have been unable to sell their shares to realise their security in the event of any default on the loans. The court ruled that it was unable, under the terms of the 1985 Act, to qualify any order that it made. It had the choice between making an order that applied all the restrictions to all persons including innocent parties, or making no order at all, thus letting off any person who failed to comply with a Section 212 notice.
The effect of this judgment could be extremely damaging in cases where innocent third parties have interests in shares that are subject to an application for a freezing order. If the courts continue to make orders in these circumstances, innocent parties will suffer. Of even greater concern, perhaps, is that the courts may well decide in the future not to make freezing orders that affect innocent parties. These orders are a vital sanction to support the Section 212 procedure, which is itself an essential tool for the disclosure of interests in shares. If freezing orders were not to be made in certain circumstances, the Section 212 procedure might be seriously undermined, to the detriment of companies and transparency in the market.
§ Lord Lloyd of Kilgerran
My Lords, I am grateful to the Minister for giving way. Can he give me references for the Lonrho case? That might save us a great deal of research. Does he have at hand the references to the case and the judgment of Mr. Justice Gibson?
§ 6.15 p.m.
§ Lord Trefgarne
My Lords, I do not have the detailed references which the noble Lord seeks, but I shall certainly ensure that he receives them. The precise amendments to be made will, however, need careful consideration to ensure that no loopholes for the guilty are created when exempting third parties. For this reason, Amendment No. 164 is an enabling power. It would allow the Secretary of State to carry out the necessary consideration and to consult those affected.
The amendment would allow the Secretary of State directly to address the effect of the Lonrho judgment. At present, the court is faced with the choice of either making an order that applies all restrictions to all persons with interests in the shares, including innocent parties, or making no order at all, thereby letting off the possibly far from innocent beneficial owner. Subsection (1)(a) would allow the Secretary of State to amend the 1985 Act so that freezing orders may be made in a form protecting third parties. For example, those acting in good faith could be excluded from the effect of a freezing order. Subsection (1)(b) would allow the Secretary of State to relax the conditions that must currently be met —even by third parties —if restrictions that have already been made are to be lifted. Subsection (1)(c) addresses another important point by allowing the Secretary of State to give statutory authority to interim orders made by the courts. It is essential that freezing orders can be made quickly —sometimes on an ex parte basis —before the full hearing of an application so that the beneficial owner does not have time to transfer the shares.
It is important to note that that is all the amendment allows the Secretary of State to do. It does not give him wide powers to amend the relevant provisions of the 1985 Act. He may change them only to carry out the three specific purposes that would, if the amendment is agreed to, have been set out by Parliament. Moreover, the power is a power to amend only. Unlike the powers already in the related Clause 108, it does not extend to a power to replace or repeal.
The Government would certainly have preferred, if it had been possible, to bring forward substantive amendments to implement the objectives of the amendment in the primary legislation. But the judgment in the Lonrho case is a recent one —28th June —and there has simply not been time to consider all the implications. I do not think, however, that it is unreasonable to leave the detailed implementation to regulations made by the Secretary of State. The important point is that it would be Parliament through the primary legislation that would be approving the policy objective. We should not miss this opportunity to take action now. Otherwise we run the risk of an important part of 1005 the system of disclosure being undermined with no opportunity for some years to put it right.
There is wide support outside Parliament for the amendment. The British Bankers' Association, the CBI and the Law Society support it. Perhaps more important, there are indications that the judiciary is concerned about the present state of the law and the possible effect that it might have on the courts' willingness to make freezing orders. Indeed, Mr. Justice Gibson himself said that he reached his decision on the effect of the existing law with reluctance and that he would very much have liked to have been able to rule that the courts could qualify orders to exclude innocent parties.
The amendment furthers a principle that is accepted, I believe, by most noble Lords. It gives the Secretary of State only narrowly constrained powers to carry out the express wishes of Parliament. And it addresses concerns of the judiciary and of distinguished bodies outside Parliament. I hope, therefore, that noble Lords will be able to agree with the Commons in their amendment.
§ Lord Williams of Elvel
My Lords, I am most grateful for the noble Lord's explanation of Amendment No. 164. On these Benches we agree with the objective. I now understand why, although the Government might have wished to do so, they were unable to bring forward substantive legislation in primary form, which we could have discussed as such. That is what I would have preferred. Having said that, I understand that the appopriate judgment was made in late June and that its implications have to be considered by the Government. In this case, given the noble Lord's assurances to the House today about what exactly is intended, I am happy with Amendment No. 164. I therefore beg leave to withdraw my Motion.
Motion, by leave, withdrawn.
§ Lord Trefgarne
My Lords, I beg to move that the House do agree with the Commons in their Amendment No. 164.
Moved, That the House do agree with the Commons in the said amendment. —(Lord Trefgarne.)
On Question, Motion agreed to.