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Lord Sharman: My Lords, I am grateful to the Minister for responding to the amendments, which were tabled by the noble Lord, Lord Hodgson. In addressing this issue I shall speak also to Amendment No. 424, which is in my name. I simply want to say that the noble Lord's Amendment No. 423 substantially addresses the issue that we have raised and I am grateful for that.
Lord Hodgson of Astley Abbotts: My Lords, I too am grateful to the Minister for responding to a quite technical matter that has concerned a number of practitioners. Without wishing to look a gift horse in the mouth, the only issue I would raise is that it seems a shame that we have 12 lines of drafting where two lines, in Amendment No. 424, seem to achieve the same effect. No doubt the whizzes of the parliamentary draftsmen will make it clear that our drafting, although short, is not as perfect as they achieve in 12 lines.
On Question, amendment agreed to.
[Amendment No. 424 not moved.]
[Amendment No. 425 had been withdrawn from the Marshalled List.]
Clause 567 [Reduction of capital supported by solvency statement]:
Lord Sainsbury of Turville moved Amendment No. 426:
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The noble Lord said: My Lords, this is a minor drafting amendment to clarify that the solvency statement required in connection with a reduction of capital under Clause 567 must be in the prescribed form. I trust that noble Lords will have no objection to it. In this context, "prescribed" means prescribed by the Secretary of State by statutory instrument under Section 744 of the 1985 Act. I beg to move.
On Question, amendment agreed to.
Clause 571 [Circumstances in which financial assistance is not prohibited]:
Lord Sharman moved Amendment No. 427:
The noble Lord said: My Lords, in moving Amendment No. 427, I shall speak also to Amendment No. 428, which is grouped with it. We return to the issue of a definition, and we are advised in this matter by the Law Society.
Amendments Nos. 427 and 428 would replace the words "principal purpose" with the words "predominant reason", and their purpose is to overcome a problem in the interpretation of the expression "principal purpose". This matter was considered by the House of Lords in Brady v Brady 1988, in which the expression "principal purpose" was construed so narrowly that lawyers are reluctant ever to rely on this exemption. The Law Society continues to press for the amendments put forward in Grand Committee to substitute "predominant reason" for "principal purpose" in lines 26 and 34 of Clause 571. In the judgment in Brady v Brady, Lord Oliver said that,
He then went on at length to explain the distinction. I shall not trouble your Lordships with it as I am sure that the noble Lords, Lord McKenzie and Lord Sainsbury, are familiar with the judgment.
A consequence of this narrow construction is that transactions and arrangements which may well be commercially justifiable are precluded by the financial assistance provisions or, in the case of private companies, can be carried out only after going through the expense of what is commonly known as the "whitewash" procedure.
The Company Law Review accepted the desirability of reformulating the principal purpose exemption in terms of "predominant reason". We considered that such a reformulation would be in accordance with Article 23 of the second directive, which prohibits a company from entering into certain transactions with a view to the acquisition of its shares, as it seems apparent that the formulation of Article 23 means that it is necessary to look to the result that the company has in view by giving the assistance rather than the
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reason for entering into the transaction constituting the assistance. The directive prohibits only financial assistance given with a view to the acquisition, and, provided the company has some other tangible and overriding end in view in giving the assistance, the assistance should not be prohibited. I beg to move.
Lord Sainsbury of Turville: My Lords, these amendments relate to the existing "principal purpose" exception to the general prohibition on the giving of financial assistance by a public company contained in Section 153 of the 1985 Act. The exception is retained by Clause 570 of the Bill.
The exception provides that such assistance is not prohibited if the "principal purpose" of the assistance is not to give it for the acquisition of shares or where the assistance is incidental to some other larger purpose of the company. In those circumstances, the assistance is permitted and no offence is committed by the company or its officers.
The concern that has prompted these amendments, and various others tabled in Grand Committee, is that the courts, and in particular this House in its judicial capacity, have interpreted the words "principal purpose" too narrowly. We have some sympathy with that view, but first I shall explain why we think that this amendment is not the answer. On that, I can only reiterate what I said in Grand Committee: namely, that the Government are not convinced that the suggested wording means anything other than what is intended by the current wording. We have discussed this issue at some length with the Law Society—we are most grateful for its input—but have not been persuaded that any transactions which companies might wish to enter into, and which would be compatible with the second directive, fall outside the current test but within the suggested reformulated exception.
If we are to take this matter forward, a clear indication is required of the intended effect of the suggested words rather than the substitution of one pair of words by another pair, which, on the face of it, mean the same. In other words, we cannot have a rational debate about this subject unless we can agree about the difference between "principal purpose" and "predominant reason". Until we can agree that, we cannot debate whether things that we all might want to do would be allowed by the change.
As I commented in Grand Committee, this may point to a reworking of the provision so as to have the intended effect. Such a new provision could refer to concepts along the current lines or may be framed on an entirely different basis so long as it remained consistent with the implementation of Article 23 of the second company directive. In this connection I would remind noble Lords that the Government are proposing to take a power to make, by secondary legislation, provisions relating to capital maintenance and we believe that such a reworking would be more suitably addressed by use of that power than by piecemeal amendment to the existing sections.
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5pm
Lord Sharman: My Lords, I am grateful to the Minister for his full explanation of this matter. I am content with it. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 428 not moved.]
Clause 576 [Power of private companies to redeem or purchase own shares out of capital]:
Lord Sainsbury of Turville moved Amendment No. 429:
The noble Lord said: My Lords, Amendments Nos. 429 to 431 in this group are required to achieve consistency with the approach taken elsewhere in the Bill with regard to the replacement of the current requirement for a statutory declaration with a requirement for a simple statement by the directors. They replace various references, currently in Sections 172 to 179 of the 1985 Act—which relate to the purchase or redemption of shares by a private company out of capital—to "statutory declaration" or "declaration" with references to "directors' statement" or "statement".
Amendment No. 432 is consequential on Amendment No. 429. It simply restates existing subsection (3) of Clause 576 which deals with the requirements as to notice where a company makes a payment out of capital in respect of a purchase or redemption of its own shares.
Amendment No. 488 brings two offences which are still extant in the 1985 Act and which relate to a purchase or redemption of own shares out of capital into Schedule 4 to the Bill. These offences are currently set out in Schedule 24 to the 1985 Act—which is to be repealed. These are minor amendments which improve the drafting of the Bill and I trust that noble Lords will have no objections to them.
On Question, amendment agreed to.
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