I move amendment No. 67 :
Before section 186 to insert a new section as follows :
(1) It shall not be lawful for a company to make a loan to any person who is its director or a director of its holding company, or to enter into any guarantee or provide any security in connection with a loan made to such person as aforesaid by any other person, so, however, that nothing in this section shall apply—
(a) to anything done by a company which is for the time being a private company; or
(b) subject to subsection (2), to anything done to provide any such person as aforesaid with funds to meet expenditure incurred or to be incurred by him for the purposes of the company or for the purpose of enabling him properly to perform his duties as an officer of the company; or
(c) in the case of a company whose ordinary business includes the lending of money or the giving of guarantees in connection with loans made by other persons, to anything done by the company in the ordinary course of that business.
(2) Paragraph (b) of subsection (1) shall not authorise the making of any loan, or the entering into any guarantee, or the provision of any security, except either—
(a) with the prior approval of the company given at a general meeting at which the purposes of the expenditure and the amount of the loan or the extent of the guarantee or security, as the case may be, are disclosed; or
(b) on condition that, if the approval of the company is not given as aforesaid at or before the next following annual general meeting, the loan shall be repaid or the liability under the guarantee or security shall be discharged, as the case may be, within six months from the conclusion of that meeting.
(3) Where the approval of the company is not given as required by any such condition, the directors authorising the making of the loan, or the entering into the guarantee, or the provision of the security, shall be jointly and severally liable to indemify the company against any loss arising therefrom."
The purpose of this amendment is to prohibit the granting of loans to directors by public companies. The wording which I have used is that of the Northern Ireland Act of 1960. It is also the wording of the British Act of 1948. I want to emphasise that the amendment relates only to public companies. I think it is very desirable to prevent public companies from lending money to their directors for any purpose and, particularly, for the purchase of shares in that company.
The Cohen Committee in Britain recommended a prohibition of these loans. Our Committee, in this country, considered the matter and thought it was not necessary to go as far as British law by prohibiting such loans. At the time the Committee was sitting the Northern Ireland Act had not, in fact, been passed.
In this amendment there is a certain relevancy to Section 192 which requires particulars of loans to directors to be given in the accounts. In other words, we here are providing for disclosure of these loans rather than prohibiting them, working, I presume, on the principle that if the shareholders are informed of what is going on they can take action if they consider it necessary to invalidate these loans. It is very undesirable that a director of a public company, a money raising company, should borrow money from it. It would, to my mind, amount to a breach of faith with the shareholders who have appointed him. If a director is a good mark for a loan he should be able to raise his financial requirements from the proper financial institutions : banks, building societies, bills of exchange and so on. If he is not a sound commercial risk why should he be lent money by the public company of which he is a director? The case is as simple as that.
I think the Committee, in this country, was unduly conservative in its recommendations. There is a very good case for keeping the British and Northern Ireland precedent in regard to this matter, as we have done in Section 185, to which we have just referred. In particular, I want to urge this viewpoint on the Minister. The disclosure will not serve the moral purpose of preventing these loans, because disclosure in the balance sheet can be circumvented by a device popularly known as window-dressing, whereby a balance sheet can be dressed up to conceal the real position. Where window-dressing is resorted to the auditor frequently can do nothing at all about it.
What I have in mind is this. Say, our Chairman is director of XYZ, a public company. His company lends him £25,000, which he uses to buy shares in the company. The chances are that if he is a man of any substance whatsoever, on the balance sheet date he will be able to effect some sort of short-term borrowing for 24 hours or for 48 hours and have it renewed again 24 hours later. Because a transaction of that nature has all the appearances of a bona fide transaction, the auditors can do nothing whatsoever about it.
The question of window-dressing has posed quite a serious, insoluble problem for the auditing profession in Britain and in other countries. I have nothing further to say. There is a cast-iron case in favour of my amendment which has the British and Northern Ireland precedent.
