Company Law Reform Bill [HL]

moved Amendment No. 427:"Page 276, line 26, leave out ““principal purpose”” and insert ““predominant reason””" 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,"““it is important to distinguish between a purpose and the reason why a purpose is formed””." 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 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.