176
T
2
been laid down, the Secretary of State preferring to keep a free hand in the matter. We are informed, however, that both in Turkey and China developments are taking place which render it desirable that certain general principles should be laid down for the guidance of His Majesty's diplomatic and consular officers abroad, and upon which they can act so as to obviate reference to the Secretary of State except in exceptional circumstances.
It should be clearly borne in mind that incorporation in the British Empire does confer upon the legal entity so created British nationality, and that fact neither the company so created nor the Secretary of State has the power to contest. To all the burdens which British nationality entails such a company must therefore be exposed. For instance, in a country where the system of the Capitulation prevails, such a company cannot contest the right of the British Courts to exercise jurisdiction over it, nor can it escape from compliance with any legislative provisions which, by Order in Council or otherwise, are made binding on British subjects in that country.
In the same way there are undoubtedly certain benefits or advantages which every British subject, whether an individual or a company, is entitled to as of right by reason of his nationality, and of such rights no company incorporated in the British dominions can be deprived by the Secretary of State.
The only subject with which the Committee have to deal is diplomatic protection, and diplomatic protection and nationality do not necessarily go hand in hand.
By the term "diplomatic protection we understand the right of a particular individual to turn to the representative of his own State in that country for the latter's active support and intervention with the local authorities whenever such support is required. It frequently happens in countries where the processes of justice are imperfectly developed that, however valid a man's rights may technically be, they would be useless and unenforceable without such diplomatic support. In more fully developed countries a man can usually enforce by the Law Courts or in other ways whatever rights he has; in such countries, therefore, diplomatic support is a much less important question, though no difference should be made as to the principles upon which it should be granted.
The more closely that nationality and protection can go together the better. The reason for any distinction between them is seldom apparent to the individuals concerned, and the refusal of protection to a person or company who or which does in fact enjoy British nationality is certain to cause some discontent.
This is no doubt the reason why, in sundry papers which have been laid before us, recommendations are made that the law in this country should be altered, and some restriction put upon the right of foreigners to incorporate a company if the company is to carry on business abroad.
We do not consider that the question of altering the principles on which the It is, company law in this country is based falls within the scope of our reference. and always has been, the principle upon which the Companies Acts have proceeded that aliens were as much entitled to register a company as British subjects.
We have, however, very grave doubt whether it would be possible in practice to draw any distinction between companies which were and companies which were not intended to carry on business abroad without introducing irksome and discouraging restrictions on the present system which would cause serious inconvenience to British industry. A memorandum prepared in the Companies Department of the Board of Trade has also been laid before us and is annexed to this report, which shows that it would be practically impossible to frame any regulations on the subject which might not easily be evaded.
We have therefore considered the subject referred to us upon the assumption that the English company law would remain as it is at present; that companies may therefore continue to be registered in the future which are intended to carry on business abroad, but in which British interests do not predominate; and that the policy hitherto pursued by the Foreign Office of endeavouring to limit protection to cases where British interests do predominate will be maintained.
The principles which should be adopted seem to us to be as follows:-
A distinction should be drawn between companies of which the seat of control
is situated in the British Empire and those of which it is not.
All companies coming into the former category should, in our opinion, receive diplomatic protection. Where the seat of control is situated in this country the companies will be paying income tax on the profits of their business as a whole, and wherever that is the case we think that diplomatic protection should follow as a
(
3
"matter of course. In cases where the seat of control is situated in a British possession but outside the United Kingdom, the companies will not be liable to pay income tax to this country, but they will be liable to colonial taxation, and will share in the benefit of the services which are maintained by the Imperial Exchequer for the benefit of the whole Empire.
Furthermore, we think it may safely be assumed that the trade carried on in a foreign country by a company of which the seat of control is at some place within the Empire will usually be in the main with the Empire.
The question of where the seat of control of a company is situated is a question of fact, and may in some cases be difficult to determine, but the decisions given on this point in income tax cases will, we think, afford a useful guide.
With regard to companies registered in the United Kingdom, there may in practice be a doubt in some cases whether the seat of control is or is not situated within the Empire. In such cases we think that the question whether or not the company is paying income tax on the whole of its profits will very frequently afford a useful working test which may safely be adopted. "Wherever such payments are being made we think that diplomatic protection should be granted.
Companies of which the seat of control is not situated within the British Empire should, in our opinion, receive diplomatic protection, if (a) a majority of the directors are British subjects resident within the country, or (b) if directors of the local nationality do not exceed one quarter, and the British directors exceed in number those of any other country.
In both cases the consul should be satisfied that the British directors are not mere dummy directors put in to create the requisite majority, but are bonâ fide directors, taking an active part in the affairs of the company.
We think that the membership of the board of a company constitutes a more satisfactory test than the nationality of the shareholders, or the amount of the share capital registered in the name of shareholders of any particular nationality, because of the ease with which shares can be registered in the name of another person.
We have considered whether it would be possible to require in all cases a majority of British directors, and we do not think that it is possible. There appear to be in Turkey a considerable number of companies on the boards of which many different nationalities are represented, and though we consider that it is reasonable to require that the British element should be the most numerous, we think that no advantage would accrue to British interests from requiring in all cases an absolute majority of British directors.
The cases where most care is required are those where local subjects convert a business into an English company in order to shield themselves against the local jurisdiction. Where that is the case we think that diplomatic protection should not be granted unless there is good reason for supposing that the fresh capital brought into the business is predominantly British, and unless the British members of the board exceed in number the members who are local subjects. If the new capital in cases of this character is not British there is a presumption that the registration of the company in the British Dominions has taken place in order to escape the burdens which are imposed on local subjects.
It may not always, of course, be easy for the British representatives to get at the truth as to the origin of the new capital brought into the business, and to require the company to furnish the proofs may lead to evasion. It may, however, sometimes be a matter of common knowledge, or be easily ascertainable, whether the fresh capital being brought into the company is, or is not, predominantly British: in other cases the British representative must use his discretion as to getting at the facts, and if in doubt must refer the matter such information as he has been able to obtain to the Secretary of State for his decision.
From the point of view of the local sovereign-particularly in extra-territorial countries-it makes very little difference whether the non-local elements in the business all belong to the same country or not, or whether the greater part belongs to the country under whose protection the company will be. So long as the foreign elements clearly exceed the local elements, the local sovereign has no ground for complaint if a firm of foreigners of one nationality obtain the protection of another country by incorporating themselves therein as a company.
In such cases, therefore, Great Britain is only concerned in requiring a pre- ponderance of British interests in order to justify her action as against the other foreign country, or to justify the additional burden which the protection of the company will entail upon herself.
B 2
[706]
+