of each asset and liability of the subsidiary companies attributable to the capital held by the holding company are set out. This procedure is not to be recommended, and gives rise to some peculiar results as will be seen later.

Preliminary Draft Balance Sheets in Appendix I

It is now proposed to consider the advantages and disadvantages of presenting the published accounts in the different ways mentioned above, the results thereby obtained and some of the more important points which arise in connection therewith.

In order to enable this to be followed the more readily an example is given in Appendix I of balance sheets of a holding company and four companies, referred to as A., B., C. and D.

It will be noted that these accounts are all described as preliminary draft balance sheets, for the reason that they are not drawn up in the form in which they would necessarily be published, but have been drafted so as to give sufficient details to illustrate some of the points to which reference will hereafter be made.

For the present purpose it is assumed that the four subsidiary undertakings are all managed and controlled by the board of the holding company or by their nominees on the boards of the four undertakings.

The balance sheet of the holding company shows that it owns one-half of the total preference share issue and nine-tenths of the ordinary shares of Subsidiary Company A., as well as 17,400 out of 17,500 shares of Subsidiary Company B., and just over one-half of the shares of Subsidiary Company D. Some of these have been acquired at a premium and some at a discount.

Subsidiary Company B. owns the whole of the 2,600 ordinary shares of Company C. and as there are no special voting rights attaching to the preference shares of that company (held by outside shareholders) Subsidiary B. controls Company C. By virtue of its control of Subsidiary B., the holding company

has in fact the ultimate control of Company C. but this does not make the latter a subsidiary of the holding company within the meaning of Section 127 of the Companies Act, 1929.

Sub-subsidiary Company

The first condition laid down in the definition of a subsidiary company in that section is that shares must be held by the parent concern. This condition is not complied with by the holding company in the example in the Appendix, and, therefore, as a company controlled through a subsidiary company Company C. falls into a special category for which no special legislative provision is made in the Act. For the purposes of this book the term "Sub-subsidiary Company” has been adopted for this type of company.

Shares in Holding Company held by Subsidiary

It will also be seen that Subsidiary Company B. owns a large block of shares in the holding company. Had this block been sufficiently large (whether with or without voting rights) or had there been voting rights attaching to the shares held by Subsidiary Company B. sufficient to give control of the holding company, the anomalous position would have arisen that the holding company would have become a subsidiary of its own subsidiary company within the meaning of the Companies Act, 1929. Strange as it may seem cases of this character have actually been encountered in practice.

Subsidiary A in Appendix I

Dealing further with the preliminary draft balance sheet of the holding company, considerable advances (some of which are secured in the form of debenture stock) have been made to Subsidiary A. and commitments have been entered into on behalf of that concern.

Attention is also drawn to the Reserve, which includes a sum of £120,000 for premium on the issue of ordinary shares of the

holding company given in payment for the ordinary shares acquired in Subsidiary A., while the profit and loss account shows that its net profit includes a considerable dividend from Subsidiary B., but no dividend whatever from Subsidiaries A. or D. The holding company has, however, made a profit on the sale of goods purchased from Subsidiary A., and taken credit for interest charged against that company on advances, while its own trading shows a loss of £280,000. Taken as a whole, there is a substantial profit shown, and the preliminary draft balance sheet appears to reveal a flourishing state of affairs.

A glance at the balance sheet of Subsidiary A. shows that this company has made heavy losses and has had to borrow substantial sums from the holding company and Subsidiary B., besides having other large outstanding creditors. The greater portion of its stocks on hand has been acquired from Subsidiary B. at a substantial profit to the latter. Generally the balance

sheet of Subsidiary A. shows a bad position.

Subsidiary B in Appendix I

With regard to Subsidiary B., it is obvious on looking at the figures that this is the company which is responsible for the large profits, the greater part of which has been paid away in dividends to the holding company. It will be noticed that

since the date of the purchase of this company's shares by the holding company, a considerable dividend has been paid out of the surplus existing at that time. The shares held by this company in Company C. and in the holding company have been acquired at a premium, but the debenture stock of the holding company has been acquired at a discount. Subsidiary B. also has made advances to Subsidiary A.

Sub-subsidiary C in Appendix I

The special points in connection with Company C. are that the preference shareholders are not entitled to vote except in special circumstances but are entitled to participate with the

ordinary shareholders in the surplus on a winding-up. The capital and dividends of the preference shareholders have been guaranteed by the holding company presumably with the object of enabling the latter, through its control of Subsidiary B., to deal more freely with the assets and business of Company C.

As already mentioned the latter company, though legally a subsidiary of Company B. and not of the holding company, is from a practical standpoint none the less controlled by the holding company.

Subsidiary D in Appendix I

In the case of Subsidiary D., the draft balance sheet included is dated 30th November 1928: the reason for this is that no accounts of that company for 1929 had been received. There was owing to Subsidiary D. by the holding company at 30th November 1928 the sum of £10,000 which is also the balance shown by the preliminary draft balance sheet of the holding company as at 31st December 1929. Apart from this Subsidiary D. does not call for special comment at this stage.

It is of interest to note that had Subsidiary D. or either of the other subsidiary companies been incorporated abroad or by Royal Charter or special statute the company concerned would not have been excluded from classification as a subsidiary company under Section 127 of the Companies Act, 1929.

An amended draft balance sheet of the holding company which more correctly sets out the real position is given and will be referred to later.

A preliminary summary statement of the surplus assets of the four companies A., B., C. and D. is also given, as well as a detailed consolidated balance sheet of the holding company and the subsidiary undertakings showing the workings in full, so that anyone who desires to see how the figures have been put together may be able to do so readily.

CHAPTER VII

METHOD (I)—THE LEGAL BALANCE SHEET

To publish only the Holding Company's own legal Balance Sheet showing its interests in subsidiary companies as an investment together with a Profit and Loss Account. The Balance Sheet would have annexed a statement showing how and to what extent the aggregate profits and losses of subsidiaries have been dealt with in the accounts.

Prior to the passing of the Companies Act, 1928 (now incorporated in the Companies Act, 1929), there were no legal enactments under the Companies Acts as to the form in which the annual or other balance sheets of companies should be presented. Thus, except in so far as the matter was dealt with in the Articles of Association of a company or by special legislation (as for instance in the case of assurance companies) it was left to the directors to determine the form in which the accounts of their company should be submitted to the members.

Under the Companies Act, 1929, the presentation of an annual balance sheet and profit and loss account is compulsory for all companies governed by the Act and there are provisions in regard to the information which is to be set out in the balance sheet. These general provisions apply to all companies incorporated under the Companies Acts, but it is not proposed to go into them here.

Special Information to be given in Legal Accounts

The 1929 Act also contains special provisions under which holding companies must give additional information in regard to certain items in their published accounts.

These special provisions which are examined in some detail later may be summarised briefly as follows

(a) Shares in subsidiary companies.

(b) Amounts owing from subsidiary companies.

The aggregate amount of the shares in and amounts owing from subsidiary companies (distinguishing between shares and indebtedness)