Clause 106 - Power for liquidator or administrator to assign causes of action

Small Business, Enterprise and Employment Bill – in a Public Bill Committee at 9:15 am on 4 November 2014.

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Question proposed, That the clause stand part of the Bill.

Toby Perkins rose—

Hon. Members:

Hear, hear.

Photo of Toby Perkins Toby Perkins Shadow Minister (Business, Innovation and Skills)

If you think enthusiasm was lacking in that “Hear, hear”, just wait half an hour.

As with clause 105, we welcome the intention in this clause to get more money back to unsecured creditors. However, we have significant concerns that there is an easy assumption here that transposing language used elsewhere on to the Insolvency Act 1986 will automatically deliver similar benefits. We are very sceptical of that. There are many reasons why an insolvency practitioner may decide not to pursue a claim. It may be something as simple as lack of evidence or resource. In such circumstances, we can see the Government’s argument that it would make sense to let somebody else do it instead, particularly if they consider that there is significant reason to pursue a course of action.

This clause would allow the office holder to assign not only the right of action but the proceeds of such action. By ensuring that the purchaser would stand to gain fully from potential benefits arising from the action, alongside bearing all the risk and cost of pursuing the claim, the Government are assuming that a clear incentive will be created to pursue more wrongdoers. The clause may well deliver in that regard. However, there may be other, unintended consequences.

I am nervous that competitive advantages may be given to people who abuse the process in a way that is not necessarily predictable at the outset. Insolvency practitioners already assign company causes of action, so companies feel that extending that to other areas will have a clear impact. However, there is a fundamental difference between company actions and office holder actions.

A company action is brought by the company as the claimant and includes, for example, recovery of a commercial debt or a claim on the director’s loan account. The insolvency practitioner will collect information on behalf of the company and, where appropriate, can assign the claim. By contrast, office holder actions are claims conferred by statute on the insolvency office holder and arise as a consequence of the insolvency. Examples include wrongful trading, preferences and  undervalued transactions. Actions are taken when the director has not operated in the best interests of their business or if they have been trading wrongfully or while insolvent.

An insolvency office holder has extensive powers of investigation as well as control of all the company’s records, including confidential and sensitive material. The exercise of investigatory powers is essential in deciding whether there is a case for bringing an office holder claim. When the office holder obtains information under their powers of investigation, they are imbued with a duty of confidence to use that information only in the interests of the administration or liquidation. They cannot, for instance, share such information with creditors for the creditors’ gain. Therefore an office holder’s investigatory powers and their powers to bring office holder actions are closely bound up—a fact recognised by the law in providing that only a licensed insolvency practitioner can pursue such claims.

That is where we have concerns. By assigning such powers to third parties, the ethics, duties and obligations on qualified professional insolvency practitioners are separated from the incentive and the right to pursue a complaint.

Office holders are given the necessary powers because they can be relied on to pursue an investigation in the correct manner and a regulator is in place to ensure that they do so. The third party, in this case, would nevertheless require access to the necessary information to pursue the claim, and currently the only way of obtaining such information is through the office holder.

On the assumption that there can be no suggestion of the office holder’s powers being delegated to the assignee, it is difficult to see how the proposal could be implemented. Conceivably, the insolvency practitioner could retain the primary responsibility for exercising investigatory powers and dealing with confidential material; but that could mean that the claim could be pursued only if the insolvency practitioner continued to run it from start to finish but—rather than its being subject to their own professional view and discretion as now—on the instructions of the assignee. That is likely to put an insolvency practitioner in a very difficult situation and, therefore, lead to a reluctance to assign claims.

Will the Minister expand on how she anticipates the clause will work in practice? Where does the balance of responsibility sit in the process of assigning a cause of action in terms of the confidential information that the office holder holds and can investigate?

We should not forget that the proposal is being considered only because of the Government’s record on action for justice; it would not be required if it were not for the assault on legal aid. Funding is currently available for these types of actions: conditional fee arrangements and after-the-event insurance can fund insolvency litigation when an insolvent estate has no money to fund the pursuit of directors or third parties who have taken money. Under the current regime, legal costs are paid for by the losing party and, in most cases, the simple threat of the regime encourages the director or third party to settle long before the case is taken to court. That quick resolution helps to keep insolvency costs down, so more money is returned to creditors.

According to a report published by Professor Walton of the University of Wolverhampton in April 2014, the current regime enforces claims of approximately  £300 million a year, returning £70 million a year to the Government through Her Majesty’s Revenue and Customs and another £230 million to businesses. A further £150 million a year is returned to creditors. However, the Legal Aid, Sentencing and Punishment of Offenders Act 2012 will end that regime next April, after which the costs must be paid from the fruits of the action, significantly reducing the amount of money returned to creditors. Professor Walton said that as the majority of claims realise £50,000 or less, they are unlikely to be pursued under the new regime because the cost will be so high that they will not be worth while. His report concluded that there are no alternatives to the current regime that will secure the same level of money for creditors. Most of the £150 million a year under the current regime will be lost as things stand, regardless of whether the clause stands part of the Bill.

In that context, does the Minister understand that we see the approach in its totality as a piecemeal means of making up for the failures of previous legislation? Will she clarify how the measure will operate in practice? Specifically, will she address the issue of the assignee having access to confidential information about other businesses’ buying prices, or other confidential information that is held by businesses? Let us remember that businesses that are suppliers to other businesses may also be their competitors. Businesses are not always organised in a straight up-and-down manner, with neat tiers of supplies. They are often other businesses’ suppliers in one department and their competitors in another. There are potentially serious unintended consequences to enabling creditor businesses to become assignees, allowing them to pursue actions of this sort and potentially enabling them to access information that they were not previously able to access.

What representations has the Minister received, and from whom, about the likelihood that the confidentiality expected of an office holder will be passed on to the assignee? What evidence does she have that insolvency practitioners will be motivated to pass it on? Can the Minister envisage reasons—for example, competitive information gathering—why an assignee might want to access information that can currently be seen only by the office holder? What safeguards does she propose against abuse?

Photo of Jo Swinson Jo Swinson Parliamentary Under-Secretary of State (Department for Education) (Women and Equalities) , The Parliamentary Under-Secretary of State for Business, Innovation and Skills 9:30, 4 November 2014

I understand the hon. Gentleman’s concerns about clause 106, which is intended to increase the prospects of creditors recovering their unpaid debt—an issue that he acknowledged. One way of doing that is to enable liquidators and administrators to assign to a third party insolvency actions that can currently be brought only by a liquidator or administrator.

The clause will help in a range of circumstances, such as when the liquidator or administrator is unable or not inclined to pursue the action themselves. As the hon. Gentleman said, such actions include claims for wrongful trading against directors who caused their company to trade when they ought to have known it was insolvent, and claims against directors who deliberately paid off favoured creditors or sold company assets for less than their worth in anticipation that the company would enter insolvency. It is right that we try all avenues to take recovery action against the directors and others who have benefitted in such cases, to ensure that creditors are compensated for their financial loss.

However, the decision to take action is a judgment of the liquidator or administrator. In some cases, they may be unable to take action, perhaps due to a lack of funding for the litigation or because of the costs involved in prolonging the insolvency procedure. Currently, when the liquidator or administrator chooses not to bring a claim, there is no way for anyone else to take the claim; there is no other avenue, even if there is a creditor or another party who is willing to take it over. We have come to the view that that is illogical. Just as the liquidator or administrator can assign pre-existing claims that the company itself had the rights to pursue, the new measure will mean that claims that arrive on entering insolvency will be brought into line with the pre-existing claims that can already be assigned. It is not consistent to treat the two circumstances differently.

The hon. Gentleman should be reassured about the concerns he expressed. He asked about how the power under this measure would work. It is basically about recognising that insolvency practitioners will still tend to bring claims where they can. Of course, many do, so the measure is not about saying that they should not or will not be bringing such claims; it just gives a little more flexibility by giving the insolvency practitioner the additional option of assigning the action instead of taking action themselves.

The hon. Gentleman rightly raised the issue of confidentiality. The IPs will still be bound by statutory limitations on disclosing information and the assignee will not have access to the statutory powers that exist for the insolvency practitioner. That is a particularly privileged position conferred on IPs, so that they can fulfil their statutory duties. It would not be right or appropriate to transfer those powers or, indeed, any information received under those powers.

In making any assignment, the insolvency practitioner will need to consider carefully whether there are any legal restrictions—such as those in the Data Protection Act—on the information that they can pass on. It will be for the prospective purchaser who is considering taking on such an action to establish in the negotiation whether or not they can access sufficient information to bring the action and therefore whether it is sensible for them to take on the assignment.

The hon. Gentleman raised the issue of changes to the funding of legal aid. I accept and understand the concerns expressed in various quarters about those changes. We are in incredibly challenging financial times, so changes have been made that have made the situation more challenging for many. It is sensible to look at every possible avenue through which a claim can be brought.

It is difficult to estimate and assign the potential loss. The hon. Gentleman mentioned the report by Professor Walton, who had the challenging task of trying to find out the likely effects. The sample of cases was small—less than 1%—and no process is currently in place that allows the accurate measurement of losses to creditors. None the less, it is in the public interest to try to ensure that we control costs on both sides of civil litigation by removing excess litigation from the system.

We want to ensure that the actions that should be taken are still taken. Clause 106 will give additional flexibility to insolvency practitioners to assign such  action to be taken when they cannot take it themselves. It is a welcome part of the reforms to the insolvency regime in the Bill, so I commend it to the Committee.

Question put, That the clause stand part of the Bill.

The Committee divided: Ayes 8, Noes 5.

Division number 17 Decision Time — Clause 106 - Power for liquidator or administrator to assign causes of action

Aye: 8 MPs

No: 5 MPs

Aye: A-Z by last name

No: A-Z by last name

Question accordingly agreed to.

Clause 106 ordered to stand part of the Bill.