Insolvency Bill [H.L.]

– in the House of Lords at 5:57 pm on 4 April 2000.

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Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords) 5:57, 4 April 2000

My Lords, I beg to move that the Bill be now read a second time.

This is a Bill which, while modest in terms of what it seeks to achieve, will make several important changes in the area of insolvency law. If we are to increase business confidence, it is essential that those entering and operating in the market-place have certainty about what will happen when a firm gets into financial difficulties. We need effective procedures to deal with the failures that will inevitably occur in a market economy. We must also deal appropriately with those who bring about business failures by misconduct. Finally, the risk of losing all, due to unfortunate circumstances, could also discourage enterprise. So mechanisms for saving businesses which are suffering short-term financial difficulties are also needed.

Both the Insolvency Act 1986 and the Company Directors Disqualification Act 1986 already go a long way to providing such a regime. This Bill builds upon those Acts and introduces important amendments and improvements to the existing procedures.

In a market economy it is inevitable that some businesses will fail. Where companies do fail the collapses are inevitably bad for the company, its customers and its suppliers--the creditors. But if those companies could be rescued, the probability is that creditors would receive a better dividend on their claims than they would have otherwise received; jobs would be saved; and where a business is fundamentally viable, it will continue to make a positive contribution to the economy.

The Insolvency Act 1986 introduced the company voluntary arrangement procedure into our law as a means of rescuing companies. The numbers of such arrangements have risen from 21 in 1987 to 475 in 1999. At the time the procedure was introduced it marked a significant change in thinking because it focused on rescue. However, the recession of the early 1990s showed that it was not particularly useful to the smaller company when it encountered financial difficulty. That is because of a lack of a short breathing space in the procedure--that is, a temporary stay on creditors' rights--so that management can put a rescue plan to creditors.

While the administration order procedure offers such a stay, the problem for the smaller company is that the procedure is generally too costly. There is also a natural reluctance on the part of management, particularly owner/managers, to use it because they know that they will be displaced by the administrator. Therefore, the only practical option open to such companies which try to achieve a rescue is to agree a voluntary arrangement with their creditors. Such an arrangement allows a financially troubled company to reach a binding agreement with its creditors, usually to pay its debts either in full or in part over a period of time. However, because there is currently no stay on creditors' actions, creditors remain able to take individual recovery action prior to the arrangement being agreed. That is the real problem. As a result, the company may, say, lose its stock in trade and be unable to continue in business. That renders the proposal unworkable and the rescue attempt a failure.

Therefore, the Bill will give a company's management the option of a short breathing space within which to put a rescue plan to creditors and will stop creditors enforcing their rights. It will do that by offering the option of a short moratorium within the existing voluntary arrangement procedure.

We propose that the directors should remain in control of the company and its business during the moratorium. To obtain a moratorium, first, the directors would have to obtain a statement from the insolvency practitioner to the effect that he was of the view that the proposed voluntary arrangement stood a reasonable prospect of being agreed and implemented. The insolvency practitioner will be the nominee and he will oversee the moratorium. Subject to the agreement of the creditors, he will also become the supervisor and will oversee the implementation of the voluntary arrangement if one is agreed.

Once obtained, the moratorium will last up to 28 days. However, with the agreement of creditors, it could be extended by up to a further two months. It will also be binding on all parties. During the moratorium the nominee will monitor the company's activities. If it appears to him that, because of new developments, the proposal is no longer likely to be acceptable to the creditors, he will have to withdraw. That will bring the moratorium to an immediate end. There will be penalties for directors who seek, for example, to abuse the moratorium, whether by making false representations to the nominee or by spiriting away assets or business records. There will also be restrictions on the exceptional disposal of assets.

Before I move on, I should indicate that we shall bring forward a small number of amendments to this part of the Bill. Both the Select Committee on Delegated Powers and Deregulation and the Trade and Industry Committee recommended that the exercise of the power for the Secretary of State to modify the eligibility criteria for a moratorium should be subject to the affirmative resolution procedure. The Government accept that recommendation and will bring forward appropriate amendments.

We are also concerned that the stay on creditors' rights contained in the Bill may not be fully effective against possible action by the holder of a floating charge. A floating charge is a form of security often taken by banks to secure their lending. Therefore, we shall bring forward amendments to ensure that the provisions that might be included in charge documents--perhaps to crystallise the charge into a fixed charge or to impose restrictions on the company's ability to deal with assets covered by a floating charge--cannot be triggered during a moratorium or because of a moratorium. In that way, we shall ensure an effective stay on creditors' rights and give the company the breathing space that it needs to put its rescue plan to creditors.

The Bill will also modify the current company and individual voluntary arrangement procedures in the Insolvency Act. One difficulty with the current schemes is that they do not bind creditors who were not notified of the meeting to consider the proposal for a voluntary arrangement. That can mean that when a previously unknown creditor comes to light--for example, someone who takes action against the company for a supply of faulty goods--he has the ability to pursue the company for the full amount of his claim. If that were to happen, the voluntary arrangement would probably collapse with disastrous consequences for both the company and its other creditors. Therefore, we have provided that unknown creditors will be bound by a company or individual voluntary arrangement. However, appropriate safeguards will, of course, be in place to prevent unfair prejudice.

Recent organisational changes in the insolvency profession show that there may be others in the market-place who could have the skills necessary to facilitate rescues. Time will tell whether such a body of people will emerge in the field of voluntary arrangements. However, having recognised that as a possibility, we have included a provision in the Bill which will allow the Secretary of State to recognise bodies whose members could act on a limited basis as nominees and supervisors in relation to voluntary arrangements.

I turn to disqualification. The power to disqualify unfit directors is an important safeguard for business and the public. In the past two years we have disqualified over 2,800 unfit directors. If confidence in the market is to be maintained, it is essential that we disqualify those who cheat their creditors and abuse the protection of limited liability. We believe that where both an unfit director and the Secretary of State are agreed that disqualification is appropriate, it is in everyone's interest to achieve a disqualification quickly and cheaply. The Bill will permit that.

At present, only the courts can issue disqualification orders. The majority of the orders are made on the application of the Secretary of State under Section 6 of the Company Directors Disqualification Act 1986. The process can take a long time and is expensive for all those involved, even where the director concerned is prepared to agree to being disqualified. The courts have been helpful in devising a procedure--the Carecraft procedure--whereby, effectively, an individual can consent to a period of disqualification. However, a disqualification achieved in that way still means that court proceedings must be instituted, resulting in delay and costs for all involved.

Therefore, the Bill provides that where there is agreement between the Secretary of State and an unfit director, disqualification can be achieved without legal proceedings. When the Secretary of State considers that an individual should be disqualified, he will be able to accept an undertaking from that individual not to act as a director for a specified period. Breach of the terms of an undertaking will have the same criminal and civil consequences for the individual as the breach of a disqualification order.

That will mean that the undertakings will provide the same protection for business and the public as a disqualification order. They will apply in relation to Section 6 of the Act, based on unfitted conduct in relation to an insolvent company, and to Section 8 following an investigation into a company. Currently, only 10 per cent of disqualification proceedings are contested and go to a full hearing. Of the remainder, 60 per cent are unopposed. That figure includes directors who simply ignore the proceedings. Directors agree to the making of the order in the other 30 per cent of cases. That suggests that a significant number of directors are likely to agree to give undertakings. As a consequence, this measure should result in earlier protection for both business and public at reduced cost by cutting down on the number of cases which need to go to the courts.

Of course, not all company directors will agree that they should be disqualified. Therefore, the existing procedure is to remain in place. The Secretary of State will then, as now, make application to the court to disqualify such persons where he considers it appropriate and they will be able to defend those disqualification proceedings in court.

Experience of the operation of the Company Directors Disqualification Act has shown that it is capable of improvement. Therefore, we are taking this opportunity to make some technical amendments to improve its clarity, effectiveness and efficiency.

With regard to the reporting of offences, in certain circumstances Section 218 of the Insolvency Act requires a liquidator of a company wound up in England or Wales to report to the Director of Public Prosecutions suspicions of criminal misconduct by company officers or shareholders. The director may then refer such reports to the Secretary of State for investigation. However, we believe that it would be far more sensible for those reports to be made directly to the Secretary of State. Therefore, that is what we have provided for in the Bill. That will streamline the reporting process and, where appropriate, ensure that cases come before the courts earlier so that the misconduct is dealt with sooner.

In addition, Section 219 of the Insolvency Act currently allows answers obtained by use of compulsory power to be used in evidence. That is contrary to the decision of the European Court of Human Rights in the case of Saunders v. the United Kingdom. Therefore, we are taking the opportunity to put right that situation.

When the Administration of Insolvent Estates of Deceased Persons Order was brought into effect at the end of 1986, it was generally believed that all the assets that a debtor owned immediately before his death would be available to his creditors in any insolvency proceedings which took place after his death. It was also believed that that would include his share in any jointly-owned property. That would have provided a level playing field for the treatment of the estates of all insolvents, whether living or deceased; otherwise, the assets available to creditors would have differed, depending on whether the debtor was alive or dead.

However, a decision in the Court Appeal in the case of Palmer (deceased) has established that the order-making power contained in Section 421 of the Insolvency Act is not sufficient to bring about that result. The consequence is that the provisions in the 1986 order are ineffective. As a result, in some cases what may appear to be the main, if not the only, asset--namely, the deceased debtor's interest in the matrimonial home--passes under the survivorship rules to the joint owner and is therefore beyond the reach of his creditors.

We are taking this opportunity to amend the order-making power in Section 421 and by so doing we will, as far as is possible, restore a level playing field and give a certainty of outcome for creditors irrespective of whether the insolvent is living or deceased.

It is a requirement that in England and Wales the trustees of bankrupts' estates and liquidators of company estates pay funds from the realisation of assets into the Insolvency Service's account. For many years there has been legislative provision that the funds of an insolvent company held in that account can be invested in government securities. That means that the company, and consequently those who have claims against it, receive the benefit of that investment. Additionally, any funds left in the Insolvency Service's account over £2,000 automatically attract interest at the rate of 3.5 per cent per annum.

For reasons which are not now clear, similar provisions have never applied to bankruptcy estate funds. This is clearly unfair and the Bill provides us with the opportunity to put that right.

Another important measure in this Bill is the order-making power to enable the Secretary of State to implement, by secondary legislation, relevant aspects of the United Nations Commission on International Trade Law model law on cross-border insolvency. It will also permit us to amend, where appropriate, our existing legislative provisions on such matters.

These days many companies operate across national borders. This can cause complications when a business fails because other countries are not always willing to recognise foreign insolvency proceedings. As a consequence, it can be difficult, if not impossible, to recover assets from abroad where a company has failed here.

The United Nations has recently adopted a model law on cross-border insolvency and the United Kingdom played a part in agreeing that model. A concerted push to implement this law by some of our trading partners such as the USA, Canada, Australia, South Africa and New Zealand is under way. But there is also a degree of reluctance to act until the intentions of other countries become clear.

Taking this order-making power now will enable us to implement the relevant part of the model law here. It will also mean that it can be done at a more measured pace than could be achieved by seeking to include the full provisions in this Bill. Also, and perhaps more importantly, it will allow proper consideration of what should be done and for appropriate consultation to take place before we actually adopt such parts of the model law as may be thought apt.

Finally, the taking of such a power would also send encouraging signals both to other countries which are reluctant to proceed unilaterally and to UK insolvency practitioners whose services are much in demand internationally.

I should mention one further point before leaving this subject. It may be that the exercise of this power will touch on issues which have been devolved to the Scottish Parliament. We have not yet come to a definite view but, if amendments to the Bill are considered necessary, they will be brought forward at the appropriate time.

All the measures in the Bill are aimed at improving confidence in the market-place. That increased confidence should create an environment which will further encourage enterprise, and I am very pleased to commend the measure to the House.

Moved, That the Bill be now read a second time.--(Lord McIntosh of Haringey.)

Photo of Baroness Buscombe Baroness Buscombe Shadow Spokesperson (Trade and Industry), Shadow Minister (Cabinet Office), Shadow Minister (Home, Constitutional and Legal Affairs) , Shadow Spokesperson (Social Security) 6:13, 4 April 2000

My Lords, while we on these Benches support the Bill in principle, we do however question both its timing and handling by the Government. In its second report on the draft Insolvency Bill dated 14th December 1999, the Trade and Industry Select Committee expressed deep concern at the lack of opportunity for proper consultation, stating:

"We have the impression that the department would have been more content if we had not examined this piece of draft legislation. The partial consultation was not only brief, but inevitably left some of those affected excluded".

Indeed, the committee had to procure a copy of the clauses and sought copies of the responses from those consulted. That is not a good start.

In essence--and I quote from the same report as I could not put it better myself--

"If the Government is serious about exposing draft legislation for parliamentary scrutiny, it is time that it recognised that such scrutiny is likely to be more useful the more time and notice is given; and that committee scrutiny can assist the process of legislation at later stages".

What is the hurry, anyway? Throughout our consultation process on these Benches, the question has been asked time and again: why introduce the Bill now in advance of the results of the consultation, known as "A Review of Company Rescue and Business Reconstruction Mechanisms"? Would it not have made sense to defer legislation until the results of a wider review were known?

Perhaps the Government are impatient to show their willingness to stimulate a "rescue culture". That is no bad thing. However, in its current form the Bill is not necessarily the panacea for small companies because it omits at least one vital element--that is, the provision for a funding mechanism to enable companies to continue trading. Who is going to underwrite the orders placed in the interim?

There is little doubt that the greatest hurdle for any company to overcome in trying to establish a viable voluntary arrangement is not the absence of the moratorium period, but the lack of funds to keep its head above the water and carry on its business.

Turning to the Bill, it is like the curate's egg; it is good in parts. It is good in parts because much of it will enact proposals previously put forward by the previous administration. As I have said, in principle, we on this side of the House support the Bill but are concerned about the detail of some parts. Perhaps I may begin with one part of the Bill with which we agree.

Clause 6 amends the Company Directors Disqualification Act 1986 and confers a power to accept undertakings on the Secretary of State with the consequence that if such undertakings are accepted, disqualification can be achieved without any significant involvement of the courts. That will plainly save considerable court time and we support that new procedure.

It should also result in a saving of costs to the director concerned, who may well have been impoverished by the collapse of the company of which he was director and beyond legal aid. Clause 6 will save the director from having to contest disqualification proceedings or going through the Carecraft procedure if he accepts that he ought to be disqualified. That procedure involves the agreeing of a fairly lengthy Carecraft statement which the court considers before disqualifying him from acting as a director.

The negotiation and preparation of that Carecraft statement is a significant expense in what would otherwise be a fairly straightforward and cheap procedure where a director effectively pleads guilty, albeit that disqualification proceedings are not criminal in nature. If the procedure, whereby undertakings are accepted instead, does not involve the preparation and negotiation of a similar statement, considerable expense will be saved. It is important that this expense is saved because we must encourage directors to take advantage of the new procedure.

If there is nothing in it for them, they might as well contest the proceedings and there will be no saving in court time. It is therefore important that the new procedure does not become unduly cluttered with detailed preconditions and requirements, such as a Carecraft statement. We hope that the Lord Chancellor will not use his rule-making powers to introduce the necessity for such a statement in this new streamlined procedure. Subject to that one point, we support the new procedure for giving undertakings proposed in Clause 6.

I turn to a part of the Bill which is not so good. It is to be found in subsections (3) and (4) of Clause 4. Those subsections create a new type of insolvency practitioner--a new animal--who can act as a nominee or supervisor of a voluntary arrangement. Subsection (4) envisages such a person being authorised by a body recognised by the Secretary of State, satisfying certain security requirements and not being ineligible on certain specified grounds. Those authorised persons need not be licensed insolvency practitioners. We find that worrying.

The Trade and Industry Select Committee, in its second report, referred to,

"the growing complexity of insolvency law and practice".

In the light of that, is it sensible to be introducing this new animal who is very possibly less qualified and competent to undertake and execute the role of nominee instead of a licensed insolvency practitioner? As in all professions, some licensed insolvency practitioners are better than others.

It is vital that there should be public confidence in such authorised persons, but an authorised person as envisaged in subsection (4) could be less well qualified to maintain public confidence than the least capable licensed insolvency practitioner. Indeed, it is inherently likely that an authorised person will be someone who has not qualified as a licensed insolvency practitioner and has therefore become an authorised person instead. There would be no need for him to become an authorised person if he was already a licensed insolvency practitioner. The result will be that an authorised person could be more undesirable than the least capable licensed insolvency practitioner. I shudder at the thought.

It gets worse. The new procedure for a moratorium cuts out the role of the court. Under the existing law, a company can obtain a moratorium if it petitions the court for an administration order. The petition is usually heard within five days. The court can then continue the moratorium by making an administration order. An individual can obtain a moratorium if an interim order is granted by the court. Again, the court is closely involved at an early stage. That is an important safeguard, because a moratorium imposes extreme conditions on creditors. The courts therefore police such moratoria carefully.

The new proposals dispense with that important safeguard. A company or an individual will be able to obtain a moratorium without any involvement by a court. That is dangerous enough, but to allow authorised persons who may not even be licensed insolvency practitioners to be the only real safeguard is, in our view, unacceptable. It is essential that there should be public confidence in the integrity and competence of those who will exercise such power to impose a moratorium on creditors.

The moratorium to which I have referred is to be found in paragraph 12 of the new Schedule A1, which is clearly based on Section 11 of the Insolvency Act 1986. There is therefore little new in the moratorium introduced in paragraph 12, but there is an important difference. The moratorium which comes into effect once an administration order has been granted is subject to the court's control within five days of the presentation of the petition. The moratorium under paragraph 12 comes into effect on the say so of an authorised person who may not be competent to qualify as a licensed insolvency practitioner.

Furthermore, the court can be involved only for the purposes of, first, calling a meeting of the company; secondly, taking steps to enforce any security over the company's property or repossessing goods in the company's possession under any hire-purchase agreement; thirdly, commencing or continuing other proceedings; fourthly, execution or any other legal process; and, fifthly, levying distress. In any of those circumstances a member or creditor can apply to the court for leave to carry out an act which would otherwise be prohibited from the moratorium.

It is legitimate to ask why there is no right to apply for the leave of the court, first, to present a winding up petition; secondly, to pass a resolution for the winding up of the company; thirdly, to seek an order for the winding up of the company; fourthly, to present a petition for an administration order; or fifthly, to appoint an administrative receiver. In all those circumstances, no one has the right even to apply to the court for leave. That is unacceptable given the fact that the court will not be involved in that new procedure. In essence, we believe that it would be an obvious and appropriate safeguard if members and creditors could apply to the court for leave to carry out any of the acts otherwise prohibited by the moratorium.

That point is particularly significant as regards the appointment of administrative receivers. One of the sad facts of business life is that when the appointment of an administrative receiver is imminent, small but valuable items of equipment tend to disappear. Laptops have no chance. The position is even worse with companies in the building trade because not only small items of equipment disappear, but large items of plant, machinery and raw materials. It is to minimise such shrinkage that debentureholders often appoint administrative receivers with little or no notice and have them move straight into the company's premises to secure their contents against theft.

However, notwithstanding the palpable risk of small items of equipment disappearing, the moratorium in paragraph 12 could prevent a debentureholder from appointing an administrative receiver for nearly three months. That is quite unacceptable. Experience teaches us that during such a period almost every item of equipment which can be carried out by one person will disappear. Indeed, with nearly three months at their disposal, those responsible will be able to hire the ubiquitous white van and remove more substantial items of equipment. The debentureholders do not stand a chance.

The Bill grows worse when one looks at paragraph 39 of Schedule A1, which creates certain offences where a moratorium has been obtained. Under that paragraph, it is an offence for any officer of the company fraudulently to remove,

"any part of the company's property to the value of £500 or more".

The limit of £500 is quite extraordinary. If an officer of the company fraudulently removes an item of equipment worth £500 or less, it appears under paragraph 39 that he does not commit an offence. That limitation is quite unacceptable and we cannot see the rationale for it. Whatever happened to theft? Is it no longer a criminal offence for some people to steal some of the time, so long as the value of the goods stolen is restricted by law? I wonder whether the Government are trying to create a second-hand market in stolen laptops.

When we consider the terms of the moratorium in more detail in Committee, we must consider also whether it is appropriate for a landlord to be able to forfeit a lease under which the company is a tenant. At present, it appears to be the case that every kind of creditor except for landlords forfeiting leases is restricted from taking any steps to obtain payment. That is an odd omission. We can see no policy reasons why a landlord should be put in such a privileged position. Indeed, we can see no grounds for restricting a landlord more than any other creditors, because in many cases the company's business will come to an immediate end if the lease for the property from which it carries on business is forfeited. The whole point of a moratorium and the proposal for a voluntary arrangement would be defeated.

If the Government believe that landlords should be in a privileged position, we should be grateful for the reason. Could it be because a landlord may find himself in an involuntary position because of assignment? That is doubtful, as commercial leases tend to be extremely short these days and, in any event, that must surely be a risk which comes with that usually highly profitable territory. If, on the other hand, there are no policy reasons why landlords should be in such a privileged position, we believe that the terms should be amended and we shall return to the matter in Committee. At the same time, similar amendments should be made to Sections 10, 11 and 252 of the Insolvency Act 1986 so that they are in line with paragraph 12 in its ultimate form.

I turn now to two provisions which apply while the moratorium is in force. The first is to be found in paragraph 13 to Schedule A1, which provides that any security granted,

"at a time when a moratorium is in force ... may only be enforced if, at that time, there were reasonable grounds for believing that it"--

I presume that "it" refers to the security--

"would benefit the company".

I must confess to being unaware of any security that would be likely to benefit a company. Perhaps the Minister will give an example of such a security. I can, of course, envisage transactions of which a security is a part which might benefit the company, such as a loan on terms that the company must grant a charge. I cannot think of any security which on its own would be for the benefit of a company.

Furthermore, lenders are in the business of lending for their own benefit and not for the benefit of borrowers. The directors of the corporate lender must act honestly in the best interests of the lender and not of the borrower. The paragraph means that they must have regard to the benefit of the borrower, even though the directors of the borrower are under a duty to act honestly in the best interests of the borrower and their acts are overseen by an unlicensed insolvency practitioner, albeit an authorised person. If the directors of the lender get the balance wrong, the security cannot be enforced and, indeed, it looks as if it can never be enforced however prosperous the company may be in the future. If the Government believe that any lender will lend money with that kind of risk, it must be said that they are living on another planet.

Paragraph 17 of Schedule A1 is equally objectionable. It provides that a company can dispose of its property only if, inter alia,

"there are reasonable grounds for believing that the disposal will benefit the company".

It is not entirely clear what happens to the disposal if there are no reasonable grounds for believing that the disposal will benefit the company. That must be clarified during the passage of this Bill. During that process mature thought must be given to whether or not the test that the disposal must be for the benefit of the company is a sensible one. The Minister will be aware that businessmen are in business for their own or their company's benefit, not for the benefit of the people with whom they do business. I appreciate that the position might be different with certain local authorities, but in business the idea of trying to benefit the party with whom one is doing business is not one that has instant appeal to most businessmen.

Let us consider the position of a purchaser of plant and equipment from the company to which paragraph 17 applies. It is not very clear when it does apply. Such a purchaser will bargain for a low price. The company's directors will bargain for a higher price. A balance must be struck, but during the course of these negotiations the purchaser will inevitably say, if properly advised, that he must be satisfied that the disposal will benefit the company and will insist on a lower price because of the chance of that disposal being set aside. If he is to be satisfied that the disposal will benefit the company, the company will have to disclose its weak financial position which the purchaser will, no doubt, exploit to his advantage thereby lowering the price even more. The result will be that the company will only be able to dispose of its assets at a substantially lower price than it might otherwise achieve. That cannot be right. It interferes with the whole notion of arm's length negotiations. I therefore suggest that we must look carefully at the provisions of paragraph 17 in Committee.

There are a number of other less important points which we shall be raising in Committee, where we believe the drafting has not been properly thought through. At this stage we wish only to give the House the flavour of things to come by referring to Schedule 1, paragraph 6 which amends Section 122(1) of the Insolvency Act 1986. That section sets out the grounds on which a company may be wound up by a court and already includes the grounds that the company is unable to pay its debts.

Paragraph 6 adds an additional ground giving the right to a creditor to petition the court for a winding up order on the ground that a moratorium has come to an end and no voluntary arrangement has been approved. That is a curious addition because, if a company is unable to pay its debts, a creditor can already present a petition on that ground. So the proposed new ground is only of assistance where the company is able to pay its debts. We cannot see why it should be appropriate for a creditor to seek a winding up order when the company is able to pay its debts, but a moratorium has come to an end without a voluntary arrangement having been approved. We shall be grateful if the Minister can explain the rationale for this additional ground for a winding up order.

In conclusion, in general we are supportive of the Bill. However, the devil is in the detail. Given its somewhat hurried early life and the lack of consultation with interested bodies, we very much hope that the Government are not intending, in the words of the Select Committee for Trade and Industry in its second report,

"to use it as a vehicle to tag on other bits of insolvency reform as it passes through Parliament".

Photo of Lord Sharman Lord Sharman Liberal Democrat 6:33, 4 April 2000

My Lords, I must first declare an interest as a paid adviser to a firm which has a division practising in insolvency.

I give a cautious welcome to the objectives which this Bill seeks to achieve. The reason for my caution is that I have some reservations as to whether the Bill will achieve its aims as regards moratoria for small companies. I share many of the concerns that the noble Baroness, Lady Buscombe, has outlined about the qualification of nominees. In particular I share her concern that the recommendation in the report of the Trade and Industry Select Committee of another place that only insolvency practitioners should be enabled to act as nominees should have seen the light of day in this Bill. However, I am pleased that the recommendation of the Delegated Powers and Deregulation Committee of this House to adopt the affirmative procedure for changes in moratoria was accepted.

In my research I noticed that the original consultation on this matter on a moratorium for small companies took place in October 1993, which is some considerable time ago. This sort of provision is long overdue. But I have problems with the qualification of nominees and supervisors, as I said earlier. At present persons who are authorised to act as insolvency practitioners are authorised to take all types of appointments under the 1986 Act. They have to be judged to be fit and proper persons to undertake such appointments by their authorising body. Their examination regime requires candidates to demonstrate a knowledge of all types of insolvency.

The provision in Clause 4, which enables the Secretary of State to recognise bodies solely for the purposes of acting as nominees or supervisors, but not otherwise to take appointments, has the potential to create some very difficult problems. That is particularly important because a moratorium may not be the only alternative that a company is considering. One is faced with a situation where there could be a number of alternatives that the directors could choose. They will need advice on that. They will need advice from people who have experience of that position. I see potential difficulty in first taking advice from an insolvency practitioner about the options available and then perhaps shopping around for someone who is prepared to sign the necessary statement. That leaves me with a residual worry as to whether the directors we would want to take advantage of this procedure, and potential nominees, will regard it as too risky to bother with and opt for other alternatives. I shall return to the role of the nominee in a moment.

I turn to some of the other detailed provisions in the Bill. Both the Minister and the noble Baroness, Lady Buscombe, have remarked on the changes in director disqualification allowing the Secretary of State to accept undertakings, which would have the same effect as a disqualification order. I believe that, quite rightly, there has been concern in the past that the Company Directors Disqualification Act 1986 was not as effective as it could have been because of the time needed to progress disqualifications through the courts. We believe that the provisions of Clause 6 are a welcome initiative to reduce court time and to increase the efficacy of the Company Directors Disqualification Act.

I refer now to deceased insolvents' estates, which the Minister dealt with. The order made under Section 421 of the Insolvency Act 1986 does, as he says, cause problems. Part of that was the definition of the estates of deceased persons without any further explanation at the time. As the Minister rightly said, in the case of re Palmer Deceased, the Court of Appeal held that where a debtor had died before a bankruptcy order was made against him, that interest in the joint tenancy passed to his wife by survivorship and so there was no severable interest remaining for the benefit of his creditors.

Clause 11 would rightly provide that an interest in such circumstances would form part of the debtor's estate. We believe that to be a sensible provision, but we shall need to be satisfied at Committee that there can be no retrospective aspects to the provision outlined in the Bill.

Interest on sums held in bankrupt estates is clearly an anomaly at the present time. The fact that liquidators could earn interest whereas those exercising the role of trustees in bankruptcy on the funds could not, was wrong. We are pleased that Clause 12 will put that right. It is a very welcome development.

We view the UNCITRAL model law on cross-border insolvency with interest. We are pleased that Clause 13 contains the enabling power for the implementation of that model law. As the Minister said, the model law was developed by the United Nations Commission on International Trade Law and adopted by the UN in 1997. I think the Minister would agree that it is still early days for this. For that reason, we would encourage the Government to push hard for its adoption by as many states as possible.

The Bill deals with a number of matters relating to creditors' voluntary arrangements and the status of moratorium period creditors. It is not at all clear from the Bill as it stands at what date it is intended that claims will be taken for the purposes of participating in arrangements. Under existing creditors' voluntary arrangements, claims are taken as at the date of the meeting held to consider the arrangement.

The relevant date for calculating preferential claims for existing voluntary arrangements which were not preceded by some other insolvency process is also the date of approval. While paragraph 35(2) of Schedule A1 is drafted in terms which suggest that creditors will be bound as at that date of approval, paragraph 69 of the Explanatory Notes talks about binding creditors who are owed money at the start of the moratorium. Paragraph 9 of Schedule 1 provides that the relevant date for preferential claims is to be the date of filing; that is, the date the moratorium comes into effect.

As the noble Baroness, Lady Buscombe, has already pointed out, there are no provisions in the Bill for how expenses arising during the moratorium are to be dealt with. Incidentally, this was also pointed out by the Trade and Industry Select Committee of another place. For that reason there remains some doubt about the status of debts arising during the moratorium period and how they are to be disposed of. We shall wish to return to this matter in Committee.

As regards voluntary arrangements generally and the issue of binding unknown creditors--if I may use that form of shorthand--the Bill provides that, in every type of voluntary arrangement, approval binds not only all creditors who are entitled to vote at the meeting but all creditors who would have been so entitled if they had had notice of it. At present, only creditors who have received a notice of the meeting are bound. This change raises a number of potential difficulties. In particular I should like to ask the Minister to consider the effect of these provisions on those who have made claims under the Third Parties (Rights Against Insurers) Act 1930, where I believe that there is a difficulty. Again, we shall need to return to this in Committee.

In conclusion, I should like to return to the issue of the nominee and his duties during the moratorium. Paragraphs 24 and 25 of Schedule A1 allow the company or other affected parties to challenge the nominee's actions by application to the court. We see a contradiction in the Bill between two views of the role of the nominee: that of an independent office holder with a duty to the general body of the creditors; and that of a professional adviser with a duty of care to his client. Those two roles clearly can be in conflict. The nominee has a duty to monitor the affairs of the company, and in the earlier draft clauses there were provisions which could have made the nominee liable for the defaults of the directors.

The report of the Trade and Industry Select Committee, to which I referred previously, suggested that the balance of duties and liabilities envisaged for the nominee required some revision to ensure both a light touch and protection of the legitimate interests of creditors. It added that no more duties or sanctions should be laid on the nominee than are strictly necessary in the unique circumstances of a moratorium.

The provisions making the nominee liable for directors' defaults have now been removed from the Bill and a new provision has been added at the end of paragraph 25(3) of Schedule A1, allowing the court to excuse the nominee if it is satisfied that his acts, omissions or decisions were reasonable in the circumstances. Although these amendments are undoubtedly of assistance, the new provision does not address the fundamental issue of where the nominee's duty lies. This issue definitely needs to be resolved in Committee.

In summary, we welcome the Bill, which seeks to move forward in an appropriate fashion the whole issue of dealing with insolvencies. However, we feel that the Bill needs considerably more work to give it a fair chance of achieving its objectives.

Photo of Lord Gavron Lord Gavron Labour 6:45, 4 April 2000

My Lords, as some noble Lords may already know, I am well qualified to speak on insolvency, having narrowly escaped it many years ago at the beginning of my career. I was an entrepreneur who was not well versed in the mysteries of cash flow. The company that so nearly went down is now flourishing and employs some 5,000 well-paid people. I hasten to add that today it is being run by people a good deal more numerate than I was all those years ago. But I did run it for 30 years and I was frequently a creditor. I think I can fairly describe myself as a very experienced creditor. Furthermore, I frequently lost my money, and yet I am an enthusiastic supporter of this Bill.

Contrary to some people's belief, most of those who start small businesses are hardworking and honest. I have learnt that there are people who think that usually they are fundamentally untrustworthy. I do not share that view. Most of them create wealth and employment and a few manage to build large and significant businesses. It is very easy for them to trip up during the early years and the most common cause of failure is running out of money through not understanding the intricacies of cash flow.

After a long career in business, I still do not fully understand the intricacies of cash flow. What I have learnt, however, is that I need to have someone at my side who does. Many entrepreneurs starting new ventures have most certainly not fully mastered cash flow. Quite often, a hiccup or two early on can sink a promising new business.

Of course it must be said that many bankruptcies are deserved and the philosophy of the survival of the fittest must prevail in business. It is not good for the employees or for the economy to keep weak and struggling businesses alive indefinitely. But the moratorium proposed in this Bill--described by Stephen Byers and by the Minister in this House as a "breathing space"--is a mere 28 days, extendable by arrangement to possibly three months. That may well be enough to save some businesses which deserve to survive.

In real life, the initiative to put a small business into receivership almost always comes from a clearing bank. Trade creditors are often patient with slow payers. If they believe that the principal is honest and if they are convinced by the rescue plan, they often continue to extend credit. Of course they may have little to lose: on the one hand they may get 10p in the pound; on the other hand they may secure a continuing and loyal customer. That is not a difficult choice.

Banks, however, are almost always secured creditors and therefore are likely to be paid in full or nearly in full in an insolvency. Their first floating charge on assets is frequently additionally backed by a personal guarantee. Perhaps I may stray for a moment in order to express my strong disapproval of banks almost invariably demanding personal guarantees, giving them both belt and braces. The typical profile of a promising entrepreneur--for that is what the Bill is about--if often of a person with a mortgage and a family or other dependants acquired after, say, 10 years' valuable experience working for someone else. When such a person contemplates a business start-up, the mandatory personal guarantee means that failure could put not only the entrepreneur but also the dependants into the street. Good entrepreneurs may take risks, but they are fundamentally cautious people. The biggest disincentive to a start-up by exactly the right sort of candidate, someone who is likely to succeed, is often the prospect of a personal guarantee.

The Insolvency Bill serves to provide a counter to the banks, which are sometimes--frequently, in my experience--too quick on the trigger. A four-week freeze can give the principal time to get together with the creditors and perhaps give the business a chance of survival. A further reason to try to save a business is that a common consequence of insolvency is the domino effect. One small business fails and cannot pay a large debt to another small business, which in turn fails, and so forth. So one small failure can cost quite a number of jobs.

This is a good Bill. I listened with surprise, or even amazement, to criticisms suggesting that it would impose disadvantages on the creditor. As an experienced creditor I believe that the reverse is true. The moratorium is likely to ensure that all the creditors are listened to, not just the major creditor with full security. The Bill will help small companies to an enormous degree, and the small companies which may be their creditors. It is an important element in this Government's determination to foster entrepreneurship. While large companies seem to be downsizing or merging and thereby shedding jobs, many small companies are expanding and creating employment. This Bill will help small companies and I support it.

Photo of Lord Razzall Lord Razzall Liberal Democrat 6:52, 4 April 2000

My Lords, in winding up from these Benches I shall try not to repeat the detailed points made by other noble Lords. First, I share the puzzlement expressed by the noble Baroness, Lady Buscombe, and my noble friend Lord Sharman as to why this Bill is being introduced today. As my noble friend said, the consultation on the Bill started in 1993. Seven years later it is brought in as a relatively small Bill but only a few months after the Insolvency Service in September launched its consultation document, A Review of Company Rescue and Business Reconstruction Mechanisms, which, presumably, after the consultation process is concluded, will result in a detailed Bill setting out a significant reform of insolvency law, as the noble Baroness, Lady Buscombe, said. I wonder also why the Bill is being brought forward after a Queen's Speech that produced 32 or 33 Bills and rumours that, as a result, in order to get their legislative programme through, the Government will not be able to have another Queen's Speech this side of the election. Indeed, if there were in place, as many of us would like, a "Moratorium on Legislation Act", this would be a provision that could well fall within it.

Having said that, when we come to Committee a number of points of detail will need to be resolved. I shall not rehearse in detail those already mentioned; I shall run through one or two in outline. First, both the noble Baroness, Lady Buscombe, and my noble friend Lord Sharman mentioned an issue that caused considerable concern--it may be said, "It would, wouldn't it?"--among representative bodies of the various organisations practising in this field; that is, the qualification of nominees. It will clearly be the subject of significant debate in Committee and on Report and we look forward to seeing whether or not the Government propose to table any amendments to deal with the concerns expressed.

Secondly--a point which has not yet been touched on in relation to the nominees--is the question under the proposed Schedule A1, paragraph 6; that is, the nominee's statement. A number of anxieties were expressed as to the provision that requires the nominee not to have to give any reasons for his opinions as to the viability of the proposals being brought forward. Under paragraph 6(3), the nominee is allowed to rely on information submitted by the directors,

"unless he has reason to doubt its accuracy".

A number of the comments made on the Bill suggest that that does not go far enough and that the nominee should be required to make such checks as are reasonable in the circumstances. We look forward to discussing that point in Committee and seeing whether it is a point on which the Government propose to move.

My third point relates to Clause 11 and the insolvent estates of deceased persons. The point that needs to be considered by the Minister, if not now, certainly when we come to Committee, is whether or not the situation as currently reflected in the Bill prejudices the marketability of title of the relevant property. The Law Society made significant comments which have not yet been taken on board by the Government. We would welcome the Minister's comments in that regard, and also on the point made by my noble friend Lord Sharman in relation to the risk that the provisions will have a retrospective effect, which also goes to the point on the marketability of the title to property.

There has been no comment so far on Schedule A1, paragraphs 17 to 19, concerning disposals of charged property. A number of points arise in the context of paragraphs 12, 13, 24 and 38. The obvious anxiety is that third parties proposing to deal with the directors, even with a strong likelihood that the dealing will benefit the company's creditors, will be inhibited from doing so by the lack of an express statement in the proposed legislation that the directors have the power to effect that dealing and, most particularly, by the fact that the third party will be protected from any subsequent failure of the moratorium or non-approval of the voluntary arrangement. Considerable concern was raised about the effect of third parties dealing with the disposal of charged property under the moratorium. Again, that is something the House will need to look at in Committee.

Another point which has not been mentioned today is the effect on creditors of paragraph 12, in particular the right of peaceable entry. Under the Bill as drafted, it seems an anomaly that a landlord cannot distrain for rent or issue a writ for forfeiture but is entitled to use the self-help remedy of peaceable re-entry and so deprive the company of its premises. Clearly, that is not the intention of the Bill and would defeat the purposes of it. We feel that the Government need to look at that in Committee.

The noble Baroness, Lady Buscombe, and my noble friend Lord Sharman raised the issue of disqualification of directors. I agree with the noble Baroness that the effective adoption of the Carecraft procedure in the section under which an individual can come to the department and agree to be disqualified for an agreed period needs to be handled with significant subtlety by the department if it is to have the appropriate effect. Of course, if that subtlety, as the noble Baroness indicated, is not exhibited, the director will be forced to go into court because he or she is not prepared to agree the appropriate statement that normally accompanies a Carecraft order.

More particularly, if the operation of this section is not administered by the department in a sensitive way, the director will be tempted to try his or her luck with the court proceedings rather than take the appropriate step of accepting the disqualification with reasonable undertakings in order to return, after the period of qualification, to the entrepreneurial activity that presumably lies behind the rationale for the section.

Finally, I endorse the point made by my noble friend with regard to the fundamental flaw in the relevant section regarding the role of the nominee. It is not clear on the face of the Bill whether the nominee has a duty to the general body of creditors or whether the nominee is a professional adviser with a duty of care to his client. In Committee that anomaly needs to be resolved if the moratorium procedure is to work.

Photo of Lord Kingsland Lord Kingsland Conservative 7:02, 4 April 2000

My Lords, I shall be extremely telegraphic. The Minister said that this is a modest Bill. It is indeed modest. It has, unlike the great man about whom the remark was once made, much to be modest about.

It is modest because it deals with a small part of the problem that confronts companies that are in financial difficulties. The Minister referred to some 500 cases a year. If the Government wanted to do something about the situation of companies that would be suited to a moratorium procedure, why is there not some flanking financial help for them in the Bill?

At an earlier stage, there was a discussion about the provision of statutory-super priority. We see nothing of that in the Bill. There was discussion about the switch of debt for equity in companies during the moratorium. We see nothing of that in the Bill. There was even speculation about the likelihood that public bodies may be prepared to reduce in size, or allow better payment terms of debts owed, not only to local authorities, but also to electricity, gas and water companies. We see nothing of that in the Bill.

If the noble Lord the Minister is to achieve his objective of being a real help to companies during the moratorium period, in my submission he needs to do much more than is on the face of the Bill.

I also believe that the Government were wrong to seek to establish a class of nominees outside the profession of licensed insolvency practitioners. I have two reasons for saying that. First, when a company is in difficulties it needs the advice of a practitioner who can look at the whole range of options in an objective way. That is the task of a licensed insolvency practitioner--with experience of full-scale company liquidations and the introduction of administrative receivers at one end of the scale; and of suggesting means by which difficulties can be solved without any formal application of the law at the other end.

By contrast, a nominee who comes from a single profession is likely to look at the problem in an extremely narrow way. Indeed, he or she may find some self-interest in recommending the amended CDDA procedure because, dare I say, that would provide work that he or she would not otherwise have had. At least for the early stages of the application of this legislation, I would strongly urge the Minister to think again about the new status of a nominee, perhaps for a period of five years, and rely on the established profession. It may be wise of the established profession to add some extra training in the area covered by the Bill; but, in my submission, companies would benefit from someone who could look objectively at the whole range of solutions, rather than simply at a single solution.

I have two final observations to make about the Bill, both of which refer to directors' disqualification. Of course, I share the views of most noble Lords who have spoken that the introduction of the undertaking procedure is a good thing. However, we know from Carecraft that a number of directors, who are probably innocent, have felt it necessary to go for that procedure, simply because, if they fought the case and lost, they would be faced with paying, as is anyone in a so-called civil case, not only their own costs but also the costs of the other side. Is the Minister prepared to consider in future CDDA cases a different cost regime, more in line with the cost regime that applies in criminal cases rather than civil cases?

Secondly, I raise the point with which the Minister is now intimately familiar as the result of the progress of the Financial Services Bill through the House; that is whether, in full-scale directors' disqualifications proceedings, the real character of the trial is not really civil but criminal. If that is so, the Saunders-proofing that has been provided in Clause 10 ought to be extended to the CDDA.

Perhaps the Minister will reflect on what occurs in directors' disqualification proceedings. The proceedings are brought for the protection of the public and, at the end of the day, a director suffers disqualification. They are initiated after a long period of investigation by a team with special powers. The penalty of disqualification is severe: not only does it lead to the loss of a job, but it also leads to the loss of social status and a heavy cost burden.

These procedures are criminal in character and, therefore, should attract all the protections laid down in the European Convention on Human Rights. The Minister has certified that this Bill conforms with that convention; but, in my submission, Clause 10 does not go nearly far enough to make that so.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords) 7:10, 4 April 2000

My Lords, since I can now use my own words, instead of the speech written for me, very properly, by officials in introducing the Second Reading, I sympathise with my noble friend Lord Gavron. I also spent 30 years running my own company, although with considerably less success. Many times in the course of my business life I was threatened by banks. I had to provide personal guarantees based on my house and possessions in return for the possibility of the provision of working capital, even when I did not need that facility at any particular time.

Like my noble friend, I was also affected on many occasions by the domino effect; in other words, the possibility that my small business would be brought down, not because of the way that it was being run, but simply the fact that business done with others was in danger of being written off as bad debts in my accounts. That gives one a very clear view of what should be the order of priority.

Although I recognise that some contributions this evening have been critical on major points of detail--I do not walk away from that--in almost all cases, with the exception of the closing remarks of the noble Lord, Lord Kingsland, there was prejudice on the side of creditors. I hope to demonstrate that this Bill seeks to assist those businesses that are in difficulties to survive, which is fundamentally in the interests of creditors.

The Government were criticised by a number of noble Lords--in particular, the noble Baroness, Lady Buscombe, made a very powerful speech--for the short period of time allowed for consultation. I thought that that criticism was answered rather well by the noble Lord, Lord Sharman, who reminded us that the original consultation had taken place in 1993 under the previous administration. The noble Baroness, Lady Buscombe, believes that everything done up to 1997 was all right and everything thereafter is no good. One should read the speech of the noble Baroness, which was good in parts. According to the noble Baroness, the good parts occurred before 1997 and the bad parts afterwards.

I remind the noble Lord, Lord Razzall, that his noble friend said that the Bill was long overdue and drew the conclusion that it was worth proceeding with this part of the whole range of necessary solutions. I am rather surprised by the approach that has been adopted. When in opposition we frequently urged the government to get on with it. The government would say that they were carrying out a review and consultation and nothing could be done to remedy the problems until that process was completed, which would be in many years' time. Here we are today: we are carrying out a review to deal with the very important questions dealt with by noble Lords this evening--funding, debt for equity, super-statutory priority and so on. All of those issues raise fundamental difficulties and will take a considerable time to resolve. We have a moratorium which everybody to whom we have spoken agrees is necessary and can be proceeded with in a relatively small Bill, yet we are criticised for proceeding with what we can do and not waiting for what we could do in due course. Sometimes the best is the enemy of the good. If we can convince noble Lords that this Bill is the good and it is not invalidated by the pursuit of the best, we shall have done something worth while.

A number of noble Lords referred to the Select Committee on Trade and Industry. Clearly, that committee gave the Bill serious consideration. However, very significant changes have been made since the draft Bill went before that Select Committee, and a large number of its comments, including some of those quoted this evening, referred to parts of the Bill which have been altered or even removed. If we look at the Bill as it is before us, rather than as it appeared before the Select Committee, the difficulties are perhaps rather less than envisaged.

It is generally agreed that the most important aspect of the moratorium debated this evening is the balance of safeguards between shareholders and creditors. It is true that we have had to strike a delicate balance in developing the proposal. Our desire has been to give directors the breathing space that they need to put rescue plans to creditors. At the same time, there is a need to provide creditors with reassurance. Creditors are concerned that the company is in financial trouble and they are unable to take action against it while the moratorium is in place. We cannot have a moratorium without safeguards because that gives the unscrupulous director an unlimited opportunity to spirit away assets free from the threat of immediate enforcement action.

I look forward to debating in Committee with the noble Baroness, Lady Buscombe, the spiriting away of various assets from laptops to rather larger items of equipment. Incidentally, I was amused to learn that the diplomatic bag with which Zimbabwe had interfered weighed 6½ tonnes. That gives a new meaning to the word "bag". But the noble Baroness raises a legitimate fear which must be assuaged. We must find ways to ensure that there is not a spiriting away of assets. However, I believe that the noble Baroness's more important point is her suggestion that the safeguard must be involvement by the court at an earlier stage, or at more stages, than is provided for in the Bill.

I believe that the fundamental safeguard--to which I shall return when I deal with the qualifications of the nominee and supervisor--is that the insolvency practitioner must be involved at the beginning. Somebody experienced in the whole range of options must be there to give objective advice. The Bill provides that initially a nominee is appointed by the directors of the company. However, the implementation of the moratorium is the responsibility of the supervisor and it is the creditors who have to approve his appointment. That is the safeguard for creditors. This is a new provision which does not exist in the Insolvency Act. In all these matters the view of the creditors prevails, which is a very important guarantee. Reading the Bill over the weekend, it took me a long time to work out that that was so, but I promise noble Lords that the guarantee exists and makes a great deal of difference. I believe that that is more important than the right to apply to the court for a winding-up order and the various other matters that noble Lords have suggested. Therefore, I hope that as we deal with the Bill in Committee we shall look at the structure a bit more closely than it has been possible to do in the course of a Second Reading debate. I hope that it will be seen that the structure is rational.

The noble Lords, Lord Sharman and Lord Razzall, in particular raised what they described as the fundamental issue of where the nominee's duty lies. The noble Lord, Lord Sharman, described the potential conflict as regards whether the nominee owes his duty to the general body of shareholders or to his particular client. The nominee is appointed by the directors but, as I said, the supervisor must be approved by the creditors. The nominee's duty is to perform the duties placed on him by the Bill. Those are his responsibilities, whoever he is appointed by, rather than owing a duty to any particular person. Again, if that is not clear, let us explore that in Committee and make sure that the Bill is unambiguous in that respect.

I turn now to the issue of whether creditors should be able to override shareholders, which lies behind some of the points which have been raised. The current company voluntary arrangement required that both the creditors and the shareholders must agree to a voluntary arrangement. That sounds all right but it can prove difficult. That is why, even now, nearly 15 years after the Act was passed, we still have only approximately 500 cases per year.

In most cases, the financial situation of a company is such that if it is to be liquidated, only the creditors have an asset in the business because the company is insolvent. Therefore, we have provided that in the event of a disagreement on major specified issues, decisions of creditors' meetings will prevail over those of shareholders. I realise that I am repeating myself but I am repeating myself in a different context. Again, that is part of the structure of the moratorium, which is extremely difficult to tease out of a 20-page schedule to the Bill. It will avoid the risk of losing what may otherwise be a workable rescue simply because the shareholders cannot or will not agree to it. But by way of a safeguard for shareholders, we have given them the right to apply to the court in such circumstances and the court may order the decision of the company meeting to have effect in place of that of the creditors' meeting; or it may make such other orders as it thinks fit.

The noble Baroness, Lady Buscombe, asked why we have introduced an extra ground to wind up a company following the failure of a moratorium. Where the company fails to agree a CVA following a moratorium, it will probably be in serious trouble. For that reason, that fact alone should support a petition to wind up a company. It will save a creditor who wants to take that step the expense of the delay necessarily involved in showing that the company is insolvent according to the test laid down in Section 123 of the Insolvency Act.

The noble Baroness, Lady Buscombe, and the noble Lord, Lord Razzall, both referred to the position of a landlord and said that he should be restricted, along with other creditors. Clearly, there is a point about right of access which we shall have to pursue. But that is not a point which is raised by this Bill. It exists already in other types of rescue, not just in a CVA. It is part of the review of company rescue mechanisms. It is too complex for us to deal with in the context of this Bill.

The noble Baroness, Lady Buscombe, asked what sort of security would benefit a company during a moratorium. The company might need to borrow money to finance its operations. The only way it might get it--because, of course, it is weakened--is by offering security to potential lenders. That is a matter which the nominee and the supervisor will have to take into consideration.

The noble Baroness asked why creditors cannot seek leave of the court to put a company into liquidation or receivership. If the court were able to grant leave for those purposes, the situation would arise where there would be two conflicting insolvency proceedings afoot--one a CVA moratorium and the other a liquidation. If there are concerns about the conduct of the directors in a moratorium, there are remedies in the Bill: the nominee must be notified and he then may consider withdrawing the moratorium; or there may be an application to the court to challenge the directors' actions.

I was asked from which date creditors' claims will be calculated for voluntary arrangements. At present, the dates from which claims are calculated are determined in the Insolvency Rules of 1986 and we shall make provision for the new procedures in the rules which we propose to be amended; that is, to reflect the amendments in the existing procedure to tidy up the position.

A major issue was the question of the qualification or authorisation of nominees and supervisors. I certainly agree that insolvency practitioner advice is required at the outset when the company is in difficulty and it needs to have the whole range of options assessed. But the appointment of supervisors provides that there is somebody who is more expert in rescue mechanisms than in the details of administration and insolvency. Indeed, the Society of Practitioners of Insolvency, now called the Association of Business Recovery Professionals, has recognised that by voting to allow those who have business rescue experience to join their organisation. It may be that this is experience in running businesses rather than the legal and accountancy aspects of not running them--in other words, running them out.

We do not know how it will work out. We do not know how that role, which is perhaps more akin to that of a company doctor, will work out. We do not know whether a body will arise or be encouraged to arise which will look for those skills alongside the skills of insolvency practitioners.

The noble Lord, Lord Kingsland, asked that we should delay this for five years. We are certainly not in a hurry to introduce it. We shall not introduce it until there is a body which recognises business rescue skills and is prepared to impose them, and we should not recognise anybody as a nominee or a supervisor unless he had agreed to abide by the rules of such a body. It may or may not be that such a person will be a qualified insolvency practitioner. But we should never allow the case which the noble Baroness, Lady Buscombe, fears; namely, that we shall get failed insolvency practitioners. Rather, it will be somebody with different parallel skills.

I can cut short what I say about disqualification undertakings because the provision was generally welcomed. I should say to the noble Baroness, Lady Buscombe, that certainly I understand the need not to have too many preconditions, and I say to the noble Lord, Lord Razzall, that I understand the need for subtlety by the department. He thinks that too many directors will be tempted to try their luck with the courts. That happens in only 10 per cent of cases now. It is unlikely that that will be a real difficulty.

I have less sympathy with the concerns expressed by the noble Lord, Lord Kingsland. I do not believe that there is anything here which takes away existing rights to contest a disqualification order in the court. Providing for something which, on past history, is likely to be agreed in a large number of cases will be beneficial. I cannot see any down-side to that.

I hear what the noble Lord says about criminal trials and I shall think about that. It does not seem entirely likely to me since we are not taking away any existing rights.

Photo of Lord Kingsland Lord Kingsland Conservative

My Lords, I am most grateful to the Minister for giving way. I was not in any way criticising the introduction of the undertaking. I think that is a good thing. But at the moment, in a full trial, the loser pays all. It is my view that a number of directors accept a Carecraft solution, or will accept an undertaking, even though they are innocent, because they fear that at the end of the day they may be disqualified and have to pay very large sums in costs. They are simply not prepared to take the risk.

I do not suggest that the noble Lord should remove the undertaking from the legislation. I suggest that he should go further and consider renewing costs awards in the disqualification proceedings themselves.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

My Lords, of course I consider seriously everything that the noble Lord says: I just do not have any instinctive sympathy with it.

I shall deal quickly with the question of insolvent estates of deceased persons. I understand the need to be satisfied that there is no retrospective aspect involved. I can write to the noble Lord to reassure him in that respect or we can debate the matter in Committee. However, generally speaking, I believe that noble Lords have welcomed this part of the Bill. Indeed, I am grateful for that welcome. In the case of UNCITRAL, I certainly agree that we should be pressing for adoption by other countries. This is our contribution to it: we could not have pressed for adoption unless we provided for it, as we have in this Bill.

I believe that I have dealt with as many points as your Lordships would wish me to do within the space of 20 minutes. I do not want to overemphasise the importance of the Bill, but we are responding to legitimate pressure to do something that seems pretty universally agreed to be desirable. We shall be happy to debate the details in Committee. But if we can make these moderate changes--I still say that they are both modest and moderate--to existing insolvency law, pending the major review that has already been started, we shall be benefiting business and enterprise in this country.

On Question, Bill read a second time, and committed to a Committee of the Whole House.