Enterprise Bill

– in the House of Lords at 4:31 pm on 21st October 2002.

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Consideration of amendments on Report resumed.

Clause 238 [Overseas disclosures]:

[Amendment No. 189 not moved.]

Photo of Lord Sharman Lord Sharman Liberal Democrat 4:40 pm, 21st October 2002

moved Amendment No. 190:

Page 172, line 13, at end insert—

"( ) whether disclosure would include commercial information whose disclosure might significantly harm the legitimate business interests of the undertaking to which it relates"

Photo of Lord Sharman Lord Sharman Liberal Democrat

My Lords, Amendments Nos. 189 to 191 deal with the disclosure of confidential commercial information to an overseas authority. As matters stand, where a UK agency is able to obtain commercial information that is subjective in terms of its competitive relevance, that information remains confidential. If such information were disclosed to an overseas authority under the Bill's provisions, the purpose of making the disclosure would by its very nature enable that information to enter the public domain in that foreign territory.

Amendment No. 190 seeks to require that in making a decision on whether such information is to be disclosed, the Secretary of State should have regard to,

"whether disclosure would include commercial information whose disclosure might significantly harm the legitimate business interests of the undertaking to which it relates".

I cannot believe that it is the Government's intention that such a situation should prevail and that such information should find its way overseas into the public domain. I beg to move.

Photo of Lord Kingsland Lord Kingsland Conservative

My Lords, we raised this matter in Committee, where the noble Lord, Lord Sainsbury, said,

"As the noble Lord, Lord Kingsland, said, the Joint Committee on Human Rights made some important recommendations to ensure that the overseas disclosure provisions were subject to even tighter safeguards. The committee recommended that the considerations that will be used by UK public authorities when making decisions on disclosure to overseas authorities should not be left to be drafted by the OFT, as currently required, but should be placed on the face of the Bill.

The committee also recommended that the criteria should include a consideration on whether the disclosure being contemplated would be proportionate to a pressing social need that the disclosure would address, and whether the matter for which disclosure is sought is sufficiently serious to justify disclosure . . . The Government have listened carefully to these recommendations and agree to them".—[Official Report, 29/7/02; cols. 743-744.]

The amendment that we tabled then addressed the recommendations made by the Joint Committee on Human Rights. It is encouraging to see that the Government are thinking about the needs raised in relation to disclosure by public authorities. We are not entirely satisfied that the Secretary of State is meeting our concerns. While we accept that he should be able to modify and add to the list of considerations, the protections under Clause 238(6) would be eroded if at a later stage any of the considerations were removed. We would not wish to see them added now for the purpose of enabling the Bill to obtain Royal Assent; and then removed at the earliest opportunity.

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) 4:45 pm, 21st October 2002

My Lords, I had better speak to Amendment No. 189 even though it was not moved, as the noble Lord, Lord Kingsland, has spoken to it. The argument hangs together for all three amendments. I shall speak first to government Amendment No. 191, which is designed to ensure that we have the desired read-across between Parts 8 and 9 of the Bill. Clause 238 permits a public authority to disclose information to an overseas authority for the purpose of facilitating investigations or the bringing of civil proceedings by that authority to enforce "relevant legislation".

Relevant legislation is defined as the legislation to be covered by Part 9, and foreign legislation which is equivalent. The amendment will ensure that the legislation which is to be specified for the purposes of Community or domestic infringements in Part 8 will fall within the definition of "relevant legislation".

Amendment No. 189 would add a set of considerations to Clause 238 to which the Secretary of State must have regard when considering whether to make a direction that a disclosure to an overseas public authority must not be made. I agree with the noble Lord, Lord Kingsland, that we must ensure that the overseas disclosure provisions are subject to adequate safeguards. That is why in Committee we added to the Bill a number of considerations to which a public authority must have regard before disclosing information to an overseas authority. Those considerations mirror in content those set out in this amendment. In addition to the considerations set out in Clause 238 a public authority must also have regard to the considerations set out in Clause 239.

These considerations will ensure that information is disclosed only when public authorities are satisfied that the matter for which the information is requested is sufficiently serious rather than speculative and little more than a fishing expedition. Clause 238 also allows the Secretary of State to direct that a disclosure otherwise permitted by this clause must not be made if he considers that it is more appropriate for any investigation to be carried out or proceedings brought in the United Kingdom or in another specified country or territory. This power, which mirrors provisions in Section 18 of the Anti-terrorism, Crime and Security Act 2001, reserves the right of the Secretary of State to decide that disclosure may not be in the interest of the United Kingdom; for example, in circumstances where an overseas authority requests information that may be more appropriately restricted to an investigation by UK authorities. We anticipate that this power will be invoked sparingly.

The role of the Secretary of State is therefore confined solely to protecting the legitimate jurisdictional interests of the UK and is quite distinct from the general duty that Part 9 places on public authorities that hold information to which Clause 232 applies to assess requests for disclosure against the considerations laid out in this clause and in Clause 239 before deciding whether to disclose information under this clause. It would not be consistent with the granting of such discretionary powers for the Secretary of State to have the ability to second guess how public authorities exercise their statutory duties.

I turn to Amendment No. 190. I have every sympathy with the objective, but it is unnecessary. Clause 239 contains considerations which public authorities must have regard to before disclosing any specified information covered by Part 9, regardless of to whom it is being disclosed. Clause 239(3) requires consideration of the need to exclude from disclosure so far as practicable,

"commercial information whose disclosure the authority thinks might significantly harm the legitimate business interests of the undertaking to which it relates".

There is an equivalent consideration in respect of information relating to the private affairs of an individual. That subsection therefore has the same effect as the amendment moved by the noble Lord, Lord Sharman, but with the benefit of covering all disclosures of specified information, not just those to overseas authorities.

Photo of Lord Sharman Lord Sharman Liberal Democrat

My Lords, I am grateful to the Minister for his response and his explanations. In the circumstances, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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)

moved Amendment No. 191:

Page 172, line 35, at end insert—

"(aa) any enactment or subordinate legislation specified in an order under section 206(2);

(ab) any enactment or subordinate legislation specified in an order under section 207(3);"

On Question, amendment agreed to.

Schedule 16 [Third party appeals]:

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, I shall speak also to Amendments Nos. 193, 197 and 205. I think the noble Lord, Lord Kingsland, may well move Amendment No. 196, as his name is attached to it.

The "purpose of administration" was discussed at some length in Committee. The noble Lord, Lord Hunt of Wirral, expressed some concerns about the objective of rescuing the company, suggesting that this could exclude a company's most valuable assets—often its people and business. I stated at the time that I had some sympathy with those concerns and I agreed to consider the issue and come back with an appropriate amendment on Report. We have done just that. While we are not changing our policy on the issue—and have not been asked to do so—we agree that further clarification on the face of the Bill would be particularly useful to those charged with making administration work.

Company rescue is at the heart of the revised administration procedure. It is, and always has been, our intention to ensure that viable companies do not fail unnecessarily. By that I mean that not only the legal entity alone is preserved, but at least a substantial part of the business of that company is also preserved with it. The noble Lord, Lord Hunt, referred in Committee to the former as "empty shells". As I have said before, it is not our policy that rescuing the company could mean simply keeping the legal entity alone intact. The Government tabled an amendment on that point, but we were happy to withdraw it and support Amendment No. 196 in the names of the noble Lords, Lord Kingsland and Lord Hunt, which makes the point crystal clear.

In addition, in Committee I confirmed that we wished to make it clear that the administrator will not be required to pursue the first objective of rescuing the company if the second objective would provide a better result for the creditors of the company as a whole. It has been suggested that this could undermine company rescue by allowing and even encouraging administrators to sell off assets in a quick and dirty sale simply to cover the secured creditor's debts, justifying such actions as being better for the creditors in the short term—in other words, business as usual for receivers turned administrators. That is simply not true.

The new purpose also does not imply that the administrator will be constrained to take the short-term view. Administrators working under the new purpose should weigh up the options in the light of their duty to the creditors as a whole. That could well result in preferring a long-term return over what could be realised in the short term.

However, there may be times when company rescue is not the best option, when the medium to longer-term viability of the business is poor. We do not want the administrator to be constrained to attempting to rescue every company irrespective of whether there is a business worth preserving. We do not want an administrator to have to pursue a company rescue that may be reasonably practicable but would result in a lower return to creditors as a whole, which could have been a consequence of the current drafting of paragraph 3. One criticism that has been made against Chapter 11 in the United States is that it can lead to cycles of repeated failure and rescue of non-viable businesses. The amendment will allow an administrator the flexibility to provide the best result to all the creditors while still maintaining the primacy of company rescue.

I am sure that we all agree that the changes that the Bill introduces to the way that floating charge holders can deal with their security marks a decisive break from the past. The Government's intention is that in all administrations the administrator should consider the possibility of rescuing the company. He must bear in mind the interests of all creditors when deciding how to deal with the company and its assets. While the Government and Parliament can set out the policy and legislative framework to achieve that, it is now for those involved—insolvency practitioners, lenders and others—to put it into practice.

The administrator's opinion was also raised in Committee and is addressed in this group of amendments. The Government remain of the view that the administrator is best placed to judge whether a particular objective is reasonably practicable, in the light of his experience and professional judgment. In the light of concerns expressed during the debate, we have made it clear that what the administrator thinks should determine which objective is followed.

The new paragraph 3 will therefore allow an administrator not to pursue the first objective if he thinks either that the second objective will achieve a better result for the creditors as a whole or that it is not reasonably practicable to achieve the first objective. This means that the creditors will not be disadvantaged in cases where the administrator thought it reasonably practicable to rescue the company as a going concern but the second objective would obtain a better return.

The Opposition have tabled a number of amendments that similarly deal with the issue of company and business rescue, and whether it should be for the administrator to decide whether particular objectives are reasonably practicable. I believe that these matters have all been addressed in the Government's amendments. I therefore hope that the other amendments will not be pressed. I beg to move.

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Conservative

My Lords, I listened carefully to the Minister. Much of what he said met the thrust of the amendments, but I should like clarification on two points. Amendment No. 194 makes clear that the rescue does not have to cover the company as a whole, by inserting,

"and the whole or part of its business".

It is not clear to me that the government amendments will give an administrative receiver or administrator the chance to deal even-handedly with the whole or part of the company's business.

The second point relates to the administrator's professional judgment. I was pleased to hear the Minister refer to that as the pre-eminent issue. That is very important. I am not clear about how the Government's amendments deal with the issue of "in his opinion". Amendment No. 199, tabled by my noble friends and myself, makes it clear by inserting "in his opinion". Part of the Government's amendment seems to meet that, but not all of it.

I should be grateful if the Minister could clarify those two points: whether the whole or part of the company is covered; and whether the administrator's opinion is pre-eminent. I am not sure that either point is covered.

Photo of Lord Hoffmann Lord Hoffmann Crossbench

My Lords, I am contributing to the debate having been for seven years a judge of the Chancery Division and having had some experience of dealing with receiverships and administrations. I am anxious about two aspects of the amendments.

The centrepiece of this area of the Bill is the part of the schedule that deals with the purposes of administration. When I first read those paragraphs, they appeared admirably drafted and entirely clear, setting out in the proper order what those purposes should be. I would have thought that no judge would experience any difficulty understanding what the paragraphs meant and applying them in a practical and common-sense way. As the Minister said, the great break with the past that those paragraphs represent is giving primacy to the prospects of rescuing the company.

As I said, two aspects of the amendments concern me. The first is the provision that now appears to place the objective of rescuing the company more or less on a par with the objective of achieving a better result for the company's creditors as a whole. It seems to me that judges faced with these clauses as they stand would in no way insist on the rescue being pursued in circumstances where this was not going to do anybody any good. However, to put the realisation of the assets in the old style—for the benefit of the creditors—as on an equal footing with the rescue seems to me to be giving a wrong signal to the profession.

The other aspect is the provision saying that what really matters is the opinion of the administrator. In my experience as a judge, the greatest respect has always been paid to the opinion of the administrator. He was the man who was in touch with the facts and who had to make the practical day-to-day decisions. It would be rare indeed for a judge to say, "No, we think that you are doing it the wrong way". If, with hindsight, one were looking at any criticism of something that the administrator has done, it would be virtually impossible to hold any administrator liable for something that he had done in good faith on the footing that the judge thought that it would have been better to take some other course.

What this amendment does, however, is to put the whole matter, even as to the future, into the hands of the opinion of the administrator. The amendment therefore precludes interested parties from coming to the court and saying, "Let us examine this matter rationally. It appears that the administrator is going about it the wrong way. It would be better, to achieve the statutory objectives, if it were done differently". The court would then be able to assess that matter. There might be occasions when the court, giving full weight to the experience and knowledge of the administrator, feels that it has to say, "No. It is quite clear that, in the best of faith, you are going about this the wrong way and you ought to do something different. The company can be rescued even though you seem to have formed the opinion that it cannot".

These amendments seem to take that power out of the hands of the court entirely and leave everything to the opinion of the administrator. In my view, both those changes represent retrograde steps.

Photo of Lord Kingsland Lord Kingsland Conservative 5:00 pm, 21st October 2002

My Lords, an intervention in the debates of your Lordships' House by the noble and learned Lord, Lord Hoffmann, is always an occasion for celebration. I know that the Minister will be keen to reply to the testing and apposite observations of the noble and learned Lord. I rise simply to thank the Minister and his officials for their careful work in response to the amendments that we tabled at Committee stage.

Photo of Lord Sharman Lord Sharman Liberal Democrat

My Lords, I rise simply to echo the remarks of the noble Lord, Lord Kingsland. The Minister and the Government have come a very long way in meeting our concerns on this matter and I am grateful.

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, the noble Lord, Lord Kingsland, is teasing me: the thought of arguing a point of law or legislative text with the noble and learned Lord, Lord Hoffmann, fills me with dread. The noble and learned Lord has known that for the 50 years that I have known him. Nevertheless, I shall do my best.

I am grateful for the comments of the noble Lords, Lord Kingsland and Lord Sharman, and I am interested in the points made by the noble Lord, Lord Hodgson, and the noble and learned Lord, Lord Hoffmann. I am not sure, however, that I understood the first point made by the noble Lord, Lord Hodgson. He asked whether Amendment No. 194 provided for the administrator to seek to rescue a whole or a part of the business.

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Conservative

My Lords, I appreciate the points made by the Minister, my noble friend Lord Kingsland and the noble Lord, Lord Sharman. The question was whether the Minister's comments covered the essence of Amendment No. 194. Can the administrator rescue a part of the business, or is he still compelled to rescue "the business" or "the whole of the business"?

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, I said "part" in my speech. I think that I had better write to the noble Lord, Lord Hodgson, about how that is implemented in paragraph 3 as redrafted. I asked for paragraph 3 as incorporating the Government's amendments to be sent round, but unfortunately I only asked for it to be sent round to the Front Benches. I have now given it to the noble and learned Lord, Lord Hoffmann, but the noble Lord, Lord Hodgson, did not have a copy.

I hope that, when the noble and learned Lord, Lord Hoffmann, reads it, he will agree that it is not the case that rescue is "more or less on a par"—I hope that I am quoting him correctly—with the interests of creditors. I hope that sub-paragraphs (3) and (4) make that clear. The administrator must perform his function with the objective specified in sub-paragraph (1)(a)—that is, rescuing the company as a going concern—unless he thinks that it is not reasonably practical to achieve that. In other words, although the interests of creditors are of course important, subject to sub-paragraph (4), they are not on a par with the company rescue. These are in an order of priority.

I think that the second point made by the noble Lord, Lord Hodgson, was on the question of "think" and "reasonably believe". The point about the wording in the Bill is that it does not second guess the administrator's professional or commercial judgment. If necessary, we would expect the courts to assess whether the office holder, in this case the administrator, has been rational in his decision. We are not seeking to apply any other test.

On Question, amendment agreed to.

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)

moved Amendment No. 193:

Page 258, line 6, leave out "with the objective of"

On Question, amendment agreed to.

[Amendment No. 194 not moved.]

[Amendment No. 195 had been withdrawn from the Marshalled List.]

Photo of Lord Kingsland Lord Kingsland Conservative

moved Amendment No. 196:

Page 258, line 6, after "company" insert "as a going concern"

On Question, amendment agreed to.

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)

moved Amendment No. 197:

Page 258, line 7, leave out from beginning to "achieving" in line 8.

On Question, amendment agreed to.

[Amendments Nos. 198 to 200 not moved.]

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)

moved Amendment No. 205:

Page 258, line 15, leave out sub-paragraph (2) and insert—

"(2) Subject to sub-paragraph (4), the administrator of a company must perform his functions in the interests of the company's creditors as a whole.

(3) The administrator must perform his functions with the objective specified in sub-paragraph (1)(a) unless he thinks either—

(a) that it is not reasonably practicable to achieve that objective, or

(b) that the objective specified in sub-paragraph (1)(b) would achieve a better result for the company's creditors as a whole.

(4) The administrator may perform his functions with the objective specified in sub-paragraph (1)(c) only if—

(a) he thinks that it is not reasonably practicable to achieve either of the objectives specified in sub-paragraph (1)(a) and (b), and

(b) he does not unnecessarily harm the interests of the creditors of the company as a whole."

On Question, amendment agreed to.

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)

moved Amendment No. 206:

Page 258, line 19, at end insert—

"3A The administrator of a company must perform his functions as quickly and efficiently as is reasonably practicable."

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, in moving Amendment No. 206, I should also like to speak to Amendments Nos. 210, 212, 213, 214, 215, 224, 226 and 230. I ask that the noble Lords, Lord Kingsland and Lord Hunt, move Amendment No. 229 from the Opposition Front Bench as it is in their names as well as that of the Government.

In Committee, I described the subject of time scales for administration as a "major issue". The subject certainly attracted a lot of attention and discussion both during our debate in Committee and in debate in another place. I acknowledge the force of the arguments that have been put to us. Currently, no limits are placed on the length of administration. This has led to some criticism that some administrations have gone on too long, and that the lack of certainty of when the process will conclude can be a distinct disincentive for businesses and lenders when considering administration.

The need for the inclusion of a time limit for the process of administration has been generally accepted but, as I explained in Committee, it is important that limits are set at a level that reflects the practicalities of administration and at a length that commands the confidence of those with an interest in administration. As a result of the clear concerns surrounding the issue of the time limits, the Government undertook to give this matter further consideration in consultation with interested parties and to table any appropriate amendments that were identified as necessary.

Officials have met with the relevant interested parties, not only the insolvency profession itself but also representatives of both lenders and business, including the CBI, the British Bankers' Association and the Finance and Leasing Association. Those discussions were constructive and these amendments take into account the points made.

We are all in agreement that the Bill should be amended so that the administrator will now have up to 12 months, as opposed to three months currently proposed in the Bill, before having to seek an extension from either the creditors or the court and the Government were happy to withdraw their own amendment and be associated with Amendment No. 229 in the name of the Opposition and the Government. Amendment No. 230 will allow creditors to extend this period by a further six months, rather than three as the Bill presently states, while the court will continue to be able to extend the administration for a specified period.

The amendments also lengthen the time limits for the administrator bringing forward his proposals and holding a creditors' meeting. Proposals will now have to be brought forward within eight weeks and a creditors' meeting held within 10 weeks compared with the Bill's current provisions of 28 days and six weeks respectively.

Although we accept the need to lengthen the time limits we are keen for administrations to be concluded as quickly as is reasonably practicable in the circumstances of each individual case. The time limits should not become the norm. For example, we would expect administrations that are straightforward because of their size or lack of complexity, to be capable of being completed within the new initial 12-month period.

In order to reflect this approach, new paragraph 3A proposed in Amendment No. 206 places a general duty on the administrator to perform his functions as quickly and efficiently as reasonably practicable. We have also included a specific duty for the administrator to act,

"as soon as is reasonably practicable", in bringing forward his proposals to creditors and calling a creditors' meeting. Our intention remains for streamlined administration to be a quick and practical business recovery vehicle that will attract the confidence of practitioners, companies of all sizes, lenders and the business community as a whole. Striking the right balance on time limits between the concerns of all those with an interest in administration is a key element in meeting that objective. We believe that the amendments achieve that balance.

However, while the Government and Opposition Members were all in agreement on overall time limits for an administration, the same cannot be said for Opposition Amendments Nos. 211 and 216, which seek to extend the period during which the administrator must send out proposals and hold an initial creditors' meeting to three months and four months respectively. I am a little surprised at those amendments in view of the constructive discussions that officials had with not only the insolvency profession itself but also representatives of both lenders and business, including the CBI, the British Bankers' Association and the Finance and Leasing Association. During the discussions a general consensus was reached, and it was that consensus that formed the basis of the Government's amendments.

In most cases it should be reasonable to expect the administrator to send proposals out to creditors and to hold an initial creditors' meeting within the time limits that we are now proposing. In those exceptional cases where the proposals are likely to take longer to prepare, perhaps as regards a particularly large company or one with a complex business structure, the administrator will continue to have recourse to the creditors and/or the court to agree an extension to the time limits. I beg to move.

Photo of Lord Hunt of Wirral Lord Hunt of Wirral Conservative 5:15 pm, 21st October 2002

My Lords, I am grateful to the Minister for the work that his officials have done over the past few days to try to resolve a number of issues. People have worked exceedingly hard and a series of meetings have been held. However, these concerns were expressed when the legislation was debated in the other place over some considerable time. I accept criticism all the time but I hope that on reflection the Minister will not criticise me as severely as he just has for not yet having adapted to amendments that were tabled only last week. It has taken a little time to assimilate all the hyper activity that has occurred over the past few days and weeks.

I refer, first, to Amendment No. 206, which the Minister has just moved and which states:

"The administrator of a company must perform his functions as quickly and efficiently as is reasonably practicable".

Who could possibly oppose the amendment? Its purpose is recognised and is laudable. However, I am advised by the many legal brains who have focused on it that its actual wording imposes something of an impossibly high standard in that every administrator must always, every minute of every day and every day of every week and month, perform with the greatest reasonably practicable speed and efficiency. It is suggested that he should be required to perform with such speed and efficiency as would be expected of a reasonably competent insolvency practitioner in the circumstances of the particular case.

In addition, that standard of performance should be subject to the fundamental duty of the administrator to act in the interests of the company's creditors as a whole as cases may occur where quick action may not lead to the best outcome for creditors. We have already dealt with the consequences of some of the legal phraseology in the notable and effective contribution of the noble and learned Lord, Lord Hoffmann.

All ER (D) 393 (Jul). All I would say to the Minister is that any legislation which he now proposes will be held, in my belief, alongside that very clear judgment. Mr Justice Neuberger said:

"As a matter of ordinary statutory interpretation, s 108 of the 1986 Act gave the court discretion as to whether or not to remove a liquidator. In such cases, the court might have to carry out a balancing exercise. On one hand, it would expect any liquidator to be efficient, vigorous and unbiased in his conduct of the liquidation, and should have no hesitation in removing him if it was satisfied that he did not live up to expectations. On the other hand, if the liquidator was honest, the court should think carefully before removing him, and it was not enough to say that his conduct had fallen short of ideal, as that would encourage disgruntled creditors to make such applications when their agent was not appointed a liquidator".

I believe that the Minister will appreciate that that is a clear statement of the circumstances in which the court would use its existing power to remove the practitioner.

I hope that between now and next Monday the Minister will give some thought to whether the wording of Amendment No. 206 does not impose an impossibly high standard and may also conflict with existing judicial directives and ratio decidendi on that particular aspect.

I am very grateful to the Minister, as I said previously, for proposing the time limits in the government amendments; they are welcomed and broadly acceptable. However, he referred to Amendments Nos. 211 and 216. Amendment No. 211 would leave out "28 days" and insert "three months" and Amendment No. 216 would leave out "six weeks" and insert "four months". I realise that the purpose of these amendments is to set realistic and achievable targets. I am grateful to the Minister for having said that he will provide limits that will command a wider consensus and for the extent of the consultations. It might be helpful if he reminded the House of the details of those consultations; I believe that a number of parties may not have been consulted during the time available.

Amendment No. 227 would leave out paragraphs 76 to 78. As the Minister knows, we should have preferred there to be no time limit relating to administrations. In relation to complicated administrations, in many cases one year would be far too short. In the time available, I have not yet been able to consult the practitioners sufficiently on the end time limits, but I should like to do so. I realise—such is the situation in this Session—that that means before next Monday; however, I hope that the Minister will allow me sufficient time to consult on the final backstop time limit. I am very grateful to him and his colleagues for having advanced a more realistic approach to the time limits following consultation.

Photo of Lord Sharman Lord Sharman Liberal Democrat

My Lords, from these Benches, I, too, express my thanks and recognition of the extremely hard work that has been done on the time limits. We have moved forward a considerable distance in that regard and, by and large, I am content with where we are.

I have one comment to make on Amendment No. 206. Until the noble Lord, Lord Hunt, spoke, I was content with that amendment. My point follows the line of the questions raised by the noble Lord. I should appreciate confirmation from the Minister that the responsibility should be read in conjunction with paragraph 3 and that it is almost subsidiary to paragraph 3(2), which states:

"The administrator must perform his functions . . . in the interests of the creditors of the company as a whole".

The amendment will add that that should be done,

"as quickly and efficiently as is reasonably practicable".

If the arrangement worked in that way, I should be a little more content than when I started.

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, I am grateful to both noble Lords for their general welcome to the amendments. If I sounded critical of Amendments Nos. 211 and 216, I am sorry; of course it is true that the consultation has taken time over the summer and that the amendments were tabled during a short period. If that means that the noble Lord, Lord Hunt, is now content and that we have answered the points raised in Amendments Nos. 211 and 216, I am very happy.

I do not believe that Amendment No. 206 imposes an impossibly high standard. I do not see it as saying that the administrator somehow has to be active 24 hours a day, seven days a week, in order to perform his functions quickly and efficiently. The relevant phrase is "as reasonably practicable" and we believe that the courts will take a practical line on construing the new duty. The duty of a given administrator is clearly to be interpreted in the light of what is reasonably practicable in the particular circumstances of a case. The same standards will not be not applied across all kinds and varieties of cases. We also believe that the courts are unlikely to entertain frivolous claims from applicants relating to trivial delay or delays that are unavoidable or cause no harm.

At the end of the day there is a potential for conflict in this regard. Yes, there are time limits and, yes, we have agreed to extend a number of them. We have also recognised that the process of administration may be more complicated than was allowed for in our original time scales. There are other people—those affected by the process of administration—who want it to be as quick as possible. That is why Amendment No. 206 is necessary. That is also why—this responds to the later remarks of the noble Lord, Lord Hunt, on time limits—we believe that there should be time limits. The present procedure has very few time limits. It has tended to make administration appear slow. A key point that came out of our consultation is that administration takes too long and provides no certainty for creditors about when they might get paid; we are also concerned with creditors in this regard. We must reassure the lending community that we are not relaxing any controls relating to the speed of administration.

Some of the critical views of the short time scales have been influenced by insolvency practitioners and those dealing with very large cases. I understand their interest. We believe that the time scales proposed in the amendment are adequate for dealing with many—if not most—cases without the need to go to court. We have taken soundings from those practitioners who specialise in smaller cases, who believe that the time scales will be more than adequate for cases at the smaller end of the market. That is why we want to add Amendment No. 206 to the Bill.

I am not sure whether I have offered any further details about the consultation process. We of course consulted insolvency practitioners. As I said when I moved the amendment, we talked to the CBI, the British Bankers' Association, the Finance and Leasing Association and representatives of business.

Photo of Lord Hunt of Wirral Lord Hunt of Wirral Conservative

My Lords, it would help if the Minister's office could let me have details of those bodies that attended so that I can check that all necessary people who have expressed their concerns to me were involved in the consultation process; I am sure that they were. I do not want that information now but if I could have a list within 48 hours that would be helpful.

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, I should be glad to do that as soon as I can and in advance of Third Reading next Monday. I believe that the general welcome justifies me in urging the House to agree to the amendment.

On Question, amendment agreed to.

Photo of Lord Hunt of Wirral Lord Hunt of Wirral Conservative

moved Amendment No. 207:

Page 261, line 23, after "appointed" insert "on a winding-up petition presented by a creditor"

Photo of Lord Hunt of Wirral Lord Hunt of Wirral Conservative

My Lords, in moving this amendment, I shall speak also to Amendments Nos. 208 and 209.

I understand that Amendments Nos. 208 and 209 will be dealt with by the rules. We discussed the rules in Committee and there was a promise—I well understand why it has not been fulfilled—that I might have a copy of the rules sufficiently in advance to enable me to consult. Unfortunately, it arrived only comparatively recently. The noble Lord, Lord Sharman, and I have done our best to assimilate it. I might need a little longer to consult with those who raised relevant points with me. In those circumstances, I shall not seek at a later stage to press Amendments Nos. 208 and 209.

The purpose of Amendment No. 207 is to permit secured creditors whose loan is in default to proceed quickly and cheaply to appoint an administrator of their choosing. Where a provisional liquidator has been appointed on a creditor's winding-up petition, it is fair to require that the secured creditor should apply to the court for the appointment of an administrator who will, in effect, replace the provisional liquidator.

However, it is my contention that it would be wrong in principle to require that where the provisional liquidator is appointed on the company's own petition. It is acutely undesirable that the company should be given a further opportunity to compete with the secured creditor over the choice of the insolvency office-holder. In those circumstances, I beg to move.

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) 5:30 pm, 21st October 2002

My Lords, I must confess to the noble Lord, Lord Hunt, that, after I said in Committee that I would do my best to get a copy of the first draft of the rules to noble Lords in good time, I was greeted with a storm of protest by officials. They said, "It's impossible to achieve this. We are nowhere near doing that and there are all sorts of consultations still in process. We cannot do it". To their immense credit, they have succeeded in getting something both to the Opposition Front Benches and to me in time for the debate this afternoon. However, I acknowledge, of course, that that is not in time for the draft to be fully studied and taken account of. If, as a result of studying the draft rules, amendments are tabled at Third Reading, I shall not complain.

I turn to Amendment No. 207, which is familiar because it has been debated on a number of occasions. I think we are all agreed that the holder of a floating charge should be one of the people who has access to a "quick route" into administration. The Bill achieves that. However, as I said previously—I know that my colleagues in the Commons have said the same thing—where the court has already appointed a provisional liquidator, it is right that only the court can replace that person with an administrator. To allow otherwise would be to usurp the powers of the court. It is not a matter between a creditor and the company; it is a question of the court making the appointment.

I want to say a word about Amendments Nos. 208 and 209, although the noble Lord, Lord Hunt, has made conciliatory noises about them. Following our discussion in Committee about the "weekend" situation—that is, the problem of court opening hours—I want to acknowledge that it is a real problem. Administration is fundamentally a court-based procedure. Therefore, we do not intend to amend the provision concerning when the administrator's appointment takes effect. However, we do intend that the amended insolvency rules will allow for appointments to be made other than during court opening hours.

I believe it was the noble Lord, Lord Sharman, who called it the "weekend problem"—that is, the question of what happens when the court adjourns on a Friday afternoon. The noble Lord, Lord Freeman, who I am sorry to see is not in his place today, raised the issue of a kind of fax-back arrangement, whereby something would be faxed to the court and the court's fax would acknowledge it by sending a reply. The Notice of Appointment would be sent to a dedicated central point by fax and the subsequent acknowledgement would show the date and time of receipt—that is, the date and time of appointment. The appointor would then be required to attend at the appropriate court at the first opportunity in order to file the original documents in the relevant court. I pay tribute to the noble Lord, Lord Freeman, for putting forward the suggestion, which forms the basis of the amendments that we shall make to the insolvency rules.

With my renewed apologies for not getting the draft rules to the Opposition Benches before today, and with my renewed appreciation of officials for their achievement in getting the draft to those Benches, I hope that Amendment No. 207 will not be pursued.

Photo of Lord Hunt of Wirral Lord Hunt of Wirral Conservative

My Lords, I join the Minister in thanking his officials very warmly for having met today's deadline, and I look forward to the bedtime reading. Undoubtedly, the noble Lord, Lord Sharman, has already assimilated the draft rules because he has an extraordinary expertise. But I am only a mere solicitor, and it may take me a few hours longer to do so. However, we appreciate the way that officials have responded. As I have said in previous debates, they always seem to manage to achieve the most unrealistic targets and objectives, which they are often given by Ministers. I am very grateful to the Minister.

I am also grateful to him for his words in relation to Amendment No. 207 and for his assurance that, if further amendments prove necessary in the light of further scrutiny of the rules, he will have no objection to that. Of course, we have to move reasonably swiftly because it is anticipated that the next stage of the Bill may be held next week. However, in all those circumstances, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 208 and 209 not moved.]

Photo of Lord Haskel Lord Haskel Labour

My Lords, I have to tell your Lordships that, if Amendment No. 210 is agreed to, I cannot call Amendment No. 211 by reason of pre-emption.

On Question, amendment agreed to.

[Amendment No. 211 not moved.]

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)

moved Amendments Nos. 212 to 215:

Page 272, line 3, at end insert—

"( ) The administrator shall comply with sub-paragraph (4)—

(a) as soon as is reasonably practicable after the company enters administration, and

(b) in any event, before the end of the period of eight weeks beginning with the day on which the company enters administration." Page 272, line 4, leave out "have complied" and insert "comply"

Page 272, line 5, leave out "before the end of the period referred to in that sub-paragraph"

Page 272, line 26, leave out "not be after the end of the period of six" and insert "be—

(a) as soon as is reasonably practicable after the company enters administration, and

(b) in any event, within the period of ten"

On Question, amendments agreed to.

[Amendment No. 216 not moved.]

Photo of Lord Hunt of Wirral Lord Hunt of Wirral Conservative

moved Amendment No. 217:

Page 275, line 11, at end insert—

:TITLE3:"FINANCING ADMINISTRATIONS

:TITLE3:Powers of court to approve financing of companies in administration

57A (1) The administrator of a company may at any time following his appointment apply to the court for approval of super priority financing.

(2) In this paragraph "super priority financing" means financing for a company in administration provided by a lender who shall enjoy repayment priority over existing secured and unsecured creditors of that company.

(3) The court shall not make an order granting an application for super priority financing under this paragraph unless it is satisfied that—

(a) the monies to be borrowed are to be used for expenditure necessary to preserve the company's business for the benefit of the company's creditors; or

(b) the monies to be borrowed are necessary to continue the operation of the business of the company in order to assist in meeting the administrator's aims under paragraph 3(1)(a); and

(c) the secured creditors are not prejudiced by the provision of super priority financing; and

(d) in all the circumstances it is appropriate to make an order in the interests of the administration."

Photo of Lord Hunt of Wirral Lord Hunt of Wirral Conservative

My Lords, this provision follows a debate that we had in Committee, when I sought to deal with the key issue of super priority finance in company and business rescues. I should tell your Lordships that the Minister, the noble Lord, Lord Sainsbury, explained to me, and no doubt the noble Lord, Lord McIntosh of Haringey, will shortly confirm, that the Government's position is essentially that the decision to lend to a company should be left to the commercial judgment of the lending market, based on whether free assets are available to use as security, among other things.

However, with the greatest respect, I believe that that approach appears to misunderstand the position that many small and medium-sized companies find themselves in when facing serious problems involving insolvency. Of course, if assets are available to lend against, why would such a company seek administration at that point? The key is to give a company protection from its creditors. That is why we have the moratorium on creditor action. Then, of course, it must have the finance to carry on while a rescue plan is put into place; otherwise, in many cases, the company would not have the funds to carry on and another potentially viable business would be lost.

I understand that much of the international community still considers our insolvency system within the UK to be essentially a liquidation process. Many small and medium-sized businesses view the system in the same way—that is, as something to be avoided at all costs, often until it is too late.

I believe we are making great progress with this Bill in reforming the whole structure. But if the new administration process does not allow a business properly to restructure and to be adequately financed while it does so, we risk making no real improvements to the rescue culture and nothing much will change. That is why I make no apology for raising again the issue of financing because I believe that it needs to be considered and properly debated.

In Committee, the noble Lord, Lord McIntosh of Haringey, noted that the Government would take part in any debate on the issue. I am informed by the noble Lord, Lord Sainsbury, that some debate has taken place during the Recess. The noble Lord, Lord Sainsbury, mentioned to me a meeting with some former members of the review group on the company rescue and business reconstruction review and some United States bankers. I have not had time to speak to all the members of the review group but those members to whom I have spoken were unaware that the meeting had taken place. Following the comments of the noble Lord, Lord McIntosh of Haringey, that he or his officials would be in touch with the review group, several members have been awaiting a telephone call but have heard nothing further. The report took some degree of effort and commitment by those who participated. The group has not met since the report was presented, nor has it been asked to attend any meeting. There is need for further debate and discussion.

It may help if the noble Lord, Lord McIntosh of Haringey, could let me know who attended that meeting, the views expressed and conclusions reached. It is a vital issue which has to be considered further in order to have the positive effect on the whole rescue business that the Bill admirably seeks to achieve. I beg to move.

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) 5:45 pm, 21st October 2002

My Lords, it is a difficult and complex issue. It is true that there are some parallels with practice in the United States; but it is also true that there are differences about which we have to be careful. Yes, we debated the issue in some detail in Committee. There has been correspondence between the noble Lord, Lord Hunt, and the noble Lord, Lord Sainsbury. The noble Lord, Lord Hunt, wrote to me on the matter within the past 10 days or so. I hope that he has received the letter in which I replied to him this morning.

I go back to the origins of the issue. The noble Lord, Lord Hunt, again referred to them. The report of the joint DTI/Treasury review group, entitled A Review of Company Rescue and Business Reconstruction Mechanisms, was published in November 2000. The review was quoted in Committee. However, as I said then, I have to record the fact that the report did not make any recommendation in relation to "super priority" financing because of the difficulty of the issue and its view that it would be necessary to have courts that were able to take largely commercial decisions to consider applications under such a procedure.

Having published its report, the work of the review group was completed. I do not know who its members were. The group does not exist at present. But it is true that the Insolvency Service has continued to draw on the expertise of members of the group. The noble Lord, Lord Hunt, raised the issue that former members of the group—I do not know which of them but I shall find out—met with US bankers to consider the issue of "super-priority" funding, but concluded only that this was a complex issue which would need careful consideration. That is, after all, what the review group said two years ago.

One major reservation on such funding for a company that is in administration is that it would essentially guarantee a return to lenders advancing funds on the basis of such priority irrespective of the commercial viability of the rescue proposals. The decision to finance such companies must be an economic one based on the viability of the company. The review group thought that that was not necessarily within the skills of the courts as presently constituted. It is not the intention of this Government that all companies should be given the chance of rescue irrespective of their viability, but rather that an administrator, on being appointed, should determine whether the company and/or its businesses can be rescued. Therefore—it is the point I made in Committee—whether to finance such a rescue should be a commercial decision, best left to the judgement of the lending market and not the court. The courts have made clear on a number of occasions, and it is generally recognised, that it is not the role of the courts to make judgements on commercial matters. That is for the parties concerned. That has been acknowledged in our discussions on other aspects of the administration process.

When considering the substance of Amendment No. 217, it difficult to see in the context of UK corporate lending, where lenders take fixed and floating charges usually over all of the property of a company, how the court could satisfy itself in relation to proposed new paragraph 57A(3)(c), where it may not make an order for super priority financing, unless satisfied that,

"the secured creditors are not prejudiced by the provision of super- priority financing".

In practice, there may be few occasions where that could be possible.

The review group's report concluded, and former members of that group found when they subsequently met with US Bankers, that the whole issue of super priority financing is an extremely complex one, with far-reaching potential effect. Legislative changes should be proposed only following extensive consideration and wide consultation. That is not something that should be dealt with in the Bill's progress.

Having said that, of course, I shall give the noble Lord, Lord Hunt, the information he seeks about who took part—unless they wish me not to give that information, although I cannot imagine that. I shall continue to keep the need for insolvency reform under review. As part of that process we are happy to consider any comments. I have said in a letter sent this morning to the noble Lord, Lord Hunt—I am sorry to learn that he has not received it—that we continue to be concerned about the issue and willing to discuss it with him. With reference to his kind offer to host a dinner, it would probably be more appropriate for us to do so, if there were to be such an occasion.

Photo of Lord Hunt of Wirral Lord Hunt of Wirral Conservative

My Lords, I am a little overwhelmed. I have never before been offered a free dinner by a Government Minister. Perhaps I may consult a little. I am grateful to the noble Lord. The Minister is noted for his courtesy. He has exceeded even his own expectations as well as mine.

On super financing, there are a number of occasions where important businesses of immense size, with huge implications for jobs and the UK economy, at present seek to reconstruct against a backdrop which gives them no protection from creditors. An unreasonable, and often small, creditor can bring the edifice crumbling down because under our present law there is no protection.

The Minister has stated how complicated and difficult the issue is to resolve. Against that background, I welcome his words and shall reflect on them. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Lord Haskel Lord Haskel Labour

My Lords, I have to inform the House that Amendments Nos. 218 and 219 have been marshalled incorrectly. I propose to call Amendment No. 219 and then Amendment No. 218.

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)

moved Amendment No. 219:

Page 275, line 42, leave out paragraphs 64 to 66 and insert—

"64 (1) The administrator of a company may make a distribution to a creditor of the company.

(2) Section 175 shall apply in relation to a distribution under this paragraph as it applies in relation to a winding up.

(3) A payment may not be made by way of distribution under this paragraph to a creditor of the company who is neither secured nor preferential unless the court gives permission.

65 The administrator of a company may make a payment otherwise than in accordance with paragraph 64 or paragraph 13 of Schedule 1 if he thinks it likely to assist achievement of the purpose of administration."

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, Amendments Nos. 218 and 219 cover the same subject. As I explained in Committee, the drafting of the provisions allowing an administrator to make payments to creditors did not work as we had wanted. Amendment No. 219 makes clear the type of payments that must be made in accordance with the standard order of priority set out in Section 175 of the Insolvency Act 1986. In addition, it clarifies the distinction between payments and distributions.

First, the provision will allow an administrator to make distributions to creditors as a body, in accordance with the standard order of priority. A distribution to unsecured creditors will require the permission of the court. In order to distinguish between such payments and those, usually one-off payments, that are made to individual creditors, outside of the order of priority, we have referred to the first category of payments as distributions.

Secondly, the administrator will continue to be able to make payments, by virtue of paragraph 13 of Schedule 1 to the Insolvency Act 1986, to one or more creditors in respect of debts that were owed at the date of administration as well as expenses and liabilities that arise during the course of the administration, where such payments are necessary or incidental to the performance of his duties.

Thirdly, the amendment will allow the administrator to make payments that he believes are likely to assist the achievement of the purpose of administration. That will involve the administrator using his commercial judgment. Examples of such a situation could be payment of outstanding debts to the supplier of equipment that requires regular safety inspections and maintenance or payment to the franchisor of a franchise business to enable necessary goods to be supplied. Payments such as those would need to be made out of the standard order of priority and to a specific creditor or creditors, rather than by way of distribution to creditors generally.

That is an important point and is not provided for in the opposition Amendment No. 218. With that one exception, we believe that the issues in Amendment No. 218 are covered in Schedule 16, as amended by Amendment No. 219. I beg to move.

Photo of Lord Kingsland Lord Kingsland Conservative

My Lords, I am curious to know why these amendments have been marshalled incorrectly. I would like to have had the opportunity to open the batting and to invite the Minister to tell me how government thinking had developed since the probing way in which I introduced this matter in Committee. From what the Minister has said, I believe that I can infer that government thinking has moved on; indeed; it has moved so far that not only have all the issues raised by us in Committee been dealt with, but an additional imaginative insertion has been made. In those circumstances I thank the Minister for dealing with the matter in the way that he has. I shall withdraw my amendment.

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, the noble Lord, Lord Kingsland, is excessively kind and it falls to me to thank him for the way in which he raised the matter in Committee and enabled us to respond as we have.

On Question, amendment agreed to.

[Amendment No. 218 not moved.]

Photo of Lord Hunt of Wirral Lord Hunt of Wirral Conservative

moved Amendment No. 220:

Page 277, line 27, at end insert—

"( ) Where the goods are used by the administrator to continue running the business, the administrator must make payments to the owner of the goods under the terms of the hire-purchase agreement."

I All England Reports 476. On the face of the Bill that will bring clarity to administrators and lenders.

Amendment No. 221 would insert the words:

"to include any additional value attributable to the owner's ability to rehire the goods".

The market value of the equipment will not in all cases compensate the lender for the goods on hire. The rehire value is often worth more than the market value and, where the equipment is still within its life expectancy, the lender will seek to rehire to capitalise on his investment. The court should be able to use its discretion in such cases. I hope that the Minister will feel able to accept Amendments Nos. 220 and 221. I beg to move.

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, I am sorry to say to the noble Lord, Lord Hunt, that I am no more sympathetic to these amendments than I was when my noble friend Lord Mitchell moved them in Committee. I understand the concerns of the Finance and Leasing Association. We have considered carefully the views expressed to us, but as I explained in Committee, the Government do not want to amend the current legislation. Clearly, where assets that are subject to such an agreement continue to be used during the administration, the hire purchase companies would suffer a loss through lack of payment during that period. But the purpose of administration is to provide a breathing space in which to put forward rescue proposals or proposals for improving the outcome for creditors. It would not be right to allow such proposals to fail as a result of a legal requirement to continue making payments of this kind throughout such a breathing space, as suggested by Amendment No. 220.

The Bill as drafted does not make a change in the existing law. It replicates existing provisions whereby it falls to the courts to resolve the difficult act of balancing the interests of the hire purchase creditor, and their need for continued payments, and the interests of the general body of creditors which requires that the breathing space is sufficient for workable proposals to be developed and implemented.

We believe that existing case law on the ability of creditors to enforce their rights during the moratorium will continue to be fully relevant to the hire purchase provision in the revised administration procedure. It remains the Government's view that the courts are best placed to resolve such matters on a case-by-case basis, taking full and proper account of the facts of each case.

Amendment No. 221 would require additional money to be paid to the owner of hire purchase goods, over and above their market value in order to account for the owner's ability, or not, to rehire the goods; that is, to pay the owner in excess of the market value of the goods to enable him or her to replace them. However, if the owner believes that some additional value attaches to the goods as a result of their capacity to be hired, it is up to that creditor to persuade the court that such an additional sum should be included in its estimation of the market value. But surely as a matter of principle all that an owner can really expect must be the market value of the goods, thus allowing the owner to replace the goods and thereafter to hire them out. I am sorry to be so negative.

Photo of Lord Hunt of Wirral Lord Hunt of Wirral Conservative

My Lords, I am grateful to the Minister for his comments on Amendment No. 220, although I regret his refusal to understand the point raised in Amendment No. 221. In the circumstances, I accept what he has said. I shall consider the matter further, but in the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 221 not moved.]

Photo of Lord Hunt of Wirral Lord Hunt of Wirral Conservative 6:00 pm, 21st October 2002

moved Amendment No. 222:

Page 278, line 22, leave out "harm" and insert "prejudice"

Photo of Lord Hunt of Wirral Lord Hunt of Wirral Conservative

My Lords, currently the Bill provides that a creditor can apply to the court for relief if he thinks that the administrator has acted in such a way as unfairly to harm his interests. I contend that "harm" is a wide term and there is little or no jurisprudence on it. It is not a word that, in this context, has been considered judicially.

I am advised by lawyers who consider these matters in everyday terms that "harm" will cause confusion as to its scope. During the course of administration, many creditors could say that they are harmed by the action of an administrator. It is therefore far too wide a term. The scope of "prejudice" is less wide and, in its favour, it is commonly used—for example, in Section 459 of the Companies Act 1989, so has a body of judicial opinion already around it. The same change should be made to government Amendment No. 205, where the word "harm" also occurs. I beg to move.

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, this is a case where the non-lawyers have to stand up for their rights. The Lord Chancellor is trying to update legal language. I found myself repeating a latin phrase because somebody else had used it. The noble Lord, Lord Hunt, did so earlier without any such justification. We are trying to get this stuff out of legal language. For the purposes of Pepper v. Hart, I am advised that there is no distinction between "harm" and "prejudice"—but "harm" is a common word and more understandable to lawyers. In the cause of updating the language of law, I will resist Amendments Nos. 222 and 223.

The noble Lord did not speak to Amendment No. 225 but I will say a word, in the hope that he will not move it. Its purpose is to prevent successful actions being taken against the administrator where he has acted reasonably in all the circumstances. There is no real prospect of a successful challenge to the actions or inactions of an administrator where he or she has acted reasonably in all the circumstances. Proposed paragraph 74 in Schedule 16, which provides the right to challenge the administrator where unfair harm is alleged is based squarely on Section 27 of the Insolvency Act 1986. There is no such proviso in that section. We would not expect the courts to act significantly differently in relation to paragraph 74 than in the past in relation to Section 27—though no doubt case law will develop in light of the revised administration procedures.

Photo of Lord Hunt of Wirral Lord Hunt of Wirral Conservative

My Lords, I was awaiting the Minister's response to Amendments Nos. 222 and 223 before speaking to Amendment No. 225. I am not sure whether the Minister has yet made his will, but I will caution the noble Lord and give him some free legal advice. He should not try to remove the jargon because huge areas of jurisprudence govern the words that his will may use. If he uses everyday language, he will find that when the sad event arrives and he departs for the next world, all his goods will go in precisely the opposite direction to that which he might intend.

Photo of Lord Hunt of Wirral Lord Hunt of Wirral Conservative

Yes, my Lords, but the noble Lord might like the assurance that his wishes would be fulfilled. Although the Minister may excite for a moment approval from the House by saying that he much wants to use everyday language, I caution him that where words have already been subjected to lengthy legal debate, it is often wiser to stick with the established words. But of course the Minister's brave attempt to justify the unjustifiable—which I remember doing on many occasions when I was in the noble Lord's position—gives me cause to think and ponder.

As to Amendment No. 225, the Minister is saying "Do not concern yourself. Those words will be implied. There is no need to include them expressly because the court will only act in circumstances where it is satisfied that the administrator has acted reasonably". In those circumstances, I accept the Minister's assurance. In the mean time, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 223 not moved.]

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)

moved Amendment No. 224:

Page 278, line 27, at end insert—

"( ) A creditor or member of a company in administration may apply to the court claiming that the administrator is not performing his functions as quickly or as efficiently as is reasonably practicable."

On Question, amendment agreed to.

[Amendment No. 225 not moved.]

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)

moved Amendment No. 226:

Page 278, line 41, leave out "under this paragraph" and insert "on a claim under sub-paragraph (1)"

On Question, amendment agreed to.

[Amendment No. 227 not moved.]

[Amendment No. 228 had been withdrawn from the Marshalled List.]

Photo of Lord Hunt of Wirral Lord Hunt of Wirral Conservative

moved Amendment No. 229:

Page 279, line 41, leave out "three months" and insert "one year"

Photo of Lord Hunt of Wirral Lord Hunt of Wirral Conservative

My Lords, I am in the wonderful position that the noble Lord, Lord Sainsbury of Turville, has added his name to this amendment. I beg to move.

On Question, amendment agreed to.

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)

moved Amendment No. 230:

Page 280, line 2, leave out "three" and insert "six"

On Question, amendment agreed to.

[Amendment No. 231 not moved.]

Photo of Lord Kingsland Lord Kingsland Conservative

moved Amendment No. 232:

Page 280, line 13, leave out sub-paragraph (a) and insert—

"(a) a majority in value of the secured creditors."

Photo of Lord Kingsland Lord Kingsland Conservative

My Lords, I shall speak also to Amendments Nos. 233 to 237 and to Amendments Nos. 251 to 253—which were first tabled in Committee. They dispense with the need to obtain the consent of every secured creditor, recognising that companies increasingly borrow from a wide variety of secured creditors; and that, as a result, it may not be timely or practical to obtain the consent of every one.

The amendments either provide for a simple majority or a 75 per cent majority. The latter figure is adopted because it represents the commonly used figure internationally for the approval of "cram downs" in insolvencies.

I know that the Government are concerned that the amendments might have the effect of disenfranchising smaller secured creditors; but we consider that, for the reasons mentioned, it is impractical to require the consent of every single one. If the concern is about larger secured creditors, the preferred amendment should be for a 75 per cent majority.

So far as Amendment No. 253 is concerned, paragraph 98 provides that an administrator is discharged from liability in respect of any action in his capacity as an administrator once he has ceased to be the administrator of the company. In the case of an administrator appointed by the holder of a floating charge, the company, or its directors, his discharge takes effect at the time appointed by a resolution of the creditors' committee; or, if there is no committee, by resolution of the creditors.

Paragraph 98(3) provides that such a resolution shall be taken as passed if passed with the approval of each secured creditor of the company and a majority of the preferential creditors in value if the administrator has made a statement, in his statements of proposal, that he thinks the company has insufficient property to enable a distribution to be made to unsecured creditors. In those circumstances the unsecured creditors are disenfranchised.

That must be wrong as regards the time at which the administrator is discharged from liability in respect of any action of his as administrator. It may be his fault that there will be no distribution to unsecured creditors. The date on which he is discharged from liability is a decision that concerns them. They should be entitled to have a say; and to insist on some explanation as to why a dividend will not be paid to them before they decide on the date that his discharge will take place. I beg to move.

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, the period of an administration can be extended by the consent of the creditors instead of requiring the administrator to apply to a court. The time limits for sending out the statement of proposals, for the period of notice for a creditors' meeting and for the holding of the initial creditors' meeting can also be extended by consent. Currently, consent is defined as being the majority of those unsecured creditors who respond, plus all the secured creditors. Amendments Nos. 232, 235, 237 and 252 allow for consent to be considered as the majority of the secured creditors rather than all of them, whereas Amendments Nos. 233, 234, 236 and 251 seek to define consent as referring to a 75 per cent majority of secured creditors.

If I understand correctly the noble Lord, Lord Kingsland, he prefers the 75 per cent option to the majority option. But we think that the decision to extend the period of an administration and the moratorium on legal and other actions that go with it, should be one that is taken following consent of all of the secured creditors.

There may be times when it is difficult or even impossible to obtain consent of each of the secured creditors. But the administrator will, in that or any event, be able to apply to the court for an extension to the administration as an alternative. That has always been the case. It would then be up to the court to weigh up the potential benefits of the extension against the interests of creditors, including the secured creditors.

Although it is a tempting idea to provide for a bare majority or 75 per cent majority of secured creditors for the purposes of consent, we do not think it would be practical. First, the administrator always has the option to go to court for an extension for a specified period. Secondly, and more importantly, in reality the administrator must elicit the support of the secured creditors—perhaps as funders of the administration, but certainly to avoid them enforcing their security immediately at the end of an administration moratorium thus probably destroying the possibility of a rescue.

On the other hand, paradoxically, Amendment No. 253 seeks to broaden the extent to which the consent of creditors is required by including those unsecured creditors who are not going to receive any distribution from the administration, and therefore have no financial interest in it.

While I believe that it is right and proper to include all creditors in those decisions in which they have a financial stake, in those cases where this is not the case, this would simply add unnecessary administrative burdens and costs to the administration; costs that could reduce the returns for those creditors who do have a financial interest. In summary, I am opposed to relaxing the rules in all these amendments.

Photo of Lord Kingsland Lord Kingsland Conservative 6:15 pm, 21st October 2002

My Lords, I thank the Minister for his full response. So far as concerns the question of the majority or the 75 per cent, I shall go away and reflect on whether it would be sensible to return again with a similar amendment at Third Reading. I shall also reflect on what he says about the position of an unsecured creditor. Meanwhile, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 233 to 237 not moved.]

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, in moving Amendment No. 238, I shall speak also to Amendment No. 244. The potential for a company to move directly into a creditors' voluntary liquidation from administration is new and is introduced by paragraph 83 of new Schedule B1—that is, Schedule 16 of the Bill. This will facilitate, for example, distributions to unsecured creditors.

These amendments are simply consequential on that new procedure. We have provided that certain requirements necessary where a company goes directly into voluntary liquidation will not be necessary or appropriate where a company moves from administration into creditors' voluntary liquidation. These matters include the requirement to publish a notice of the resolution to wind up, to hold a meeting of creditors, to lay a statement of affairs before the creditors and to appoint a liquidator. This latter requirement is addressed specifically by paragraph 83. The others will have already been undertaken as part of the administration process. There is no value in repeating them simply for the purposes of the creditors' voluntary liquidation.

In addition, the possibility of a declaration of solvency has no place in this procedure. Where a creditors' committee has already been formed in administration it will continue to exist as if it were a liquidation committee. I beg to move.

On Question, amendment agreed to.

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, in moving Amendment No. 239 I shall speak also to Amendments Nos. 240 to 243 and Amendments Nos. 245 to 250. These are technical amendments. They make reference to documents being filed with the Registrar of Companies; references to documents being sent to him and thereafter registered by the Registrar.

The Bill includes various references to the administrator filing documents with the Registrar of Companies, but in technical terms this merely means the document arriving in whatever state it may be in at Companies House. In other words, Companies House considers that it has been filed when it arrives in the post room. In most instances in the Bill this is acceptable since nothing substantive flows from the filing. However, there are two occasions on which an action or change in circumstance is instigated on a document being accepted by the Registrar of Companies. It then becomes particularly important that the terminology used in the Bill is precise, to mean that the substantive effect is from when the document is put on the register, not merely when it has arrived at Companies House.

The two occasions are those dealt with in the two paragraphs affected by these amendments, which deal with the end of the administration, when the company is either to move into creditors' voluntary liquidation, in order that the administrator can make distributions to creditors, or, in those cases where there is nothing left to distribute, is to be dissolved.

The Bill as drafted allows for the move into liquidation or dissolution to take effect on, or at a point some time after, the filing of the appropriate document with the Registrar of Companies. However, for the reason that I have given regarding the registrar's definition of "filing", the filing of an incorrectly filled-in form is not the "filing" that we would want to trigger the change in the company's circumstances. We want the change to be effected when the document is accepted and placed on the company's public file—that is, from the date that it is registered with the Registrar of Companies. I beg to move.

On Question, amendment agreed to.

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)

moved Amendments Nos. 240 to 250:

Page 282, line 42, at end insert—

"( ) On receipt of a notice under sub-paragraph (3) the registrar shall register it." Page 282, line 43, leave out "files" and insert "sends"

Page 283, line 3, leave out "filing" and insert "registration"

Page 283, line 8, leave out "filed" and insert "registered"

Page 283, line 12, at end insert—

"( ) In the application of Part IV to a winding up by virtue of this paragraph—

(a) section 85 shall not apply,

(b) section 86 shall apply as if the reference to the time of the passing of the resolution for voluntary winding up were a reference to the beginning of the date of registration of the notice under sub-paragraph (3),

(c) section 89 does not apply,

(d) sections 98, 99 and 100 shall not apply,

(e) section 129 shall apply as if the reference to the time of the passing of the resolution for voluntary winding up were a reference to the beginning of the date of registration of the notice under sub-paragraph (3), and

(f) any creditors' committee which is in existence immediately before the company ceases to be in administration shall continue in existence after that time as if appointed as a liquidation committee under section 101." Page 283, line 15, leave out "file" and insert "send"

Page 283, line 16, leave out "with" and insert "to"

Page 283, line 18, at end insert—

"( ) On receipt of a notice under sub-paragraph (1) the registrar shall register it." Page 283, line 19, leave out "filing" and insert "registration"

Page 283, line 21, leave out "files" and insert "sends"

Page 283, line 26, leave out "filing" and insert "registration"

On Question, amendments agreed to.

[Amendments Nos. 251 to 253 not moved.]

Schedule 17 [Administration: minor and consequential amendments]:

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)

moved Amendment No. 254:

Page 298, line 35, leave out "of the approval of the voluntary arrangement" and insert "on which the voluntary arrangement takes effect"

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)

The amendment and those grouped with it—Amendments Nos. 255 to 259—are consequential and technical amendments necessary to align the Bill with the Insolvency Act 2000 and facilitate the drafting of the insolvency rules. Amendments Nos. 254 and 255 reflect the fact that Section 387 of the Insolvency Act 1986 has already been amended by the Insolvency Act 2000 and add further necessary consequential amendment to subsection (3). Amendments Nos. 256, 257 and 258 will ensure that we have sufficient vires to provide appropriate rules for the Bill's provisions. Amendment No. 259 corrects a cross-reference in Schedule 17(9). I beg to move.

On Question, amendment agreed to.

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)

moved Amendments Nos. 255 to 259:

Page 298, line 38, after "paragraphs" insert "(a),"

Page 300, line 7, at end insert—

"( ) At the end of paragraph 2 (which becomes sub-paragraph (1)) add—

"(2) Rules made by virtue of this paragraph about the consequence of failure to comply with practice or procedure may, in particular, include provision about the termination of administration."" Page 300, line 10, at end insert—

"(2A) After paragraph 14 insert—

"14A. Provision about the application of section 176A of this Act which may include, in particular—

(a) provision enabling a receiver to institute winding up proceedings;

(b) provision requiring a receiver to institute winding up proceedings."" Page 300, line 10, at end insert—

"(2B) After paragraph 14A (inserted by sub-paragraph (2A) above) insert—

"Administration

14A. Provision which—

(a) applies in relation to administration, with or without modifications, a provision of Parts IV to VII of this Act, or

(b) serves a purpose in relation to administration similar to a purpose that may be served by the rules in relation to winding up by virtue of a provision of this Schedule."" Page 300, line 23, leave out "28(4)" and insert "28(7)"

On Question, amendments agreed to.

Schedule 18 [Schedule 2A to Insolvency Act 1986]:

Photo of Lord Hunt of Wirral Lord Hunt of Wirral Conservative

moved Amendment No. 260:

Page 308, line 1, leave out from "involves" to end of line 3 and insert "the grant of a security interest by a party to the arrangement to—

(i) a person holding it as trustee for one or more persons who hold a capital market investment issued by a party to the arrangement;

(ii) a person party to such arrangements who issues a capital market investment;

(iii) a person holding it as trustee for a person party to such arrangement who issues a capital market investment; or

(iv) a person holding it as trustee for one or more persons who are party to the arrangement and who provide finance to a person party to such arrangement; or"

Photo of Lord Hunt of Wirral Lord Hunt of Wirral Conservative

My Lords, we have already debated the amendment in Committee. I am aware that the Government believe it to be unnecessary, but I have consulted widely outside the House, in particular, with those in the legal profession who specialise in the area and who are not as satisfied as the Government appear to be.

The purely technical nature of the amendment is evident; I ask the Government only to reconsider. Perhaps I may explain. The existing capital markets exemption provided for in Schedule 18 demonstrates that the Government have decided that such transactions should be exempt from the restriction on appointing an administrative receiver to support the structured finance market.

I am not aware of any policy issues connected with the exception as it applies to special purpose vehicles used in structured finance transactions. Several structures should fall within the exemption but, as drafted, the Bill covers only one of them. It would be unfortunate if the Bill provided for some types of finance techniques dealing with special purpose vehicles but not others for what appears to be no sound policy or political reason. I therefore make no apology for again moving this purely technical amendment designed to cover all the types of structure that the Government have agreed should be exempt.

Finally, I am happy to share with the Minister and his colleagues the legal advice that I have received, which makes it imperative that the amendment is accepted. Meanwhile, I beg to move.

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, let me immediately say in response to the noble Lord's final point that officials have already met the London Law Society. If, following today's consideration, the society wants a further meeting, I am sure that that may be arranged. If the noble Lord, Lord Hunt, is referring to some other adviser, we would include him in that meeting or make separate arrangements.

First, let me say what is a capital market arrangement. It is defined in Clause 72B(1) and paragraph 1 of the schedule. It is an arrangement that involves the issue of a capital market investment; that involves, or is expected to involve, a debt by at least one party of at least £50 million; and that involves security being granted to a person holding it on trust for someone who holds a capital market investment issued by a party to the arrangement.

There seems to be a fear that the definition of a capital market arrangement contained within paragraph 1(1)(a) of Schedule 2A will be insufficiently wide to encompass all potential capital market arrangements. That is true, but it has never been our intention that that subparagraph should cover all such arrangements; that is why we have subparagraphs (b), (c) and (d). The exception provisions provided by paragraph 1 of the Schedule are for all sorts of structures within the capital markets. It must be possible to ensure that an arrangement falls within those provisions.

Indeed, officials have spent much time considering and drafting the exceptions with various interested parties—including City lawyers—and are completely satisfied that, while the exceptions are not so broad so as to encourage avoidance, they will in practice prove to be flexible. The matter would also presumably impact on the eligibility criteria for the new company voluntary arrangement procedure introduced by the Insolvency Act 2000, which was amended specifically to deal with capital market arrangements by an instrument approved by this House on 24th July—without comment of which I am aware.

The proposals in the Bill and the eligibility criteria for the new company voluntary arrangement impact on similar capital market arrangements. It makes sense to have comparable definitions. Indeed, to adopt different definitions would create the potential for confusion and uncertainty and call into question the instrument accepted by Parliament only three months ago. I must resist the amendment.

Photo of Lord Hunt of Wirral Lord Hunt of Wirral Conservative

My Lords, the Minister resists the amendment with such good grace and such a kind offer to allow those who advise to consult further with him and his colleagues that in the circumstances, I have no alternative but to beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 247 [Unsecured creditors]:

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)

moved Amendment No. 261:

Page 179, line 28, at end insert—

"( ) Subsection (2) shall also not apply to a company if—

(a) the liquidator, administrator or receiver applies to the court for an order under this subsection on the ground that the cost of making a distribution to unsecured creditors would be disproportionate to the benefits, and

(b) the court orders that subsection (2) shall not apply."

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, in moving the amendment I shall speak also to Amendments Nos. 262 to 263. In dealing with Amendment No. 261, I thank the Opposition for giving us the opportunity to reconsider since Committee whether an office-holder—a liquidator, administrator or receiver—should be free not to implement the ring fence where, although the net property is equal to or more than the prescribed minimum, he nevertheless thinks that the cost of distribution will outweigh the benefit. We are thinking of here a company that may have a large number of unsecured creditors. As someone who has an ITV Digital box, I probably fall into that category. Seriously, where the office-holder is of the view that—because of the sheer numbers of unsecured creditors, for example—the costs of distributing the prescribed part would really not justify that distribution, he should be able to act to disapply the new section.

On further consideration of the issue over the summer, we have reached the conclusion that new Section 176A would benefit from an express provision to allow the office-holder to apply to court to disapply the obligation to set aside the prescribed part where such a situation arises. The amendment will do this where the court is satisfied that the costs of distribution would outweigh the benefits.

We are grateful to the City of London Law Society for bringing the need for Amendments Nos. 262 and 263 to our attention. Our policy has always been that the calculation of the prescribed part is not to apply to charges created before the section's commencement—and that is consistent with the provision that the holder of an existing floating charge will continue to be able to appoint an administrative receiver—but that it is to apply to any floating charge created after the section's commencement.

The easiest way to explain that is to give an example. Where a company has granted both pre- and post-commencement floating charges, the liquidator, say, would pay out to fixed security holders; then pay the expenses of the winding-up; then pay any remaining preferential claims; then pay out to the pre-commencement floating charge holder, or holders; and then he would apply the prescribed part to the net property available to the post-commencement floating charge holders.

We do not anticipate a problem with pre-commencement charges that have subordinated their claim to a post-commencement charge. They will have done so in the knowledge that they will be waiving their right not to be subject to the new Section 176A. I beg to move.

On Question, amendment agreed to.

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) 6:30 pm, 21st October 2002

moved Amendments Nos. 262 and 263.

Page 179, line 44, after "creation" insert "and which is created after the first order under subsection (2)(a) comes into force"

Page 180, line 2, leave out subsections (9) and (10) and insert—

"(9) An order under this section may include transitional or incidental provision."

On Question, amendments agreed to.

Clause 248 [Liquidator's powers]:

Photo of Lord Kingsland Lord Kingsland Conservative

moved Amendment No. 264:

Page 180, leave out lines 10 to 14 and insert—

"The following shall be inserted in Part II of Schedule 4 to the Insolvency Act 1986 (c. 45) (liquidator's powers in winding up: powers exercisable without sanction in voluntary winding up, with sanction in winding up by the court) after paragraph 4—

"4A. Power to bring legal proceedings under section 213, 214, 238, 239 or 423.""

Photo of Lord Kingsland Lord Kingsland Conservative

My Lords, in a liquidation certain powers are only exercisable with the sanction of the court, the sanction of the liquidation committee or the company's creditors. For example, a liquidator can make a compromise with creditors only with sanction. In contrast, a liquidator can raise money on the security of assets of the company without sanction. Some powers are exercisable with sanction in a compulsory liquidation, but without sanction in a voluntary liquidation.

One such power is to bring or defend any action or other legal proceeding in the name, and on behalf of, the company. In a compulsory liquidation the liquidator must seek sanction for doing so. By contrast, in a voluntary liquidation there is no need for him to do so. He can take proceedings in the name and on behalf of the company, without seeking the sanction of the court or, indeed, anyone else.

Clause 249 provides that the legal proceedings under Sections 213, 214, 238, 239 and 423, which are proceedings in the name of the liquidator but for the benefit of the company in liquidation, can be exercisable only with sanction both in a compulsory and a voluntary liquidation, despite that in a voluntary liquidation the liquidator can bring proceedings in the name and on behalf of the company without sanction. We can see no reason why proceedings under Section 213, 214, 238, 239 or 423 should be treated differently from proceedings in the name and on behalf of the company.

If it is right that a liquidator can take legal proceedings in the name and on behalf of the company without sanction in a voluntary liquidation, we believe it must be right that he can take proceedings under the above-mentioned sections in his own name without sanction as well. All such proceedings should be treated in the same way. I beg to move.

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, the noble Lord, Lord Kingsland, has moved that amendment without one reference to the Lewis case, which I thought was going to be the central point. However, as currently drafted Clause 248 will mean that the liquidator of a company will need to seek the sanction of the court or the liquidation committee, or a meeting of creditors where there is no committee, before taking any civil recovery action. That will be the same whether the company is in compulsory or voluntary liquidation. The amendment seeks to remove the need for sanction if the company is in voluntary liquidation. We do not believe that is appropriate.

Perhaps I may remind the House of the reasons behind that provision. Until a recently decided case—the Lewis case, otherwise known as Floor Fourteen—the power in Paragraph 4 of Part 2 to Schedule 4—that is the power to bring or defend any action or other legal proceeding in the name and on behalf of the company—was thought to include the power to bring civil recovery actions. Therefore, it was presumed that the liquidator in a compulsory liquidation would require sanction to bring such actions, while a liquidator in a voluntary liquidation would not.

However, it was clear from the judgment in that case that civil recovery actions are not actions in the name of, or on behalf of, the company. Therefore, it became apparent that no liquidator would require the sanction of creditors to take such action. That has led us to review the whole process of making civil recoveries and the issue of whether a liquidator—whether in a compulsory or voluntary case—ought to require sanction from creditors in order to take such action.

Consideration of that matter led us to look at the impact of the removal of the Crown's preference, whose abolition is aimed at generating funds for unsecured creditors. We would not want any such sums to be used by the liquidator in pursuing legal action unless the creditors approve. After all, it is a commercial decision for the creditors to choose between, say, a five pence in the pound dividend payable now, or whether to allow the liquidator to pursue a claim which may result in a 50 pence in the pound dividend at a later stage.

That is why we have put in the new power for the liquidator in Part 1 of Schedule 4 to the Act, which covers powers exercisable with sanction in both voluntary and compulsory liquidation.

Photo of Lord Kingsland Lord Kingsland Conservative

My Lords, perhaps the noble Lord can tell me whether he accepts my amendment or whether he rejects it.

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, I thought I was making it clear that we need the change which is provided for in the Bill and that the amendment would damage that. We cannot accept it.

Photo of Lord Kingsland Lord Kingsland Conservative

My Lords, I shall not bring the amendment back at Third Reading. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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, in moving Amendment No. 265, I shall speak also to Amendments Nos. 344 and 345. Those amendments are consequential on previous amendments. They will ensure that appropriate insolvency provisions extend to Scotland in addition to England and Wales. I beg to move.

On Question, amendment agreed to.

Clause 251 [Duration of bankruptcy]:

Photo of Lord Hunt of Wirral Lord Hunt of Wirral Conservative

moved Amendment No. 266:

Page 181, leave out lines 25 to 28.

Photo of Lord Hunt of Wirral Lord Hunt of Wirral Conservative

My Lords, as the Minister is aware, I was concerned as we were debating the Bill in Committee about the effect of the automatic right to discharge and release on or within 12 months, as compared to the existing position where that occurs after three years. I therefore move Amendment No. 266 on page 181, which proposes a substitution for Section 279 of the Insolvency Act 1986. It would leave out subsection (2), which reads:

"If before the end of that period the official receiver files with the court a notice stating that investigation of the conduct and affairs of the bankrupt under section 289 is unnecessary or concluded, the bankrupt is discharged when the notice is filed".

In Amendments Nos. 267 and 269, I seek to insert the words on the Marshalled List.

I want to raise with the Minister the early automatic right to discharge and release. As I understand the position under the Bill, the period would be 12 months, unless a notice were filed by the official receiver under the clause to discharge the bankrupt at an earlier date. I also understand that during consultations it was stated by one of the Minister's officials that this could well result in someone filing for bankruptcy and eight weeks later being discharged.

Many people outside this House are most concerned about such a major change in the bankruptcy law. Under these proposals, I and my colleagues are seeking to allow for the bankruptcy discharge period being for a fixed period of 12 months without the possibility of reduction. I would argue that for the following reasons. Reducing the period to less than 12 months is likely to act as a significant incentive to debtors to enter bankruptcy, after which the debtor can acquire new assets free of any claim from his creditors.

Secondly, by definition, a bankrupt is unable to pay his liabilities and so his assets are likely to be minimal—or certainly exceeded—by the amount he owes to creditors. Being divested of existing assets is therefore not a significant disincentive to becoming bankrupt for the "culpable" bankrupt.

Thirdly, Clause 251 as drafted would substantially reduce the trustee's power to ensure co-operation from the debtor since once a notice under the clause has been issued it would remove the power to suspend discharge for failure to co-operate. That is a most important consideration.

Fourthly, under the clause as drafted, there is little time in practice to come to any conclusion about culpability, prior to filing a notice to discharge, as the official receiver is likely to make a decision quickly after a first interview with the bankrupt. A trustee in bankruptcy may subsequently discover matters relevant to the conduct of the bankrupt. In those circumstances, there is no opportunity to make an application for a bankruptcy restriction order because the bankrupt would have received his discharge.

As drafted, there is no provision for any co-operation between the official receiver and the trustee on the filing of a notice under this clause, even though the trustee is likely to hold information relevant to the decision-making process; for instance, inappropriate conduct and failure to co-operate. I hope that the Minister will carefully consider the situation in the light of evidence which is slowly emerging.

I am not sure whether officials have fully briefed the Minister on the latest report from the Centre for Economics and Business Research. I am pleased to see that they have. The consultancy is warning that personal bankruptcies could rise by more than 50 per cent if the Government's proposals are not defeated in this House tonight. Measures in the Enterprise Bill which are designed to allow these so-called pain-free bankruptcies that do not punish individuals for taking risks with their credit could backfire.

The report sets out to say that instead of boosting the economy it is estimated that personal bankruptcies will increase by more than 13,000 a year, knocking £180 million off the gross domestic product. It claims that the resulting £76 million annual cost to unsecured lenders could lead to 170,000 people being excluded from the credit market. I have been made aware of the situation in the United States where there are what are called US-style serial bankrupts who exploit lenders. I am also aware that the report has caused Martin Hall, Director-General of the Finance and Leasing Association, to say that the Government were going too far in exposing the bankruptcy system to abuse.

Photo of Lord Patten Lord Patten Conservative 6:45 pm, 21st October 2002

My Lords, I am grateful to my noble friend for giving way. I listened with great care to the forensic presentation of his case, which is devastating whatever the outcome. Will he agree that respect for law passed in this place and another place is paramount? Will he further agree that a law passed by this place and another place which allowed American serial bankrupts or people in this country to go through a revolving door of bankruptcy every eight weeks by setting up a business and moving on will rapidly be brought into disrepute? I am sure the Minister would not want that?

Photo of Lord Hunt of Wirral Lord Hunt of Wirral Conservative

My Lords, I am grateful to my noble friend Lord Patten. I agree that disturbing statistics and conclusions are revealed by an independent research consultancy. We would do well to recall the experience in the United States. The concern from these Benches is that if one creates a US-style situation, in many circumstances those who find difficulty now in borrowing but succeed will find themselves excluded from such credit being made available.

The noble Lord, Lord Sharman, may make the point that, as was said by his noble friend Lord Razzall, it is important to get the balance right between allowing people to start again quickly and preventing the consumer credit industry from serious damage. My noble friend Lord Patten rightly drew attention to the importance of these provisions. My noble and learned friend Lord Howe of Aberavon has also expressed concern, as have many noble Lords from all sides of the House. It is therefore a matter of getting the balance right.

The most fundamental point I seek to make is the difficulty this House faces in getting the balance right because the Bill does not distinguish business bankrupts from consumer bankrupts. I have every sympathy with the Minister in wishing to make things possible for those who started up businesses through their own entrepreneurship but who through no fault of their own now face difficulties. Those business bankrupts, those business entrepreneurs, are in a completely different category. We should want to see measures introduced that would reduce the bankruptcy discharge period for entrepreneurs of that kind. However, it has been shown in other countries that, where the bankruptcy discharge period is reduced, the number of consumer bankrupts increases considerably.

The Minister looked quizzically at me when I sought to differentiate between consumer bankrupts and business bankrupts. That is exactly what the law does in the United States. For example, in America, over 97 per cent of the 1.5 million bankruptcies in 2001 were consumer bankruptcies. In Hong Kong, in 1997—the year before its insolvency law changed—there were 639 bankruptcy orders, 33 initiated by the debtor and 606 by creditors. By 2001, there were 9,151 orders, 7,389 of which were initiated by the debtor and 1,762 by creditors. There are equivalent examples in Scotland. That is because consumers, rather than entrepreneurs, take advantage of the reduction. I do not believe that the figures demonstrate that the number of entrepreneurs in these circumstances is falling. It is much more because the number of consumers taking advantage of the reduction is considerably increasing. A greater burden is placed on business as it is unlikely that unsecured creditors will agree an individual voluntary arrangement with the consumer bankrupt; there is no incentive if the discharge period is shorter.

There is no restriction on how short the period should be. Earlier, I gave the example of eight weeks. It will be the time that it takes the official receiver to file a notice at court that no investigation is necessary.

I understand that the reaction of the Department of Trade and Industry to the survey by the Centre for Economics and Business Research has been that the modelling assumptions are flawed and do not take into account economic factors such as interest rates. As I understand the position—I have checked this with the consultancy—the modelling assumptions do take account of economic variables, including interest rate levels, income and debt levels, and the prevailing macro-economic conditions. I understand that this has now been explained to the department. The findings of 13,000 additional bankruptcies a year are in addition to any changes in bankruptcy levels caused by changes in these variables.

If the Minister intends in his response to repeat the DTI line, I point out to him that I should feel much more reassured if the department had carried out research. As I understand the position, it has not commissioned any research on this issue. I am, therefore, not sure on what basis the department's line that there will be no change is based.

An increase in bankruptcy will result in the official receiver not having the resources accurately to investigate. I understand that there is some thought that consumer bankruptcies will be subject to telephone surveys or standard questionnaires. I do not for one moment believe that those are sufficient. The official receiver will require appropriate training and competency levels to ensure that they have the ability, the resources and the inclination to ensure that the system does not become open to abuse.

In conclusion, I raise these points from a genuine belief that we must assist the entrepreneur and do our best to ensure that enterprise is not stifled. At the same time, we must take every possible step to ensure that in this Bill we do not create a rogue's charter. While we accept that all the restrictions and sanctions of bankruptcy will remain, the perception among many will be that if one can get out of bankruptcy within a few months or weeks, this becomes a more attractive option. That is why it is essential to have a fixed minimum term. I beg to move.

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Conservative

My Lords, I do not wish to weary the House with a repetition of the excellent points made by my noble friend, but there are one or two additional points to be made. As my noble friend Lord Patten has said, there is an issue of public confidence. The Minister indicated in Committee (at col. 826 of Hansard) bankruptcy will not be pain free. But if there is to be no minimum period, that comes jolly close to it—and for the persuasive bankrupt, very close indeed.

The Minister indicated also—a point which I find extraordinary—that,

"There was wide support for the one-year discharge period in responses to the White Paper".—[Official Report, 30/7/02; col. 825.]

I understand that, and such a proposal has been put forward. However, the provision that the amendment seeks to delete offers the chance to drive a coach and horses through the idea of the one-year period by allowing no discharge period at all. The CBI has expressed strong concern, as have many credit organisations.

There is a second problem in having a provision for automatic discharge; namely, potential regional disparities. As my noble friend Lord Freeman pointed out in Committee, different levels of resources and different processes could lead to different results in terms of automatic discharge.

The Minister and his officials will no doubt have seen an interesting article in the Financial Times by David Storey, the director of the Centre for Small and Medium-sized Enterprises at Warwick Business School. He argues powerfully that there is a law of unintended consequences. Attempts to provide a way for people to get away from bankruptcy can lead to severe consequential costs as regards the availability of credit. He uses the US example of Texas and Connecticut. The procedure in Texas is very liberal: a bankrupt's home is exempt and up to 30,000 dollars. In Connecticut, all the debts have to be repaid in full. The result has been a drift of bankrupts to Texas to take advantage of the arrangements there; but business credit availability in Texas has consequently been reduced. The availability of business credit is better in Connecticut. If we liberalise the situation—I use the word "liberalise" advisedly—in the way proposed in the Bill as presently drafted, we must think about the consequences in terms of the impact on small and medium-sized enterprises and on credit availability.

I, along with many other noble Lords, have received letters from MBNA Europe Bank Limited pointing out the ratio for personal bankrupts; namely, that an average bankrupt costs 26 times the profit earned on the average customer. So the cost of personal bankruptcies will be severe to the full and proper payer.

I do not propose to quote again the Centre for Economics and Business Research. It seems to me that it has some powerful arguments, and they were powerfully made by my noble friend. My view is that there should be some irreducible minimum period which keeps faith with those who have lost in the bankruptcy, be it creditors, employees, taxpayers or others. While I appreciate and applaud the fact that the Bill may be about reducing the stigma of bankruptcy—and that is fair enough—we should not eliminate the stigma. There needs to remain a measure of deterrence. That is why I support the amendment.

Photo of Lord Patten Lord Patten Conservative 7:00 pm, 21st October 2002

My Lords, I am very happy to follow my noble friend Lord Hodgson, who is absolutely right to say that there should be an "irreducible minimum period" before people could discharge their bankruptcy. I also agree with him on the other three important points that I believe he made.

My noble friend Lord Hunt, who is leading us in this debate this evening, is quite right to warn the House to be awfully chary of creating something that turns out to be a "rogues charter", which is a very telling phrase. I worry very much that we may, inadvertently, in this Bill—many parts of which I applaud—be creating an opportunity for a revolving door of a few hard cases going in and out of bankruptcy in order to manifest the worst extremes of pyramid selling, or of other corrupt practices, that we have seen in the past decades.

What worries me more—I look to the Minister in his normal cheery way to clear up this point—is the suggestion by my noble friend Lord Hunt that this excellent piece of research, which is fundamental, has effectively been rubbished by the spinners of the Department of Trade and Industry as being somehow unfounded—a department of trade and industry that has not itself carried out such research. I do not know whether my noble friend Lord Hunt agrees with me, but I find that rather worrying. I am not normally one of your Lordships belligerent tendency, but if that turned out to be the case and it has just been dismissed out of hand by the spin doctors at the DTI, I believe that I would join the belligerent tendency.

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, I do not know whether this could be thought to be belligerent, but, if I believed that there was any real substance in the research that noble Lords opposite have quoted with such approval, I would not be satisfied by tabling an amendment that said that there should not be any discharge from bankruptcy before the period of one year; indeed, I would be opposing the provisions in the Bill much more widely. I ask the House to consider why we find ourselves in this situation. If noble Lords seriously believe that there will be an increase of 50 per cent in the number of bankruptcies as a result of changes in legislation—in fact, the research points to 53.5 per cent—I wonder whether they should be satisfied with such modest amendments at this time.

I have to say that both the understanding—

Photo of Lord Hunt of Wirral Lord Hunt of Wirral Conservative

My Lords, I feel that I should answer the question that the Minister just posed. I did not speak at great length to the proposals in Amendments Nos. 267, 268 and 269. The noble Lord must surely appreciate that I was seeking to accept at face value the assurances that he gave when we debated the matter in Committee. There needs to be some further consideration in the light of the findings of this report. That is provided for in the provisions set out in the subsequent amendments; and, indeed, answers the question that the Minister just raised.

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, that is why, if the House will allow me, I propose to spend some time in dealing with our understanding, and my understanding, of the issues that have been raised both by the research and by the amendments.

Judging by the speech made by the noble Lord, Lord Hunt, there seems to have been a very considerable misunderstanding of the nature of the changes that are being made. If we look at the Explanatory Notes to the Bill, we can see the differences. The really important change being made in the Bill is not a general reduction in the period for discharge from bankruptcy, but a distinction that is being made between culpable bankrupts and those who are less culpable. Under the provisions of the Bill, culpable bankrupts are to be subjected to bankruptcy restriction orders—or, sometimes, agreements, if possible—which extend for a period of at least two years, and up to 15 years, following discharge.

The protection of the public, which is a very important concern in the way that we are considering bankruptcy here, is very much to be found in those restriction orders and their inherent seriousness. At present, the duration of the bankruptcy is the same generally for bankrupts, regardless of culpability or the level of their assets or liabilities. Therefore, we propose that there should be an automatic discharge one year after the bankruptcy is made. However, if the official receiver files a notice stating that further investigation into the bankrupt's conduct or affairs is unnecessary, the period may be reduced. That is the burden of Amendment No. 266.

We do not expect all bankrupts to be discharged before the automatic 12-month period has elapsed. That will happen only when any administrative work is complete, where the bankrupt has co-operated fully with the official receiver, and where any matters raised by creditors are investigated to the satisfaction of the Insolvency Service. I make the point that the creditors always have to be kept informed. If the grounds are not satisfied, the discharge period will stay at 12 months.

As I said, we are introducing a tougher regime of bankruptcy restriction orders for those bankrupts whose conduct has been irresponsible, reckless, or otherwise culpable. Those orders will place restrictions on bankrupts for between two and 15 years, and—in answer to the point made about serial bankruptcies—any previous bankruptcies will be taken into account by the courts when considering bankruptcy restriction order cases.

I turn to the issue of whether there is a distinction between consumers rather than business. Surely such a distinction is artificial. The Bill should be seen as a whole, and the general reduction of stigma on bankrupts is aimed at stimulating enterprise in broad terms, but that does not apply to those who are culpable. People who find themselves being made bankrupt through no fault of their own may be in business, or may be individuals, but it happens. The bankruptcy restriction orders regime will cover both consumers and traders, as well as acting as a deterrent for the irresponsible and reckless. It will, therefore, provide greater protection in future for the public and the business community. Therefore, consumer bankrupts who behave irresponsibly could find themselves subject to restrictions for between two and 15 years.

I do not know how much of this argument will be dependent on the research from the Centre for Economic and Business Research. I have great respect for its director, Doug McWilliams, who is a former director of research for the CBI. I am not sure how much your Lordships will wish me to say about the detail of the research. However, I have been provoked into speaking about it by the noble Lord, Lord Patten.

I am a researcher; I am not an econometrician. We are talking about a piece of econometric research, rather than economic research. Perhaps it ought to be economic rather than econometric research. However, having read the report and considered the issues raised in debate, I simply do not believe that the effect of any bankruptcy legislation, let alone the bankruptcy legislation introduced in this Bill—and still less the provisions for early release before the period of 12 months—could have the effect anticipated by the research. I say that both having looked at the research and having considered the evidence that is available from other pieces of research.

The starting point for the CEBR research is an assessment of the effects of the Insolvency Act 1986 on bankruptcy numbers. It rightly says that the 1986 Act made significant changes to bankruptcy law. However, the research then makes the assumption that the 1986 Act accounted for 68 per cent of the subsequent increases in bankruptcy. We have to consider the relative importance of macro-economic factors and the effect of legislation. Yes, the research took account of debt levels to income ratio, of interest payments to income ratio—both long-term and short-term—of unemployment, of GDP, of interest rates, and, curiously, of divorce decrees, although I do not quite understand the significance of the latter.

But research carried out by other distinguished researchers, including Professor Lawrence M Ausubel of the University of Maryland who reported to the Senate Committee on Bankruptcy in 1998, suggests that other significant factors should be taken into account, not least since the research was carried out on behalf of a credit card company and considering the number of credit cards issued.

Professor Ausubel said that 98 per cent of the variation in the personal insolvency rate during 1987 to 1996 can be explained by four factors: the increase in the number of credit card accounts; the household debt burden; unemployment; and interest rates. Another researcher, Stuart Feldstein, added to that list decreased savings levels, which sounds plausible.

Without entering a further debate on the quality of the research, which has been accepted uncritically by noble Lords opposite, surely it is implausible that changes in bankruptcy legislation could have such an important effect on the numbers of bankruptcies in comparison with macro-economic factors such as those mentioned above. It is totally implausible to me as someone who has spent his entire life in economic and survey research. If that were to be the basis of the argument then I would look to different conclusions from the amendments. Those we have here would make a substantive change; they would make it impossible for there to be any discharge from bankruptcy before the period of 12 months. That is a legitimate point of view that was properly argued.

What was not shown in any way was how that is likely to have an effect on the number of bankrupts as analysed by the Centre for Economic and Business Research. If it were true that as a result of the Bill there would be an increase of 50 per cent—13,000—in the number of bankrupts, noble Lords opposite would be honour-bound to propose far more radical changes to this part of the Bill. Indeed, if I were them I would be moving to take out the entire part of the Bill relating to individual bankruptcies. They are now calling into question what has not been called into question at any earlier stage.

We are now on the last day of Report stage in the second House. Noble Lords opposite are calling into question the basis on which we have consulted, drafted, revised, legislated and subjected ourselves to parliamentary scrutiny. It is not plausible or acceptable for these amendments to be put forward on the arguments that have been advanced. I ask the House to reject them.

Photo of Lord Hunt of Wirral Lord Hunt of Wirral Conservative 7:15 pm, 21st October 2002

My Lords, I reiterate how strongly I and my colleagues support the Government in their objective of creating a more entrepreneurial culture in the United Kingdom, as well as their moves to provide more effective protection against reckless and culpable bankrupts.

Having said that, I hope that the Minister will accept that the independent economic analysis produced by the Centre for Economic and Business Research causes us to think carefully about the consequences of what he has proposed. If the Bill were to cause bankruptcies to double, even on the most cautious estimate, that would be an increase of over 13,000 per year, at a cost of £76 million per year to unsecured lenders. If lenders were to adjust their margins to take account of that, lending rates would have to increase for all.

Alternatively, lenders could seek to exclude more borrowers to minimise the increased risk of bankruptcy losses. That could exclude 170,000 people from the credit market. The individuals most likely to be affected are those already at the margins of the lenders' portfolio, at the lower end of the social spectrum.

On careful reflection, the Minister must surely accept that that would work against our efforts on all sides of the House to improve social and financial inclusion and the commitment to tackle loan sharks. I have not even mentioned the effect on the economy.

The Minister cast doubt on the situation in the United States. I shall reflect on what he said, but the analysis in the report is based firmly on UK figures. There is no doubt in my mind that if US data had been used, the estimates would have been higher still.

I turn to the Minister's challenge: if I believe the research, why have I come forward with such a limited amendment? There are other amendments on the Marshalled List. I and those to whom I have spoken about the provisions believe that there must be four amendments or groups of amendments to rectify the point raised by the Minister. This group deals with restricting the bankruptcy discharge period to a fixed period of 12 months. The Minister has analysed it and said that he is not willing to accept the amendments, but there are amendments tabled seeking that the official receiver's obligation to investigate the bankrupt's conduct should be mandatory in all cases.

At the moment there is a discretion as to whether to investigate. Without mandatory investigation it is impossible to see how the Minister can make a distinction between culpable and non-culpable bankrupts; the honest and the dishonest. How can a proper decision be made and how can creditors have any confidence that their interests are being protected if in a substantial number of cases the official receiver does not investigate at all?

I turn to income payments orders, which are intended to ensure that bankrupts make an affordable contribution towards their debt from their income for up to three years. The proposed legislation states that the income payments orders will last for up to three years irrespective of discharge, but will not last longer than three years. We believe that the length of the order should be left to the courts or to the trustee's discretion.

In seeking to defend the existing provisions, the Minister referred to the bankruptcy restriction order process to deal with culpable bankrupts. I welcome warmly the bankruptcy restriction orders, since they would provide a longer period of restriction than is currently proposed. However, the orders should not be overestimated as a deterrent in the context of such fundamental changes to the system. The primary effect of such an order is to restrict the bankrupt's ability to run a business.

Of course it will impact on business, but how will it impact on the majority of consumer bankrupts? These orders are likely to be limited in any event because of the cost of applying for an order and the difficulty in proving unacceptable conduct. Should not the court have power to impose financial penalties in appropriate cases as an additional disincentive against abusing the system?

I hope the Minister will see that I have not brought forward the amendments with only a minimal consideration of the latest statistical analysis. We are proceeding down a potentially very dangerous road. I have sought to warn the Minister about it. He has cast some doubt on the economic research. I shall go away and discuss his criticisms with those who have produced the research. If I find that there are fundamental flaws such as he has outlined, I shall want to reconsider the matter. Obviously, I need time now to take further evidence.

I would not dismiss the evidence from those who have experience of the United States, such as the Maryland Bank of North America, which has been referred to in previous debates and which has a genuine interest in seeking to ensure that the provisions do not have the impact on the number of bankruptcies that the research shows that they could have. We are all united in that respect and in wanting to create a more entrepreneurial culture in the UK. However, as the Finance and Leasing Association has pointed out, we have to tread very carefully when changing so fundamentally a structure that has worked so well to date.

I shall take time to reflect on the issue and I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 267 to 269 not moved.]

Schedule 20 [Schedule 4A to Insolvency Act 1986]:

[Amendments Nos. 270 to 273 not moved.]

Clause 253 [Investigation by official receiver]:

Photo of Lord Kingsland Lord Kingsland Conservative

moved Amendment No. 274:

Page 182, leave out lines 28 and 29.

Photo of Lord Kingsland Lord Kingsland Conservative

My Lords, as with compulsory liquidation, the official receiver's obligation to investigate the conduct of the bankrupt should be mandatory in all cases. The clause leaves the decision on whether to investigate to the discretion of the official receiver.

We believe that an investigation should be conducted, in all cases, to justify a decision on whether it is appropriate to bring an application for a bankruptcy restrictions order. The report should be filed with the Secretary of State as well as the court, to enable a decision to be made on whether to bring such an application. Without that, it is impossible to see on what basis a proper decision can be made. Nor will creditors have any confidence that their interests are being protected.

If the number of bankruptcies increases significantly under the new system, as we anticipate, the importance of investigating each case will increase to prevent the abuse of the system. That should be addressed by the provision of appropriate levels of training and resources rather than by removing the obligation to investigate. I beg to move.

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, we have seen this amendment before in this House and in another place. Its aim is to ensure that there is a mandatory duty on the official receiver to investigate all cases. The Insolvency Act 1986 introduced for the first time the concept that the official receiver did not have to investigate in small cases—that is, where the bankrupt had unsecured liabilities of less than £20,000. Such cases are termed "summary bankruptcies". The official receiver has used that discretion to investigate for 16 years.

Summary cases account for a large proportion of the annual total of bankruptcy cases. For the remainder of non-summary cases, there is a mandatory duty on the official receiver to investigate. The exercise of that discretion has been carried out responsibly and effectively by the official receiver and has not, as far as I am aware, led to any significant number of complaints from creditors or other interest groups in the past 16 years.

The Bill will remove the existing provisions relating to summary bankruptcy and introduce discretion to investigate in all bankruptcies, including the larger ones. That will ensure that resources are properly targeted and used effectively. Every case will be looked at on its merits, based on an assessment of the facts, rather than, as is currently the case, taking the level of unsecured debts as the deciding criterion.

Some cases with large unsecured debts do not merit investigation and some cases where the unsecured liabilities are less than £20,000 do require investigation. What is important is that all cases that warrant it are investigated.

The amendment would require the official receiver to conduct a full investigation into every case without regard to its individual facts and circumstances. That would go further than the current position and would be a wasteful use of investigative resource.

There may be concerns that if the duty to investigate is made discretionary, some who show misconduct or are potentially guilty of criminal offences might slip through the net, or that resource pressures on the official receiver will mean that cases that should be investigated are not fully investigated. Under the new regime there will be little change to the way in which bankruptcies are currently handled. As is currently the case, the official receiver and his staff will continue to interview all bankrupts. Only then will the decision be made on whether further investigation is appropriate. Creditors will continue to receive a report on the case after a few months, when they will be asked to tell the official receiver about any matters that, in their view, warrant further investigation. The official receiver will then consider any matters brought forward by creditors and investigate those that warrant it.

It should be remembered that even after a case has been investigated under the current system, very little can be done to address misconduct, other than criminal sanctions in a very small number of cases. The bankruptcy restrictions order regime introduced under these proposals will provide an effective weapon at the official receiver's disposal and will significantly improve the level of public protection. That will allow a distinction to be made by all, including the credit industry, between those who show misconduct and those who do not.

As I have already said, the Bill allows for the proper and focussed targeting of investigative resources on those cases that merit it, and we see no reason to amend it. I hope that that shows that I do not support the amendment.

Photo of Lord Kingsland Lord Kingsland Conservative

My Lords, this time the Minister has made that clear. He thinks that the safeguards in the Bill are sufficient to allay any fears that I might have about the operation of the system. In those circumstances, I shall not press the amendment again on Third Reading and I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Lord Davies of Oldham Lord Davies of Oldham Government Whip, Lords in Waiting (Whips)

My Lords, I beg to move that further consideration on Report be now adjourned. In moving the Motion I suggest that the Report stage begin again not before 8.30 p.m.

Moved accordingly, and, on Question, Motion agreed to.