§ The Attorney-General
I beg to move, in page 19, line 41, to leave out from 1030 ' order," to "any," in line 43, and to insert:varies under Section six or Section seven of this Act the terms of.This is one of three Amendments to this Clause which stand in my name on the Order Paper. It is made to help remove a misunderstanding with regard to the scope and intention of the Clause, and it concerns the effect of liabilities adjustment proceedings or a scheme of arrangement on persons liable jointly or as securities. An important case I have in mind is a case where rent is reduced under the Clause which we were considering earlier or where the mortgage interest is reduced. The reference in the Clause as to providing "a scheme of arrangement approved under this Part of this Act "led, I think, to a misapprehension and made people think this Clause went wider than it does. They thought that where there was simply an ordinary debt for £50 or a loan which had been guaranteed, the guarantor would get off if the debtor was able to pay only 10s. in the £. That was never our intention. If a debt is guaranteed, then the guarantor must pay, and references to any other contract are references to contracts varying under Section 7 of the Act, and the only circumstance in which an executory contract can be varied is where the variation is in the interest of both parties and where, of course, he could otherwise disclaim. These are the three cases where the sureties' liabilities may be cut down. It is not effective in the case of an ordinary debt. Where the rent is reduced, the surety liability goes with it. Where the mortgage interest is reduced, the surety liability goes with it. The executory contract can be varied. The first two Amendments are drafting, and the third Amendment proposes to leave out the words, "or a person in the nature of a surety." Those words are taken from the Bankruptcy Act. I am not clear what a person in the nature of a surety is, and whether, indeed, there are any such persons.
§ Sir H. Williams
Having regard to the fact that the Attorney-General made a statement which very conveniently dealt with the whole significance of the Clause, I think it might save time, Colonel Clifton Brown, if I could go a little beyond the scope of the Amendment, because frankly I am in a realm with which I am not very 1031 familiar. My right hon. and learned Friend is aware that many people are greatly perturbed about this Clause. They regard it as something which relieves certain people who undertake certain obligations from their obligations because somebody else is in trouble. As I understand it, if one goes surety for a man, the object is that if he cannot do the job, one has to pay up. If circumstances arise in which a person cannot do the job, this Clause appears to relieve the man who has gone guarantee for him. I should like to be told what is the exact effect of the Amendments that are proposed. I think the minds of all hon. Members might be influenced to some extent by an explanation of that sort.
§ The Attorney-General
If the Committee agree, I think it would be convenient if we had a general discussion on the Amendments.
§ The Deputy-Chairman (Colonel Clifton Brown)
If the Committee agree to this, I think it would be a suitable course. There is an Amendment on the Order Paper in the name of the hon. Member for South Kensington (Sir W. Davison) which might not be covered, but that could be put separately afterwards.
§ Sir A. Maitland
Would it not be better if my right hon. and learned Friend had some idea of the points we wish to make, so that he could answer them?
§ Sir A. Maitland
May I put one point to the Attorney-General? Will he consider the deletion of the Clause as a whole? That strikes me as being the most effective way of dealing with the matter.
§ The Attorney-General
I quite understand that this Clause is one which has raised some apprehensions and that it requires discussion. As I have already said, I think some of the apprehensions are unfounded. I will leave aside for a moment the reference in the Clause to "contract other than a hire-purchase agreement," and will consider leases and 1032 mortgages. That is the case with which the Clause is intended particularly to deal, and with which I think it deals logically. If, under Clause 6, the court decides to reduce the rent, the reason will be that, owing to war conditions, which neither landlord, tenant nor guarantor contemplated, the house is very likely to become as near as may be unlettable, while there is a pre-war rent of, it may be, £400. I will quote a case which has come to my notice. I do not do so because hard cases make good Acts of Parliament, but the possibility of hard cases is very often a very good reason for inserting a provision of this kind in a Bill. The case which I am about to quote would not be an isolated one. It is a case where a youngish man took a boarding house, it may have been for seven or 10 years, at a rent which was in the neighbourhood of £400 a year. It was in a part of the country where war conditions rendered the whole thing unprofitable. When he entered into the lease, the landlord not unreasonably got the man's mother to give a guarantee for the rent. In normal times, what would have happened if the son had failed in his business would have been this. He might have got into arrears and if he had gone on failing, it would have become apparent fairly soon that he could not run the business and that he had better take up some other line of business. The limit of his mother's responsibility would have been comparatively small. The landlord would have applied to her, and she would have taken the matter up with her son, and would have said to him, "If you cannot make it pay, you had better clear out and let the landlord regain possession." The matter would have solved itself with a comparatively small liability to the guarantor.
The war has produced a very different set of circumstances. The landlord, in the circumstances, does not want possession; he cannot get another tenant, and the building is simply an uneconomic structure. I quite agree that the man could file a petition in bankruptcy and disclaim the lease, but nobody wants him to be forced to do that. Short of that, however, and but for this Clause, the mother in this case would have to go on paying the full rent of the uneconomic structure. It might take the whole of her resources or her savings. What we 1033 say is that we are not dealing with the normal ups and downs of success and failure which people look for guarantors to cover. We are dealing with a case where war circumstances have rendered the particular buildings uneconomic structures, possibly for a long period. Where they are unlettable or lettable only at a very reduced value, it is reasonable that the guarantor's liability should come down, too, for otherwise the landlord could get the full pre-war rent from the guarantor, the guarantor would be en-titled to go to the debtor for what he had had to pay, and in effect, if the debtor had any resources, one would not be reducing the rent as far as he was concerned to anything like the figure one appeared to be. Although he would have to pay only, say, £50 to the landlord, the landlord would get the remainder from the guarantor, and the guarantor would come back to the debtor for the balance of what he had had to pay. If the debtor had resources he would have to pay too. That is the case of rent and I think it is fair. As far as ordinary debts are concerned, that is to say debts for goods supplied or services rendered, the guarantor remains under his liability and that can be enforced. What I have said about rent applies also in substance to cases in which there is this limited reduction of mortgage interest. At present there are these words in the Clause "or contract." They are clearly qualified by the words now to be inserted—" varied under Subsections (6) or (7)." Clause 6, Sub-section (4)—this is the only case where guarantors under contracts might be relieved —states:Where it appears to the court that it would be in the interests of all parties under a contract …which could be disclaimed under the last foregoing section that the contract should continue in effect in a varied form rather than be disclaimed, the court may in the liabilities adjustment order vary the contract accordingly.That is limited to executors' contracts and to cases where it is in the interest of all parties. I have been told by the hon. Member for South Kensington (Sir W. Davison) and others that, in a great many cases, local authorities take a guarantor not so much for a money payment but for performance. Where a man puts in a tender for building, someone guarantees his performance. I suppose there is some penalty if the work is not done to time, or is not up to quality. That was not the 1034 type of surety we had in mind. I am not sure how it would arise. It may be that, without damage, we could leave out the reference in this Clause to contracts and confine it to leases and mortgages. I should like a little more time to look into the matter. I do not want to do anything which would prejudice either local authorities, or contractors in the sort of case which my hon. Friend has put to me. Supposing one of those people who got into difficulties was a contractor to a local authority. He might be able to disclaim the contract or he might be able to continue it with variations. I should like to know rather more than I do about the terms of these guarantees. It may be that the question of the guarantor can be left where it is. On the other hand, it may be that it would be desirable to give him some relief. However, I should like to look at the matter more fully. I hope I have described the sort of cases we intended to meet.
§ Sir W. Davison
As the Attorney-General has just said, this Bill, with the general approval of all parties, was introduced mainly in order to keep in being small businesses, lodging-house keepers, boarding-house keepers, and others. Its object was to enable them to tide over a difficult time, and to have equitable arrangements made between themselves and their landlords, so that, in the interests of both parties, the businesses could start again after the war on the same footing as before. It seems to me, however, that this Clause goes very much further than the main objects of the Bill. The Committee will remember—and I "nave drawn the attention of the Attorney-General to it in private—that it is practically the universal custom of local authorities, when entering into contracts involving substantial amounts, to require a surety. Until 1933 this was obligatory under the Public Health Act, 1875, in cases where the amount involved exceeded £100. This was repealed by the Local Government Act, 1933, Section 266 of which provides a local authority with powers, almost directions, to establish Standing Orders to carry this into effect. Mode! Standing Orders were prepared by the Ministry of Health, and a common form of Standing Order was supplied and adopted by practically all local authorities. I have a copy of that Standing Order with me which states: 1035Every contract which exceeds £100 in value or amount and is either for the execution of works or for the supply of goods or materials otherwise than at one time shall provide for some pecuniary penalty to be paid by the contractor in case the terms of the contract are not duly performed and the Council shall require and take sufficient security for the due performance of every such contract.That, I believe, is the universal practice. The Attorney-General asked for instances. With regard to the supply of particular things it is the common practice among local authorities to take the lowest tender. It would add greatly to their burdens if in every case they had to make elaborate inquiries into the stability of the lowest tendering contractor and whether he could carry out the work for, say, paving, painting railings or lamp-posts, tar spraying, building contracts, etc., and the thousand and one other things which local authorities have to do. Therefore they adopted this method of asking for a guarantor to guarantee the due performance of the contract. The way it works is this. Supposing a local authority asks a contractor to supply building material or shovels, for which he has submitted a tender, and then he says that he cannot supply them. The local authority in that case can go into the market and find out the best terms on which they can obtain the shovels or the building material—then they can ask the guarantor to pay the difference between the amount in the contract and what the local authority has paid.
That seems to me to be something quite different from the real objects of this Bill. I am anxious to make it quite clear that the Bill is not intended to deprive local authorities of this practice of obtaining guarantees for the fulfilment of contracts by contractors. It is a system which has been universally admitted by Parliament as a proper system to adopt, and it is very much in the public interest. I know it was not intended to include such matters as those to which I have just alluded and, if the right hon. and learned Gentleman does not like my proviso, perhaps he will put in some other words which will make it clear that the Bill is not intended to apply to guarantees of contracts such as I have described.
§ Sir H. Williams
I am completely in agreement with what my hon. Friend has said, but I am anxious that this should 1036 not be limited to contracts with local authorities, because the same thing happens in industry. I have had representations from the Association of Municipal Corporations and also from the Federation of British Industries, who are concerned with identically the same problem, where a third party guarantees the performance of that contract between two others. That is a legitimate form of guarantee and it does not necessarily follow that there should be complete exemption for these people. The Clause seems to me to be rigid: the words of my Amendment would make it more elastic. It is a proposal that all the circumstances shall be taken into account. It may well be that someone has insured with a well-to-do corporation for the performance of a specific task. We relieve the person who has failed to do that task, in certain directions, but this may be the eventuality against which he has insured. There is a wider problem affecting the position of building societies. There, again, I think there is a problem to be examined. Possibly at the conclusion of our discussion the Attorney-General may find himself in a position to state that the whole Clause will be re-examined before Report.
§ Sir A. Maitland
I should like to endorse my hon. Friend's suggestion. The Attorney-General has recognised the disquietude which the Clause has caused. We should bear in mind that in the peculiar circumstances of to-day our proceedings do not get the publicity which they would receive in normal times. We may be passing very important Measures, the full significance of which is not realised by people who, in normal times, would certainly have something to say about them. While we have the greatest sympathy with the genuine desire of the Government to help distressed debtors, these provisions are likely to have reactions which deserve consideration as much as the difficulties of the debtor. I know a pathetic case of two old people, the owners of two houses, which represent their life savings and their sole means of support. It is a hard case, similar to that which the Attorney-General mentioned. It seems to me that by this Clause you are defeating a very important principle which is adopted in ordinary day-to-day transactions and doing something which will have a retrospective effect and 1037 extend the possibility of further trouble. I sincerely hope the Attorney-General will reconsider the whole question in the light of the effect upon local authorities and contracts generally. If this Clause is carried as it was first put down, even in the light of the Attorney-General's Amendments, which are Amendments of form rather than of substance, it will do a good deal of harm. As there are grave doubts about it, I suggest the best method is to leave it out.
§ Mr. Douglas
I desire to support this Clause, for it is based upon a sound principle. The idea which underlies it is that the liability of the surety should not be increased by the operation of the Bill. It is not intended to relieve him of such amount of liability as he would have been under in any case, if this legislation had not been passed. If it is passed, surely it is unfair that the surety's liability should be increased by something which he could not possibly have foreseen, which was never in contemplation when he entered into the contract of suretyship, and which is an extraneous thing imposed by Parliament. If the Clause is omitted, it may tend to destroy the purpose of the Rill because the court is not under any obligation to make an order under the liabilities adjustment procedure. The court has merely a permissive power, a discretion as to what action it shall take, and, exercising that discretion, it may very well have regard to what the consequences will be upon a surety. If this provision is omitted, the court will be restricted in its power to deal with the application of the debtor by consideration of the fact that it will be increasing the liability of the surety and it will be unable to give the surety any relief whatever. To meet that case is the purpose of this Clause, and it is a sound purpose. Therefore, it ought to apply in every case.
I am very interested in local authorities, but I cannot come here and ask for a special privilege to be granted to them in this Bill in regard to their sureties which is not given to other people. A provision of that kind would not be fair. Once that is admitted, the argument is admitted for extending it to private corporations, building societies and other people, and if it is extended in that way, the whole purpose of the Clause will be weakened and more unfairness will be 1038 caused. We are dealing with a very exceptional situation and with legislation of an exceptional character which is intended to protect debtors and to prevent the full extent of the law being applied to them, in bankruptcy or otherwise, as it could be at the present moment. In doing that, we are automatically affecting the position of sureties, and we ought not to obtain relief for the debtor at the expense of imposing on the surety an obligation which was never and could never have been in contemplation.
§ The Attorney-General
I would like to emphasise again what my hon. Friend the Member for North Battersea (Mr. Douglas) has made clear, that this Clause is deemed to deal only with cases in which under the Bill the court has power to order the continuation of a contract in a varied form that is to keep alive leases and mortgages. The important cases we have in mind are leases and mortgages. We added the words "or contracts ", but the Committee will see in Clause 6(4) that the only cases in which contracts other than leases or mortgages are concerned are those in which:it appears to the court that it would be in the interest of all parties under a contract … which could be disclaimed … that the contract should continue in effect in a varied form.That does not, in terms, say that all the parties have to agree to the continuation, but it implies it in substance. The court in deciding whether it should be continued in a varied form is to be satisfied that it is in the interests of everybody. If either debtor or creditor says, "I do not want it in that form; it is no good to me ", the court can exercise its discretion. That being the only form of contract which can come in, my view, particularly in view of what we have heard about local authority contracts, is that the best thing is to leave out of the Clause references to other contracts. They have obviously caused a good deal of misunderstanding, and I do not think, looking at Clause 6(4), that they really fulfil any useful purpose. The guarantor himself would be a party and would be entitled to be heard under Clause 6(4), and what is contemplated by that Sub-section is quite a different sort of arrangement by agreement from what is contemplated under Clause 18. I do not think that local authority contracts would really have been affected by this Clause, although difficult points might 1039 have arisen as to whether they were or were not. It was not the type of guarantee we had in mind and it is not the type of guarantee which would be made more onerous by the operation of this Bill. It could only be extended by Clause 6(4) when it was for everybody's benefit.
It would be to the advantage of everybody and to the disadvantage of nobody if we deleted on the Report stage the references in the Clause to other contracts. My hon. Friend the Member for Faversham (Sir A. Maitland), who was particularly concerned with local authority contracts and contracts of that form, thought that the Clause should be left out altogether, but while there is no case for retaining the words referring to contracts, I think that, as far as leases and mortgage interest are concerned, the Clause is right. Where rent is reduced under Clause 6, or mortgage interest is reduced under Clause 7, I think that it would be right that the guarantor's liability should be affected. I will look into the Clause again with a view of taking contracts out and leaving in leases and mortgages.
§ Major Milner
I am inclined to think that the Attorney-General is right in his view. The essential thing is that where sacrifices have to be made they should be fairly and equitably spread, and it seems tome that if this matter were dealt with in the way he has suggested the power to ensure that would be given to the Court. It also seems to me that it is right to exclude "other contracts," because frequently they are, as my hon. Friend the Member for Faversham (Sir A. Maitland) said, subjects of insurance policies, or payments have been made in respect of them, and therefore it would not be right to give relief in those cases. At the same time, there will continue to be some feeling that a guarantor ought to obtain relief in the same way as the person whom he has guaranteed is relieved, and in such cases perhaps relief might be granted on the overriding principle set out by the right hon. and learned Gentleman, namely, that at the time it could not have been within the contemplation of the parties that circumstances of war would cause a default on the part of the principal debtor. In such cases, therefore, I think that relief might equally well be granted. I take it that the right hon. and learned Gentleman 1040 will bring up a further Amendment on the Report stage and that we shall then have an opportunity of looking at the matter again.
§ Amendment agreed to.
§ Further Amendments made: In page 19, line 46, leave out "him," and insert" the debtor."
§ In line 46, leave out from "surety," to "for," in line 47.—[The Attorney-General.]
§ The Attorney-General
I beg to move, in page 20, line 3, to leave out "such person," and to insert:person who is a surety or in the nature of a surety for the debtor or is jointly bound with him.
§ Mr. Denman
A few moments ago the Attorney-General told us that he had no idea what the words "in the nature of a surety "meant. In view of that does he now wish to insert them here?
§ The Attorney-General
In this Subsection the words are used in a negative form. They are words which occur in the Bankruptcy Act, in which there is a provision that nothing shall affect a person who is a surety or in the nature of a surety. There it does not much matter. In Sub-section (1) of this Clause we are defining a class of persons to be brought within the jurisdiction, and for that positive purpose it seemed undesirable that we should have a vague form of words. I agree that there does seem to be some inconsistency, but if we pass the words now it will be possible to leave them out on Report stage if it is thought desirable.
§ Mr. Denman
I should like to assure the right hon. and learned Gentleman that I have no personal objection to those words.
§ Amendment agreed to.
§ Further Amendment made: In page 20, line 4, leave out "him," and insert "any such person."—[The Attorney-General.]
§ Clause, as amended, ordered to stand part of the Bill.
§ Clause 19 ordered to stand part of the Bill.