HC Deb 26 October 1976 vol 918 cc302-12

'Section 365(3) of the Companies Act 1948 shall be amended by the addition of the end of subsection (3) of the words— Any scale of fees set out in a statutory instrument submitted to Parliament shall ensure that the fees charged reflect costs so that, taking one year with another, there is no cross subsidisation between firms where the amount brought to credit is less than £100,000, less than £1,000,000 and more than 1,000,000."'.—[Mr. Higgins.]

Brought up, and read the First time.

Mr. Higgins

I beg to move, That the clause be read a Second time.

On the face of it, the new clause is of a general kind, but, as the Under-Secretary will be aware, it relates to a point which arose on 30th October 1975 in respect of a highly emotional issue, namely, the Nation Life Insurance Company collapse. At that time I expressed concern at the extent of the fees which the Government were charging in relation to the winding up of that insurance company. That was a matter of general concern because it became apparent in the liquidation that the amount which the policyholders received might be significantly reduced by the fees which the Government were charging at that time. At various stages there was some dispute in the courts about the actual figures involved. The Department of Trade originally said £282,000 but this was later increased to £350,000.

Mr. Clinton Davis

That was an estimate, as the hon. Gentleman knows. A new order came to light on 1st October of that year.

Mr. Higgins

I understand that point. But there was some confusion about whether the figure was £282,000 or £350,000. It was a significant difference reflecting a change in the rules that this House has agreed under a Statutory Instrument. At all events, I think that the point of principle was clear—that whereas previously the Government had carried out this service for free, they were proposing in future to do so as a percentage of the money invested. That is the crux of the provision in this new clause, which seeks to amend the existing legislation and in effect to overrule the existing Statutory Instruments. The point at issue is whether the basis for computing the Department's charges is satisfactory. We all appreciate that the charge in the Nation Life case was substantial.

No one on the Opposition side, anxious as we are to confine public expenditure and to ensure that any costs of Government service are charged out, would disagree that the arrangements we make should cover those costs. But there is a problem over the burden of the different categories of firm or person going into liquidation. What worried me at the time and still worries me to some extent is that the balance is not right.

We are all agreed that the total costs that the Department levied should reflect its total costs, but it seems that the Statutory Instrument which so far we have approved and which the new clause would override means that for the medium-sized firm the burden of the Government audit fees and other charges in connection with the winding-up is probably about right. In the case of a small firm, that is perhaps more doubtful. There are obviously no economies of scale involved and perhaps the fees should be adjusted to allow for that.

It is at the upper end of the scale that we are particularly concerned, because the assets of an insurance company which goes into liquidation are likely to be very large. Consequently, on the present basis of charging, the Government audit fee and the other charges levied are also likely to be extremely high. I doubt whether that charge and the present basis of charging are equitable, in the sense that the people concerned are charged the true cost. If the new clause is accepted we should reach a more equitable basis.

I do not think that this matter was adequately considered by the House in advance of the Nation Life affair. It is typically the kind of thing which goes through in a Statutory Instrument, probably on the nod and without adequate debate. So this is simply a probing clause designed to suggest that the present basis of charging in winding up, which is one of the matters covered by the Bill, needs to be reviewed.

I hope that, in the general spirit of co-operation that we have now engendered, the Minister will be able to be forthcoming, to say that he has reviewed the matter and will consider accepting the new clause or tabling a new Statutory Instrument to put the matter right. It is certainly difficult to believe that in the case I have mentioned the cost of the audit was as much as £350,000, but no doubt the Minister can elaborate on that.

That is the yardstick by which we should judge the present situation, whether the amount levied—no doubt the Minister will say whether the estimate was £350,000 and whether it has changed since—reflected the charges and costs incurred in carrying out the audit. If it is that high, we should seriously consider the scope for economies in the Department in this respect at a time when public expenditure is very important.

What gave rise to the new clause was a particularly emotional case, but I hope that the Minister can give some more general reply. It is worth raising the subject on Report rather than in Committee, because at the time it raised strong feelings among many hon. Members with constituents who had been badly hit by the Nation Life collapse and who felt that the burden which they were being asked to pay to the Department was unduly and unfairly heavy.

Mr. Clinton Davis

There can be no doubt that the issue which gives rise to this debate was emotive. We are not debating today the merits of the Nation Life situation but rather how the Government compute their fees under the fees order. I gather that the hon. Member for Worthing (Mr. Higgins) is probing here with a suggestion that we should aim to fix the fees on the basis that in certain groups of compulsory liquidations the overall amount chargeable would be related to the actual cost of the work involved. I do not think that he would seriously contend that the new clause represents the last word on the matter, but he is perfectly entitled to probe on a matter of this importance.

I shall deal first with the basis on which we approach these matters—a basis which commended itself to the House because the Companies (Department of Trade) (Fees) Order 1975, which came into operation on 1st October that year, did so with the concurrence of the House. That order authorises the fees and percentages to be charged in respect of the various proceedings for the compulsory winding-up of companies. These include fees and percentages chargeable by, first, the official receiver when he acts as liquidator in respect of some of his duties—for example, he has to realise assets, to distribute funds to creditors and so on—and, second, by the Department, which has to audit accounts, invest funds and so on.

But there are other duties which both the official receiver and the Department perform in connection with the winding up of companies for which no fee is prescribed in the order. I should not complain if the hon. Member were not aware of this situation, because this is a technical matter and I confess that I was not aware of it myself until I became involved in these matters.

Under this category, in cases of compulsory liquidation, the official receiver has a statutory duty to investigate the reasons for failure and any criminal offence and the Department has functions to perform in relation to the conduct of compulsory liquidations. It has to make banking arrangements, keep accounts, undertake the audit, deal with the investment of funds and pay out moneys from the liquidation account. The conduct of liquidators may have to be investigated where complaints are made. It has to deal generally with complaints by creditors and others arising out of compulsory liquidations. So the fees chargeable under the order are not intended to cover all the costs of the Insolvency Service. However, these costs are expected to be recovered, as far as possible, from fees and income accruing from the investment of estate funds in both bankruptcies and companies winding up.

5.0 p.m.

The work of the Insolvency Service has to be undertaken for the benefit of the country as a whole, because it must represent the interests of the creditors. Therefore, it cannot be paid for merely by charging any particular estate for the actual work done in that connection. It is clear that in many estates the assets are inadequate to cover the cost of the work done. The service would therefore be incurring a permanent financial deficit. It is necessary to fix the fees at a level sufficient to produce an overall income which, together with the income from investments, will as far as possible meet the overall costs of the service.

Despite this policy, in the financial year ended 31st March 1975 the service was able to recover only about 80 per cent. of its costs. There is a practical limitation, which I fully recognise, on the extent to which fees can be increased without diminishing returns. Creditors are already discouraged by the amount taken by preferential creditors, and they will not consider it worth their while to petition if the remaining corpus of assets is further mulcted by costs and fees. There has to be a point beyond which one cannot go on doing that sort of thing.

The clause would have a curious effect. It would increase the amounts chargeable to estates by official receivers and the Department, because the cost of the work done in most cases exceeds the fee charged. However, I concede that it would result in lower charges where large amounts are brought to credit—for example, Nation Life. There is already power under the fees order for the Treasury to sanction a reduction of the fees in such cases where the Secretary of State for Trade considers that they may be excessive. But if the actual costs charged to the estates under the clause were first subsidised by the income from investments, the service would operate at a loss, because it would be able to recover its costs only in cases where there were sufficient assets. The cost of the work done in other cases would fall to be dealt with out of public expenditure. I do not think that the hon. Gentleman, on reflection, would consider that to be a proper result.

Another effect of the clause would be to increase the cost of the Insolvency Service, because detailed accounts would have to be provided in relation to work done in each case so that the cost could be calculated. That is not done at present, and it was not done under a Conservative Government.

I come now to the question of Nation Life and the actual fees charged to date. First, in the category where the Department of Trade charges arise, the audit fee was £60,260. In the second category, which relates to certain statutory duties which the Official Receiver performs, the statutory stationery fee charged under the fees order amounted to £18,127; the realisation fee was £16,701; and the ad valorem fee, by far the largest proportion, was £205,595. The total statutory fees to date have amounted to £300,683. The total realisations in the accounts so far audited amount to £14,099,752. There is likely to be further realisation of assets and there will be further audit and ad valorem fees chargeable. I cannot foresee what they are likely to be, because they depend on what occurs.

Mr. Higgins

I have the greatest difficulty in reconciling any of the figures the hon. Gentleman has just given with the ones he gave in the debate on Nation Life on the date to which I referred. I understood then that the legal costs were £500,000, that the liquidator's and special manager's costs were expected to be £700,000, and that the Department's audit fee was £282,000. These seem to be totally different orders of magnitude, let alone totally different figures. Can the Minister reconcile them? I know that it is a complex matter, but it is one of some concern.

Mr. Davis

I am not dealing with the legal fees or with the liquidator's fees. They are separate matters and are not encompassed in what the hon. Gentleman has raised today. I am dealing with the statutory fees. What I was seeking to say in that debate—I was corrected on the matter—was that it was expected earlier that the statutory fee would be about £282,000. Then there was an increase from 1st October 1975, and it was then estimated that the fee would be of the order of £350,000. The figure I have just recounted is the actual fee up to the present of £300,683. I hope that that puts the matter right for the hon. Gentleman.

The work carried out by the Insolvency Service in this case can also be conveniently divided between that done by the official receiver and that done by the Insolvency Service headquarters. The official receiver was appointed provisional liquidator of the company by order of the court on 3rd July 1974. He was directed to take possession of and to protect the assets of the company, and in performing that function he took over the control of the company previously exercised by the board of directors. He subsequently applied to the court for, and was granted, leave to continue the company's business for limited purposes.

On 29th July 1974 the court ordered the company to be wound up, and the official receiver thereupon became provisional liquidator pending the appointment of a liquidator—that is, in the usual sense and not merely for the primary purpose of acting as receiver prior to liquidation. In his new capacity as provisional liquidator he negotiated arrangements with the clearing banks for them to continue operating the direct debit system for collecting policyholder's premiums. In this connection he entered personally into guarantee arrangements with the clearing banks. He was involved in making numerous reports, applications and attendances before the court in connection with the continuance of the company's business. He made arrangements for a statement of affairs to be lodged and summoned meetings of creditors and contributories. This involved the issue of some 40,000 notices and forms of proof of debt. The official receiver chaired these meetings and reported the results to the court, following which Mr. G. A. Weiss, of Cork Gully, was appointed liquidator.

Subsequent to the meetings the official receiver sent to each creditor and shareholder of the company a summary of the statement of affairs, together with his observations thereon. To obtain the information for the meetings and his observations the official receiver interrogated the officers of the company, and he is still engaged in carrying out a full investigation of the company's affairs.

The Department of Trade, since the first appointment of the official receiver as provisional liquidator, has acted as banker for both the official receiver and the subsequent liquidator, and in this capacity has arranged for the investment of funds as they became available within the ambit of court orders. Subsequently the Department arranged for the realisation of these investments and prepared payable orders to enable distribution to be made to the creditors.

Two dividends have been paid so far—the first for 41.5p, which I was able to report to the House on the occasion to which the hon. Gentleman referred, and the second for 11p. I gather that a third dividend is expected to be paid shortly. I am not sure what will be the amount of that dividend.

The Department has further assisted the court in arriving at decisions on the interest to be attributable to the various funds and in resolving the conflicts between the various groups of policy holders. The House will recall that the Department appeared as amicus curiae in the proceedings, on the liquidator's application, to determine the rights of policyholders regarding liquidators generally.

In addition, the Department has given advice and help to the liquidator, particularly in connection with his application for special bank accounts, his control of the Committee of Inspection and the expenses incurred by that body, and in connection with bank fees. At present the Department is also required by law to carry out a detailed audit upon submission of accounts from the liquidator. These are due every six months, and the audit thereof is a major operation. Bi-annual audits will continue until the liquidator is released.

Mr. Tim Renton

The Minister said that the third dividend would be paid shortly. Will that be the last dividend? I did not understand whether it was the third and final dividend or whether there would be a further dividend thereafter.

Mr. Davis

I did not say that it would be the final dividend. Dividends depend on the realisation of assets. The liquidator has determined that it is appropriate shortly to pay a further dividend. What further dividends will follow will be dependent upon what he is able to realise.

I hope that I have been able to demonstrate to the hon. Member for Worthing and the House that what has occurred in relation to Nation Life has fully complied with the statutory requirements. The basis which the hon. Gentleman proposed for the Insolvency Service could lead to a substantial financial imposition borne by the taxpayers which I would not expect him, on reflection, to embrace as a policy. This debate has given me a useful opportunity to recount what has happened about Nation Life, and to that extent I am grateful to the hon. Gentleman.

Mr. Higgins

I am grateful to the Under-Secretary of State for bringing us up to date in what is in many ways a tragic story. I am also grateful to him for distinguishing between the legal costs, manager's expenses and so on and the costs of the Department. We have had no clear indication whether the Department's fee of £368,300—

Mr. Clinton Davies

Let us get it right. The hon. Gentleman has added another £68,000, which is a substantial addition. The figure is £300,683.

Mr. Higgins

I have now understood what the hon. Gentleman said. We are not clear to what extent that figure reflects the costs of the operation. We tabled the clause because under the arrangements which the Under-Secretary of State supports there is a degree of cross-subsidisation between liquidations of different sizes. I understand that in many cases there are no assets and the cost falls on the Insolvency Service. On the other hand, firms with large assets make big payments and there is, therefore, an element of cross-subsidisation.

We are worried about whether that is the right principle. We are anxious that the service should be self-financing, but we need a scale which as far as possible avoids cross-subsidisation.

I should like to consider what the Under-Secretary of State said about who is appropriately charged to cover any deficit in the service. It is a little curious that the people who are charged for the services provided by the Insolvency Service for those who have no assets should be the people who are themselves in liquidation but who happen to have some assets. It is nice to be able to balance out the accounts and say that the Insolvency Service pays for itself. There is a lot to be said for that, but it is a little curious that the people who pay should be those who are also in liquidation.

Mr. Clinton Davis

Is the hon. Gentleman saying that the Insolvency Service should get even more into the red than it is at present? That is what would happen if his argument were pursued.

5.15 p.m.

Mr. Higgins

That is not what I am saying. We should like to know the degree of cross-subsidisation to enable us to form a judgment. Perhaps I shall table a Question later. That will give the hon. Gentleman—whose briefing on this subject on earlier occasions has not been as perfect as it might be—an opportunity to go into the matter. I am grateful to the Minister for bringing us up to date. I shall try through a Question to get exact information, because there are limits within which one would wish to operate. There may be cases which involve payments by individuals who may be every bit as hard up as other individuals.

In view of what the Under-Secretary of State said in his helpful reply, I do not wish to press the clause which, as he has said, is a peg on which to hang the argument rather than a clause we wish to see embodied in the Bill. I therefore beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

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