§ Order for Second Reading read.3.40 pm
§ The Parliamentary Under-Secretary of State for Trade and Industry (Mr. Alex Fletcher)
I beg to move, That the Bill be now read a Second time.
The measure before the House today represents the first major revision of the law relating to corporate insolvency for 50 years. It is also the most important reform of the law on individual bankruptcy this century.
During this long period, many major changes have of course taken place in every aspect of life. Thus, the need to undertake a major overhaul of the insolvency legislation is now both urgent and compelling. This the Bill achieves by introducing significant new provisions into the law on corporate insolvency in relation to England, Wales and Scotland and by simplifying and clarifying the existing legislation.
The Bill also achieves systematic modernisation of the law on individual bankruptcy in England and Wales. In Scotland, this is achieved by the Bankruptcy (Scotland) Bill which received its First Reading in this House on 18 December 1984.
The need for a thorough-going review of the insolvency legislation became apparent by the mid-1970s after 25 years of particularly rapid innovation in our financial and commercial systems. In 1977 the major, not to say daunting, task of examining the legislation and identifying sectors in need of repair and renewal was given to the review committee on insolvency law and practice chaired by Sir Kenneth Cork.
The review committee's report, which was completed in June 1982, represents a most comprehensive analysis of this part of the law and its operation. The committee found that the vast economic and social changes that have taken place since the 19th century, when the basis of the existing insolvency law and procedures were laid,have rendered them at best, obsolescent and at worst positively harmful".It concluded that without radical reformthey are no longer capable of meeting the requirements of a modern societyand thatfresh legislation of a comprehensive nature is required".The Government entirely accepted this conclusion, and this Bill, which implements the majority of the review committee's recommendations either directly or in spirit, achieves the radical reforms judged necessary.
I should like to express, on behalf of the Government, my warm appreciation for the very substantial task carried out by Sir Kenneth Cork and the members of his review committee. Their report formed the basis of the Government's consideration of the deficiencies of the existing law and this Bill owes a very great deal to their valuable work.
Since the review committee's report was published, wide-ranging consultations have proceeded with interested bodies and individuals as to the way in which reform should proceed. These consultations took place first on the basis of the report itself and subsequently on the Government's White Paper "A Revised Framework for 142 Insolvency Law" published in February last year, which set out our main proposals for reform. Very many helpful contributions and observations were received, and these are reflected in the Bill's provisions.
Before considering in detail the Bill's provisions it will be helpful if I outline the legislation's main themes. First, the Bill will ensure that those who act as insolvency practitioners are fit and competent to do so. The absence of checks on who may act in this capacity has undoubtedly led to a small but unacceptable number of abuses Part I of the Bill will remedy that problem.
Secondly, the Bill will combat abuses of the privilege of limited liability by those whose actions undermine the vitally important commercial purpose for which it was established. By so doing, it will encourage directors to take a close interest in the financial circumstances of their companies and, most importantly, to take remedial action at an early stage when financial difficulties loom.
The third theme of the Bill is to strengthen and improve procedures for facilitating the rehabilitation or reorganisation of businesses which become, or are likely to become, insolvent. To this end, the Bill establishes a new mechanism, the company administration procedure, which is designed to provide an alternative to receivership. Provisions are also included to clarify the law on receivership and to ensure that receivers are more open about their work.
Finally, the Bill contains a major modernisation and simplification of the law on corporate and personal insolvency. Those reforms will do away with unnecessary involvement of the court and will make more straightforward the working of the insolvency procedures.
The reforms will also have the valuable effect of enabling the official receivers of the insolvency service of the Department of Trade and Industry to reduce their commitment to the tasks of acting as liquidators and trustees, so permitting them to concentrate on their protective and investigative work.
The Government propose to bring forward some amendments during the Bill's passage through the House. They will mainly be of a technical nature to improve the insolvency procedures and to reflect the helpful comments of practitioners in insolvency on the Bill's provisions. But they will also include provisions to give effect to the announcement I made in November last year that the principal essential utilities should be prevented from securing more favourable treatment than other creditors following insolvency by threatening to discontinue supply. I hope that the necessary amendments will be brought forward during the Bill's consideration in Committee. Perhaps I should make it clear that I am referring to the suppliers of electricity, gas, water and telephones.
I now come to the provisions in part I which relate to insolvency practitioners. The evidence submitted to the review committee confirmed the view——
§ Mrs. Elaine Kellett-Bowman (Lancaster)
May we take it that my hon. Friend will not overturn all the Lords amendments, many of which are helpful to the Bill?
§ Mr. Fletcher
I can assure my hon. Friend that we shall overturn, not all the amendments made in the other place, but only those that require that treatment.
§ Mr. Anthony Beaumont-Dark (Birmingham, Selly Oak)
My hon. Friend shows his usual good humour. I hope that his common sense will be as good as his humour. 143 Many hon. Members thought that many of the Lords amendments made the Bill acceptable to those who would take part in enterprise, which is meant to be the Government's main task. If the Government insist on overturning the common sense of the Lords, the Bill will have a difficult passage. May we hope that he will at least retain in the Bill the Lords' intention that those who enterprise in a proper manner will not be penalised by the Bill?
§ Mr. Fletcher
I shall come to the steps that we wish to take on the main amendments that were made in another place. We should not confuse enterprise in starting a business with wrecking a business. That is the distinction that we wish to try to achieve in the legislation.
§ Mr. Fletcher
Then we are at one, which is splendid.
I come now to the provisions in part I of the Bill concerning insolvency practitioners. The evidence submitted to the review committee confirmed the view that the majority of insolvency practitioners carry out their duties in a way which gives no cause for concern. But, unfortunately, a minority of practitioners has engaged in questionable activities to the detriment of creditors. It is the Government's view that it is not only desirable but essential that the public should have confidence in those who handle insolvencies.
At present, with few exceptions, anyone can act as an insolvency practitioner. The review committee recommended that measures should be introduced to ensure that professional standards are observed by all insolvency practitioners and that in future fidelity insurance should be compulsory for all forms of insolvency proceedings. The committee further recommended that transitional arrangements should be made to allow experienced but unqualified practitioners to act.
The Bill adopts those recommendations and provides that a person will not be qualified to act as an insolvency practitioner unless he has a certificate authorising him to act and has provided security for the performance of his functions. In addition, a person will not be qualified to act in a particular case unless he is independent of the company or individual concerned. It is accepted, however, that as the Bill, stands at present the restrictions on a practitioner acting in respect of "associates", as defined in clause 207, are too widely drawn to be practicable.
Consultations with the main accountancy and legal bodies are proceeding with a view to introducing amendments which will reduce the area covered by the existing provision in the Bill. Our intention is that only those relationships which clearly constitute a conflict of interests will be caught.
§ Mr. Nicholas Lyell (Mid-Bedfordshire)
Will a chartered accountant who is placed by a bank with a debenture in a position of company doctor to advise the company on its financial affairs be capable thereafter of acting as a receiver if the company is subsequently put into receivership or wound up?
§ Mr. Fletcher
That is a good question, and it is the sort of point that we are currently considering. We must discuss where we should draw the line with regard to the conflict of interest. I mentioned associates, which would 144 include partners in a firm, and the various rules that the professional bodies apply, for example, to auditors. I cannot give my hon. Friend a precise answer, because this is the sort of point that the Department wishes to consider further before introducing proposals in the House.
§ Mr. Dennis Skinner (Bolsover)
Will the Minister also consider the case of a firm of accountants examining, for instance, Johnson Matthey Bankers in early 1984 and giving it a clean bill of health, and then within a few weeks it becoming apparent to every man and his dog that the bank is going under? The parent company did not seem to do anything about it, and the report was then published. May we be assured that, when the Bill is enacted, it will ensure that accountants who give such a clean bill of health will not be allowed to continue to practise and to be used in the way that they were used on that occasion? Will the Bill prevent banks such as Johnson Matthey from being nationalised by a Tory Government? Is that the intention? From what the Minister said to the hon. and learned Member for Mid-Bedfordshire (Mr. Lyell), I would guess that a set of accountants could examine a company and then act as its receivers. I have an idea that Sir Kenneth Cork used to do that regularly.
§ Mr. Fletcher
I am sure that Sir Kenneth Cork can speak for himself on that point. I thought that the hon. Gentleman was in favour of nationalisation of any sort, even the backdoor nationalisation to which he referred. However, the legitimate points that he raises are not matters for this Bill. The remedy open to anyone in the case to which he referred, whether shareholder or creditor, who believes that the accountants' report was inadequate and that they have suffered as a result——
§ Mr. Fletcher
No, better than that: they can seek a remedy in the courts.
The Bill also provides that the Secretary of State's functions as regards the issuing, renewal and revocation of certificates for insolvency practitioners may be delegated to an appointed body. As yet, no final decision has been taken about the level of experience and training which will be required of an applicant for a licence or to which bodies the Secretary of State's licensing function will be delegated. Consultations are continuing with the main accountancy and legal bodies.
It is expected, however, that bodies seeking approval by the Secretary of State will be required to demonstrate that they have a qualifying examination for membership and effective disciplinary procedures, that their members have knowledge of insolvency work and that they are prepared to operate, and are capable of operating, a system of practising certificates.
It is not possible for me to say at this stage which bodies will be approved for licensing purposes. Each application will be dealt with on its merit, irrespective of whether or not that body is recognised in other, non-insolvency fields.
I stress that the Bill does not restrict the certification of experienced but unqualified persons to existing insolvency practitioners. It provides for unqualified persons who obtain the necessary practical experience in future to apply for a certificate.
It is not intended that these provisions will apply to receivers appointed by a fixed charge holder, but they will apply to administrative receivers, as defined in clause 91, and to company administrators appointed under clause 13.
145 The provisions of Part II(1) are principally concerned with combating abuses of limited liability. Limited liability is an essential element of a successful commercial and financial system, but it is abused. The Government's view is that limited liability is a privilege. Any misuse of it, as a result of incompetence or of lack of concern for the interests of creditors, must be punished in the interest of consumers and the business community generally.
We believe that further measures are required to strike a proper balance between limited liability and the protection of creditors. Clauses 7 to 12 are designed to restore this balance and to ensure that those concerned in the management of companies diligently monitor the financial circumstances of their businesses and confront difficulties at an early stage.
Of course, most directors of companies experiencing difficulties make timely and effective arrangements which do not require the court to intervene in their affairs and which often result in insolvency being avoided. But there are others who take no effective action, leaving the state to wind up the affairs of the company at a point where few, if any, assets remain to meet the claims of creditors.
Unless such dilatory directors have been guilty of fraudulent behaviour—which involves dishonesty, and is not a simple matter to establish—no distinction is drawn between directors who take timely action and those who do not.
§ Mr. Michael Grylls (Surrey, North-West)
Many of the good provisions in the Bill, particularly the changes relating to utilities, represent a step forward, but there is an area which the Minister has left out and which I hope he will consider. I refer to banks being allowed, almost uniquely in this country compared with other industrialised countries, to have a floating charge over assets. That often puts unsecured creditors in a difficult position and it certainly weakens their position.
Will my hon. Friend consider introducing a provision in the Bill which would outlaw, as is the case in the United States and elsewhere, banks having a floating charge but being able only to have a charge over an asset? That would prevent a bank from having a floating charge over the whole of a business. In that event, the banks would come in earlier and would have a better chance of encouraging companies to be saved.
§ Mr. Fletcher
I appreciate that my hon. Friend feels particularly strongly on that matter. I have no desire to avoid the issue that he raises, but I must remind him that the Bill deals with insolvency and insolvency procedures. We should be overstepping the scope of the Bill if we sought to reform the way in which normal commercial lending is carried out in this country.
As for unsecured creditors, the Bill provides that receivers will be required to take account of unsecured creditors in terms of the work that they perform, be they administrative receivers, as they are now called, or be they, as they were formerly called, receiver managers. The work that they perform will be of a nature that requires them to keep the unsecured creditors informed of the state of affairs of the company. That will go at least some way towards meeting my hon. Friend's point.
No distinction is drawn between directors who take timely action regarding the affairs of their business and those who do not. Indeed, at present there is no incentive in law for directors to take early action. Those who do not 146 are a danger to shareholders, employees, consumers and, last but not least, other businesses. Most people are both traders and creditors.
Before I describe the provisions of the Bill concerning the protection to be accorded to investors and creditors from the sort of irresponsible behaviour I have described, I should like to say something about the Government's earlier proposals on disqualification which have already been referred to by some of my hon. Friends.
The House will be aware that the Bill as introduced in another place contained a clause which would have provided for directors of companies subject to compulsory winding up to be disqualified automatically from holding office in that capacity. That clause was removed from the Bill in another place.
Our initial judgment was that the director who allows the affairs of a company of which he is an officer to deteriorate to the point where the intervention of the court is required to wind it up has already gone most of the way to demonstrating his lack of fitness for corporate management. Nevertheless, we have accepted that a policy of automatic disqualification might, in a very few cases, have resulted in those who had conducted themselves properly being penalised.
Accordingly, clause 7 now requires the Official Receiver or the voluntary liquidator to report to the Secretary of State if, in their judgment, there is prima facie evidence that a person's conduct as a director makes him unfit to be concerned in future in the management of a company. If the Secretary of State considers that the public interest demands that a person should be disqualified he, or the Official Receiver on his behalf, will make the necessary application to the court.
That revised provision has the advantage over our original automatic disqualification proposals that it will apply to directors involved in voluntary as well as compulsory liquidations. It also maintains the Government's determination that strict policing of corporate insolvency must take place to ensure that creditors are protected from directors whose conduct has demonstrated their unfitness to assume the responsible office of company director.
Hence, clause 7 places the Official Receiver and the voluntary liquidator under a duty to report to the Secretary of State when they detect unfit conduct. Taken together with the provisions of Part I of the Bill to ensure that insolvency practitioners are competent and experienced, we believe that the threat of disqualification will be a strong incentive to directors to take a much closer interest in their company's financial position and to pay proper attention to the interests of creditors.
Before I proceed, I should like to comment on the amendments made in another place to clause 7, against the advice of the Government. Those amendments, which form subsections (2), (3), and (5) and the latter parts of subsection (8) of the clause, were prompted by a concern that the Bill should give guidelines as to what constitutes unfit conduct and should place some time limit in respect of the workings of clause 7.
We accept that guidelines on unfit conduct and a time limit in relation to clause 7 are desirable. We do not believe, however, that the amendments which were made represent the best approach to this question and it is intended to bring forward our own proposals as the Bill makes progress.
147 I now come to clause 9, which provides for directors to be made personally liable for the debts of their companies where the court makes a declaration of wrongful trading. I believe that this measure will provide an even more powerful spur to proper conduct than our proposals on disqualification. Put simply, it affects the pocket directly. That may impose its own discipline on the conduct of certain directors.
That directors should be required to accept personal liability for wrongful as opposed to fraudulent trading is a new concept, which was one of the review committee's main recommendations. It concluded that nothing less would serve to meet widespread concern at the ease with which an unscrupulous person can allow a company to continue to trade when there is no reasonable prospect of its creditors being paid.
The Government share the review committee's judgment and consider that the introduction of the concept of wrongful trading will be of major benefit in discouraging reckless conduct. In particular, it will tackle the vicious problem of the "phoenix syndrome" where successive insolvent companies carry on what is essentially the same business.
Clause 9 of our Bill draws heavily on the committee's proposals. It empowers the court to declare a director of a company in insolvent liquidation to be personally liable to make a contribution to the assets of the company if it had traded wrongfully.
Such a liability is incurred if before the liquidation the director knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation and did not take the steps he ought to have taken to minimise the potential loss to creditors.
The effect of the clause will be to provide an effective civil remedy to those who suffer losses as a result of a director's behaviour which may have been reckless, negligent or otherwise unreasonable.
Taken together, our proposals on disqualification and wrongful trading should go far towards improving commercial conduct and protecting creditors. I believe they are generally welcomed.
§ Mr. Tim Smith (Beaconsfield)
Given that the provisions relating to disqualification in clause 7 will very much rely upon the liquidator reporting to the Secretary of State if he considers that a director is unfit, how effective does my hon. Friend think that they will be in practice? How far will the clause deal with the abuse to which he referred earlier? Would it not have been much better if the original proposal relating to automatic disqualification had been retained and we had said res ipsa loquitur—the thing speaks for itself—and that if a director has gone as far as compulsory liquidation he should account automatically to the court? Is it not unfortunate that, with the connivance of the Labour party in another place, these clauses were removed from the Bill?
§ Mr. Fletcher
I am bound to sympathise very much with my hon. Friend. As I tried to explain earlier, the Government's proposals which were removed in another place were criticised on one or two points. They were criticised a great deal on emotional points and they were criticised legitimately on one or two factual points. One 148 criticism was that as the proposals were framed they might have caught a very few innocent directors. We had to bow to that argument. I wish that the original clause 7 had been more fully debated in another place before the amendments were made, but in considering the question as a whole we are falling back on the liquidator or the official receiver making his report to my right hon. Friend the Secretary of State for Trade and Industry.
We are still examining the provisions of clause 7. We wish to provide guidance in the Bill about what constitutes unfitness in a director so that directors and their advisers, as well as liquidators, will know precisely what is expected of them when filing their reports and running their businesses. The Government want the proposals to be as effective as possible. In many ways they are a second best. I have to concede that. However, in all honesty, I think that as they compare in other ways with the original clause 7, one has given way on a particular point. I am delighted that my hon. Friend says that the proposals will improve and strengthen clause 7. I look forward to his co-operation.
§ Mrs. Kellett-Bowman
I wonder whether the Minister was confusing innocence with slackness. It would seem that if a director has allowed that pitch to be reached, he must have been dilatory in carrying out his duties towards that firm.
§ Mr. Fletcher
I agree with my hon. Friend. If a company is completely ruined, as all too often happens, I hope that the liquidator responsible for reporting on the conduct of directors will not just take into account the guidelines that we are laying down but will draw on his own experience and ask himself, "What were the directors doing, each and every one of them, in the days, weeks and months before the company was wrecked?" It is on that basis and in that spirit that we expect to receive reports from liquidators and the official receiver.
§ Mr. Fletcher
We have considered that possibility. We take the view that we do not wish frivolous actions to be raised. We believe that the person who is in the best position to make the judgment regarding the conduct of directors is the person responsible for winding up the affairs of the company. In this case, it would be a licensed liquidator or the official receiver himself.
I am sure that those matters will be discussed at great length in Committee. It is an important aspect of the Bill. I shall be happy to have those discussions.
§ Mr. John Fraser (Norwood)
Does not the Minister recognise that a similar situation exists under the law at the moment, and that no more that about a couple of dozen directors a year are recommended for disqualification? Surely, when there is a prima facie case of neglect of duty by a director, the right solution is that he should be automatically disqualified, with the burden of proof then reversed, and let him make an application to the court to show his innocence as there is a prima facie case against him.
§ Mr. Fletcher
On the basis of remarks that have been made in the House this afternoon, there seems to be a difference between us and another place in the view taken 149 of the Government's original proposals. No doubt that debate will continue for the rest of the day and in Committee.
I was about to refer to the Bill's provisions on company rescue procedures. The review committee recommended that greater emphasis should be placed on business rescue and reorganisation, and suggested that a new procedure should be established—the company administration procedure—under which the court may appoint an administrator to a company if it considers that the appointment would promote either its rehabilitation or restructuring through sale of parts of the business as going concerns.
A key element in company rescue is the availability of a breathing space during which plans can be put together by new management to return the company to viability or to secure survival of parts of the business. The absence of that breathing space too often means the demise of any prospect of the rehabilitation or the reorganisation of companies.
The administration procedure therefore provides for a statutory moratorium on all actions and proceedings against a company including creditors' rights to enforce their security.
Following publication of the Bill, many helpful comments from practitioners in the insolvency area have been received regarding the new procedure. As a result, it is hoped to make a number of amendments to the Bill's provisions to improve the new procedure and to ensure that it can work effectively.
I refer now to the provisions amending the law relating to receivership. The review committee drew attention to two principal areas of weakness in the existing law. The first concerned the receiver's lack of accountability to unsecured creditors. The second weakness is the lack of clarity of the law relating to a receiver's powers and duties. The main thrust of the provisions is therefore to remedy deficiencies in those areas.
The Bill's provisions deal mainly with the law on receivers appointed under floating charges over the whole of a company. Such receivers will be known in future as administrative receivers. That is the old receiver and manager. I must confess that I find that a little confusing. We are talking about a new administrator and administrative receivers. I looked at the Bill the other day, and found that it would require about six or seven dozen amendments to change the terminology throughout the Bill. However, we shall see how we get on with the terminology. If it seems to be confusng, we may consider making changes.
§ Mr. Fletcher
That is a legitimate question. I take note of my hon. Friend's point. As I said, six or seven dozen amendments would be required. That is why I hesitated.
§ Mr. Peter Thurnham (Bolton, North-East)
When the receiver is appointed, the decision is made more or less immediately, as I understand it, but with an administrator there is a period between a petition being presented to the court and the court deciding to appoint the administrator. Will my hon. Friend clarify the length of that period, because time is of the essence in these matters?
§ Mr. Fletcher
The moratorium takes effect from the day when the application to the court is made, and the 150 provisional administrator is appointed, so to speak. I think that there is a period of three months—I am sorry, but I cannot be certain—between the application and the administrator being confirmed or otherwise. The breathing space starts immediately a petition is made, and the administrator is instructed to go forth and prepare his plan.
§ Mr. Thurnham
Would it be possible for the petition to be withdrawn if the firm found that things were not as bad as it thought?
§ Mr. Fletcher
Indeed. An application can be made to the court by a company, creditor, or anyone affected by the administration, to have the petition withdrawn. I hope that that rehabilitating and restructuring procedure will be used. I shall be happy, as I am sure the whole House will, to see companies emerging after six, nine or 12 months of breathing space fit and able to conduct their business with new vigour.
I should like to refer to the new corporate and individual insolvency codes. I refer now to the fourth of the Bill's major areas of reform—the restatement in modern form of the corporate and personal insolvency codes—which accounts for nearly three quarters of the Bill's 211 clauses. In the Government's view—and one which I believe is widely shared—it is essential that modern insolvency codes should reflect the commercial world within which they must operate. They should ensure that causes of commercial failure are the subject of close inquiry, both in the interests of those who have suffered financially and in the public interest to promote a healthy business environment. In order to achieve our aim of simplified, modern and harmonised codes for both corporate and individual insolvency, which will endure for many years, the Bill adopts many of the recommendations contained in the review committee's report. It also effects a complete overhaul of the antiquated bankruptcy code, which is currently embodied in the Bankruptcy Act 1914. Many of the corporate insolvency provisions in the Companies Act 1985 are also modernised or replaced by undated legislation.
As a result of the new procedures, time-consuming and routine tasks which currently fall to the official receiver and his staff will be swept away. In future they will be able to concentrate on the investigation of the affairs of both individual and corporate insolvents. The simplified procedures will also mean that insolvency practitioners who act as liquidators and trustees will be able to carry out their duties without unnecessary bureaucracy and expense.
I am pleased to say that the general response to the detailed procedural elements of the Bill has been favourable. We have gone a long way towards developing new insolvency codes which will meet the needs of today and the foreseeable future, but we continue to welcome suggestions for improvements to the Bill's proposals.
We have had many helpful comments already, and I should like to express my appreciation for the contributions which practitioners in insolvency have made to our work on the Bill. We hope to introduce a number of amendments to take account of the various matters drawn to our attention and to make further improvements to the Bill. For example, we have been urged strongly to look again at the question of the matrimonial home in bankruptcy and we have issued a consultative paper. This will enable account to be taken of the views on how reform should be made in the present legislation. A copy of this paper has been placed in the Library.
151 I draw the attention of the House to one final matter—the preferential status of certain debts, such as taxes, owed to Government and others. The review committee recommended the abolition of preferential status in the case of some tax liabilities, and a reduction in the period for which preferential status is applied in others. The Government looked again at this question and subsequently brought forward amendments to the Bill in another place.
The Bill's provisions now have the effect of removing the preferential status of taxes except in the case of collector taxes—that is, taxes such as value added tax and pay-as-you-earn which are collected on behalf of Government and which represent sums of money that are never the property of the individual or company which collects them. It would be quite wrong if, on insolvency, such moneys were distributed to private creditors.
§ Mr. Robert Sheldon (Ashton-under-Lyne)
This is a particularly serious matter for the small company which can fail because of preferential creditors which can have a domino effect upon a number of other companies. The problem is that the Inland Revenue might have failed to collect money owing when it should have collected it. If it had collected the money, it would not have built up such a large preferential debt and more money would be available to distribute to other creditors. The failure of the Inland Revenue can cause the failure of a number of companies. I do not see why the Inland Revenue should be in such a privileged position.
When a company fails, it should not be assumed that only 5 or 10 per cent. of its debt will be paid to non-preferential creditors. A substantial sum—perhaps one third or one half—should be paid to them. That would have a substantial effect on small companies which would not be faced with the distress with which they now have to cope when one of the customers goes bankrupt.
§ Mr. Fletcher
I am grateful to the right hon. Gentleman, but I cannot accept the premise upon which he bases his argument. He said that sometimes a creditor is to blame for the debtor's disaster. One could argue that not only about Crown debts but in relation to a bank, which has supported a company for years. One could say that the bank is to blame if the company goes under because it should have clipped the company's wings much earlier. I do not accept the right hon. Gentleman's general argument.
The Government have gone a long way in relation to Crown preference. I have explained what we are doing about public utilities which have had a bogus preferential status. We have moved a long way in that direction.
§ Mr. Fletcher
I do not know how much further we can go than to say that a body does not have preferential rights, that therefore it must not act as if it had and to pass legislation to ensure that it does not act in that way.
§ Mrs. Kellett-Bowman
My hon. Friend has the wrong end of the stick. I was referring to the preferential treatment still accorded to VAT and PAYE.
§ Mr. Fletcher
We are trying to distinguish between assessed debts—corporation tax, some income tax and rates. They lose their preferential status. However, when 152 a company collects money such as employees' tax, VAT or national insurance contributions, that has nothing to do with trading. The company is carrying funds on trust with a view to paying them to the Revenue. That has nothing to do with a liquidation or bankruptcy and such funds should be given preferential treatment.
Unlike normal traders, the Government cannot choose with whom they do business. They cannot refuse to deal with a company's PAYE, VAT or national insurance contributions because they do not like that company's record, but a trade creditor can refuse to do business with a company. I think that the arguments are powerful.
§ Mrs. Kellett-Bowman
Does my hon. Friend accept that a small business man faced with a large company does not have much choice either?
§ Mr. Fletcher
The small business man can decide whether he does business with a company. However, the Government do not have that choice in relation to VAT and PAYE. The Government's concessions go a long way towards satisfying the legitimate arguments expressed here and elsewhere.
§ Mr. Thurnham
What happens when an administrator is appointed to a firm which has not paid its bill to a supplier? Will the supplier still have to pay the VAT on a bill which is not paid because the administrator has imposed a moratorium? The administrator provision would be more popular if we knew the answer to that question.
§ Mr. Fletcher
I shall answer that later, but I think that such a supplier would still have to pay the VAT. I do not want to confuse that issue with the receivership provisions in the Finance Bill. We are making changes in legislation which will allow a concession to be made in relation to VAT.
The Bill's proposals represent a significant reform of the law on preferential debts. I am sure that this will be generally appreciated. I would add, however, that the Government do not accept that there is any justification for the reduction in the preference period of value added tax from 12 months to six months. This was inserted into the Bill by an amendment made in another place. We shall invite the House to restore the previous position.
§ Mr. Tim Smith
I am sure that my hon. Friend is right to distinguish between the two taxes. As soon as a business registers for VAT, it has an immediate cash flow benefit. Many small firms use VAT to keep going. However, perhaps there is something in what the right hon. Member for Ashton-under-Lyme (Mr. Sheldon) said. It is up to the Government to move on this matter. Is not the Treasury acting in accordance with the Keith committee proposals? The Chancellor said that over the next three or four years he expects a £800 million cash flow benefit from the changes in VAT enforcement contained in the Finance Bill.
§ Mr. Fletcher
There is a quid pro quo. As business men rejoice in the changes relating to Crown preferential debts, public bodies which lose preferential status may decide to move more quickly and be less lenient when debts becoming outstanding. With the loss of preferential status, such bodies may chase for their money harder than before. That is inevitable.
I believe that the Bill will ensure that insolvency proceedings are conducted by practitioners who are 153 competent and fit to act in that capacity. It will deter and punish those who take advantage of limited liability either by negligent conduct or by furthering their own interests at the expense of creditors. The new administrator procedure and the reform of the law on receivership will give a new thrust to efforts to avoid insolvency or to rescue the viable parts of insolvent companies.
Finally, the Bill will provide modern and effective insolvency codes which will not only meet current needs but also stand the test of time. I commend the Bill to the House.
§ Mr. Brian Gould (Dagenham)
It is in a way appropriate that it should fall to this Government to bring forward a Bill on insolvency because it comes at a time of record insolvencies, with over 13,000 company liquidations and over 8,000 bankruptcies last year. Having enlarged the scope of the problem in this way, the Government can at least be said, in bringing forward the Bill, to have recognised their responsibility.
The Insolvency Bill is the first major attempt at reform of the subject this century.
§ Mr. Gould
I have only just started, and I do not propose to give way for some time.
The reform is universally regarded as long overdue. The mischiefs against which the Bill is directed are notorious. Indeed, the Minister mentioned a large number of them. I suppose the first, at least in the public consciousness, is the phoenix syndrome, which he mentioned, whereby rogue directors escape their liabilities by going into liquidation, leaving in their wake a trail of unpaid creditors, and are then able to set themselves up in the same business on the following day free of all their debts and ready to start again.
Then there is the cowboy liquidator who often acts in collusion with the rogue director. As the law stands, liquidators need have no qualifications of any sort. The cowboy liquidator is nevertheless permitted to handle and to gain access to substantial assets. In many cases, I am sorry to say, he uses that ability to cheat creditors of what is due to them.
There is also the plight of the unsecured creditor, which I think was very much in the mind of the Cork review committee. The unsecured creditor almost always loses out because he is left with what remains after the holder of a floating charge has recovered his money, after preferential creditors such as the Government have taken their share, and after professional expenses have been paid. What is left to the unsecured creditor as a consequence is, in most cases, nothing.
A further mischief with which the Bill is concerned, to which the Minister also referred, is what is often a headlong rush into insolvency—usually at the instance of the debenture holder, the bank—of companies which could be nursed back to proper financial health. It is often—this is a point that the Minister did not raise—the employees of such an enterprise who bear the brunt of the priority asserted by the banks in protecting their own interests. There is a clear public interest in making sure that companies do not go prematurely into insolvency.
There are then myriad ways with which the Bill is largely concerned in which an archaic insolvency law fails 154 to provide the speedy, fair and effective procedures that we need in today's circumstances to establish a proper balance between the interests of the directors on the one hand, and creditors, consumers, employees and the community at large on the other. To the extent that the Bill seeks, as it does, and largely succeeds, to remedy these deficiencies, the Opposition will support it.
The Bill is, of course, based substantially on the Cork report. The Opposition join the Minister in expressing our appreciation of the work done by the review committee and Sir Kenneth Cork. It was the Secretary of State's predecessor who appointed Sir Kenneth Cork in 1977. As the Minister said, the report was produced in 1982, followed by a Government White Paper in February 1984.
Despite this fairly leisurely timetable—particularly, if I may say so, on the Government's part, rather than that of the committee—the Bill shows many signs of inadequate preparation, and certainly inadequate consultation. One instance of this is that no debate took place either on the Cork report or on the White Paper. In the light of the mauling that the Bill received in another place, to which the Minister made many references, the Government must surely regret now not having consulted more widely and thoroughly before they produced the Bill.
We intend to approach the Bill constructively. Our object is to make it a better Bill. Our starting point—and here I echo the language that the Minister used—is that limited liability is an immense privilege that allows business men to trade, often using other people's money, at little risk to themselves. It is a privilege which has been of great importance and which will continue to be of importance in stimulating economic activity. It is also one which is clearly susceptible to abuse. In our view, the evidence is now incontrovertible that that privilege has been considerably abused, and that many worthwhile interests which deserve attention have suffered as a result.
Too often we believe that limited liability encourages commercial behaviour which would rightly be regarded as outrageous if it were a matter of the private affairs of a private individual. We believe, in other words, that the privilege should be extended only to those who are clearly fit to use it, and that those who abuse it should have the privilege removed.
We bear in mind that the whole thrust of the Cork report was to shift the balance of advantage away from directors and in favour of consumers, creditors, employees and the public interest.
§ Mr. Thurnham
Is the hon. Gentleman saying that the privilege should be extended only to those who are clearly fit to have it? Does he suggest that people can become directors of limited companies only if they pass some kind of test?
§ Mr. Gould
I do not believe that even the hon. Gentleman expects me to be so foolish as to agree with that proposition. It is not what I am saying. I am saying, however—and this takes us immediately to the heart of the issue which occupied and, indeed, preoccupied their Lordships in another place—that we are not content with the present form of clause 7, and here we share the Minister's view.
The Bill began by proposing that any director involved in a compulsory liquidation should be automatically disqualified, subject to the right of appeal and so on. We do not find the principle of automatic disqualification as 155 offensive as many clearly have. We are, after all, talking of withdrawing a privilege, not of convicting somebody of a criminal offence. I think that what went wrong with clause 7 as originally drafted was that it took the wrong criterion. It fastened upon compulsory liquidation as the point at which the disqualification should apply. That was unacceptable simply because it did not necessarily catch the rogue director who would be pretty adept—more adept, perhaps, than the unlucky and incompetent director—at escaping, getting out and going into voluntary liquidation long before the measure came to apply to him.
We favour a set of tough rules to restrict unfit directors. We believe that clause 7 as it stands is too weak. It is particularly weak in the mechanism that it proposes. One or two hon. Members have already referred to that in interventions. It proposes, as the Minister knows, that the matter should depend upon a report by the official receiver or a liquidator. All the evidence is that liquidators in particular simply do not make such reports.
There is a statutory provision under section 9 of the Insolvency Act 1976 which is virtually unused. Under the legislation, for example, companies have an obligation to file accounts and, when those companies go into liquidation, liquidators have an obligation to make reports if they fail to carry out that duty. However, although 400,000 companies are at present in default of that duty, the average figure of reports by liquidators on such failures is fewer than 30 in the past two or three years. We shall wait to see what amendments to this provision the Government bring forward.
By way of indicating what we would like to see, we believe that we should try to strike at the inclusion in clause 7 of a pattern of conduct which is able to identify not, as I have said, the unlucky director who makes a mistake on one occasion, but the director who comes in, knows what he is doing, gets out at the right moment and sets up again. Therefore, we may well look with favour upon an amendment seeking that sequence of perhaps two liquidations—whether compulsory or voluntary does not matter—as a sign that here is a director involved in something which is an abuse and which ought to be stopped.
As to other matters in the Bill, we support the concept of wrongful trading, that is, the idea that a director who accepts credit at a time when he knows or ought to know that the company is insolvent should be personally liable. We believe that the amendments that were made in another place means that clause 9 is unsatisfactory and needs tightening. We would like to see a move towards something nearer to the basic recommendations in the Cork report.
We agree strongly that liquidators should be professionally qualified. Currently, anyone can be a liquidator. The only experience that liquidators have at the lower end of the market, as it were, is that they themselves have been insolvent on many occasions. Some of them have been through the mill so often that they recognise eventually that it is easier to make money out of running liquidations than constantly becoming insolvent. That is often the way in which they are able to gain experience and to make a profit from their activities.
We support the proposed reform, but we are not convinced of the soundness of the Minister's detailed thinking on who should be qualified. We shall want to 156 consider that in more detail in Committee. The Minister may be aware that there are some operators who foresaw reform and the introduction of a Bill some years ago. They took the precaution of setting themselves up in small professional bodies for the purpose of meeting any criteria which might be laid down in the Bill. That is something that should be examined carefully.
We support also the introduction of the Cork-recommended administrator, whose task will be to keep a failing company in business. It is a valuable idea which offers some hope of reducing the number of unnecessary business failures. However, we are concerned that the appointment of an administrator can be vetoed by the debenture holder—usually the bank—and that employees' rights are not given greater protection.
As a general proposition, the Government have been perhaps too solicitous of the banks' interests. One of the major shifts in emphasis between the report and the Bill is that the banks have managed to ensure that nothing will happen to disturb their preferences. Surely the administrator's role should be to stop companies from being driven into insolvency unnecessarily. We are all familiar with notorious examples such as Stone Platt where the banks insisted on putting in their receivers. In effect, they have destroyed companies that could have survived. We should consider the relationship between the rights of a debenture holder and the appointment of an administrator. There is a more general case, however, for restricting the rights of the holders of floating charges, who almost always grab the lion's share and leave little for unsecured creditors.
The Bill does not go far enough to protect the interests of employees of a company to which an administrator is appointed. One of the real promises of advance that lies behind the idea of an administrator is that jobs that might have been destroyed will be safeguarded. Many members of the work force will be involved directly as their jobs will depend on the administrator's success. At least one representative of the work force should be on the administrator's committee. The administrator should be under a clear statutory duty to consult and inform the work force. He should have a general duty as well to safeguard employment.
On one issue we are less at one with the Government than on the matters to which I have referred so far. We believe that the Bill, in some respects, is animated by an attempt to downgrade the role of the official receiver, probably in an attempt to save public spending. It is clear that the savings from such an exercise would be illusory and, at best, minimal. The exercise is an example of dogma at work. We can claim the support of the Cork report in maintaining that there is a legitimate public interest which must be protected in ensuring that insolvency procedures are properly carried out. This means a continuing and important role for the official receiver.
§ Mr. Fletcher
I agree with the hon. Gentleman that there is an important public interest role for the official receiver. The improvements that we have made to the details in the Bill and the shifts of policy in the Bill are intended to allow the official receiver's department to be able to carry out its investigative and protective work more effectively and spend less time on matters for which it was never designed.
§ Mr. Gould
I am glad to hear the Minister say that. I give him notice that we shall consider carefully and critically anything that smacks of an attempt to privatise by a side wind any of the official receiver's functions.
The Government, under pressure, have gone some way towards the recommendation in the Cork report that the Government's preferences and those of public corporations shold be abolished. We welcome the move on rates and on what are now known as directly assessed taxes such as corporation tax and capital gains tax. We welcome the amendment, which was agreed to in another place, to reduce the scope or time limit of the preference on collector taxes such as VAT and PAYE. We shall ensure that there is further debate on these issues in Committee, bearing in mind the general desirability of equivalence of treatment so that as much as possible is left for unsecured creditors. That is a leit motif of the Cork report and we must never lose sight of that objective.
Consumer organisations have been keen to give special protection to the consumer who makes a prepayment for goods or services to a firm which then fails before the goods or services are delivered. There is no doubt that such persons, who are currently treated as ordinary creditors, receive a raw deal, but we must accept that they are not unique. All unsecured creditors are in that position. The argument is finely balanced. It is undesirable to create a new class of preferred creditor, but there is a case for saying that the ordinary consumer has less chance of protecting himself than a trade creditor and is perhaps less aware that he is advancing credit to a trader, which the trader can use as part of his working capital. We shall be keen to hear further argument on these issues in Committee. We shall come to a conclusion in the light of the arguments.
§ Mrs. Kellett-Bowman
Does the hon. Gentleman agree that consumer organisations are concerned also about servicing contracts, which are rather difficult to quantify and which give consumers very few rights?
§ Mr. Gould
The hon. Lady is right about that. There are a number of areas in which the consumer is not properly protected. I am sympathetic generally to the consumer organisations' argument but I enter the caveat that we should be a little chary of creating new classes of preferred creditors when the general thrust of the reform should be to treat everyone as nearly equivalent as possible.
So much for what is in the Bill. The Opposition's major criticism is directed to what is not. It is unfortunate that in some respects the Bill can be regarded as a missed opportunity. It has failed to provide the comprehensive reform that was recommended in the Cork report and was the object of the review committee's report. For example, the Bill fails to provide for a specialist insolvency court, which the Cork committee recommended. Such a court would have meant a substantial step towards simplification of inevitably complicated procedures, whatever reforms the Bill is able to introduce. Insolvency involves many complicated matters and there is a powerful case—the Cork committee certainly made one—for a specialist court to deal with it.
The Bill makes no provision—perhaps this is its major omission—for the Cork recommendation of a fund comprising 10 per cent. of available assets to be set aside for unsecured creditors. There was some dispute 158 over the precise purpose of the fund, but it seems that the ground for that argument has changed slightly since the report's publication. Whatever the ground on which that idea would be supported—either because it was a fund for distribution to the unsecured creditors or because it was a fund to enable the liquidator to carry out his tasks and duties more efficiently for the unsecured creditors—it is unfortunate that it has not been embraced by the Bill. We shall table an amendment on that subject so that we may have a proper debate.
§ Mr. Fletcher
May I make this point for the sake of clarity. I have discussed the matter with Sir Kenneth Cork. I have it on his word that what is intended is a fighting fund for the liquidator and not a dividend reserved for the unsecured creditors, which would be a paltry sum in most cases.
§ Mr. Gould
I am grateful to the hon. Gentleman for making that point. I believe that the fighting fund concept is a stronger ground on which to support this idea, although the report did not advance the idea in quite those terms.
The Bill is deficient in omitting to establish an insolvency court and a 10 per cent. fund. The legislation has failed to provide the package recommended by Cork. Everything hung together in that package. Because important elements in the Cork package are left out, the Bill falls far short of the comprehensive reforms that Cork recommended. Without those elements, the reforms in the Bill will be less effective than they should be.
The Bill is widely regarded as excessively long and complicated. That was perhaps inevitable. It is only the framework of the body of rules, regulations and law which will govern this matter in the future. Much will depend on the detailed rules and notes that have yet to be produced, and we hope that we will receive further information in Committee about them. Much will depend also on the amendments that are made in Committee. If we emulate our colleagues in another place, those amendments will be substantial, numerous and far reaching. The Committee stage could be unusually important, and we intend to make it so. We intend to approach this important task as constructively as possible.
§ Mr. Peter Thurnham (Bolton, North-East)
This has been an extraordinarily difficult subject on which to put speech notes together. It affects us in two ways, because it is one of the few ways in which hon. Members can be disqualified. For someone who is a both a business man and a Member of Parliament, there is a sort of double jeopardy, because one faces a potential disaster area as a business man and as a Member of Parliament.
This subject is a bewildering mystery to most business men. It reminds me of the charts for ancient mariners which show that a part of the sea was a no-go area. I believe that most business men would like to keep well clear of it. I am worried that people might be frightened into taking precipitate action and calling for voluntary liquidation, even though they might still be able to fight out of a corner.
The proposal to appoint an administrator is an interesting new idea. We shall have to suck it and see to ascertain how it will work in practice. I suspect that most business men would be reluctant to call in an administrator 159 if they felt that they could deal with matters themselves. It would be helpful to have a document equivalent to the highway code to guide business men through the Bill's provisions, explaining the courses open to them if they are in difficulties.
I feel that I can speak from personal experience because a year or two after I started my business I found that I was in difficulties. I had two bankers. One said that he did not want to go to gaol with me. The other said, "You have got into this muddle; you get out of it yourself." Fortunately, he helped me during the next two or three years until I was able to show a respectable state of affairs.
I understand that the Office of Fair Trading has said that more than 200,000 people lost £18 million last year. Last year there were 3,000 receiverships, 5,000 compulsory liquidations, 8,000 personal bankruptcies and 9,000 voluntary liquidations. They were probably only the tip of the iceberg, because, for every business that goes into liquidation, there must be many more fighting to survive and make a go of their businesses.
During the past seven years there have been, on average, only about 20 prosecutions a year for dishonest practices, because it is difficult to prove dishonesty. The hon. Member for Dagenham (Mr. Gould) said that there is a record number of bankruptcies, but he was looking at only half the figure. On the other side of the coin, there was a record number of company formations. More than 1 million companies are registered at Companies house—an increase of nearly 50 per cent. since the Conservative party came to power. That reflects the way in which the small business can help.
An interesting table published in, I believe, the Financial Times showed how few of those companies can make substantial profits. The majority are very small businesses and are probably only just able to show a small net worth. Such businesses might become insolvent if they ran into difficulties.
Although I would not question Sir Kenneth Cork's competence, the report contained some strange points. The report stated:We have sought to protect the non-executive directors in large enterprises, on the one hand, while severely penalising those who abuse the privilege of limited liability by operating behind one-man, insufficiently capitalised companies on the other.I disagree, because I believe that we should help one-man businesses. Those businesses are often under-capitalised, and we do not want legislation that will penalise them while protecting the non-executive directors in large companies. It was a pity that all the members of the Cork committee were from the "good and the great". The committee included no representatives of lay people or small businesses.
Sir Kenneth Cork said that an insolvent company could trade out of its difficulties only by incurring further liabilities. That is not true. I found when I was in difficulties that the best way to pay the bills was to collect the amounts owing to my business. That is not a way of incurring greater liabilities. I question some of the report's references to the liabilities of small firms.
I must confess that I have not come to a judgment as to where the Bill strikes a balance between clamping down on rogue directors and helping genuine investors. To some extent, the Bill does not go far enough in dealing with rogue directors. To threaten compulsory disqualification 160 is unsatisfactory to the majority of honest directors who are doing their best. Their reputations could be impugned by compulsory disqualifications, even though they had taken what they believed was a sensible risk.
My business is currently investigating an opportunity to take over another company which has had a period of difficult trading. I spoke to my fellow director yesterday about this matter. He said that if there were any question of his being compulsorily disqualified he would not touch the other company. Although there are many provisions to assist people—the hon. Member for Dagenham said that he did not think that certain actions should be criminal offences—the fact is that a person who is disqualified from being a director loses his livelihood in that business. He would not, therefore, want to take on another risky business. The other place debated this difficulty. A person's livelihood would be affected if he took on the directorship of a business that got into difficulties even as long as two years after he left it.
§ Mr. Fletcher
One's livelihood is seriously affected if one drives a car into a tree. That is the way in which we should examine how directors behave in a company. We should consider whether they have wrecked the business or whether, despite the fact that the business became insolvent, they acted responsibly. It is not suggested that we should impose a penalty for insolvency. What matters is the way in which directors behave when they should have seen the danger signals.
§ Mr. Thurnham
I am grateful to my hon. Friend for pointing that out, but it is not easy. It depends upon the way we look at it. It is not inappropriate to look at one of the new credit cards. It has a hologram on it. It differs depending on the way one looks at it. It is the same with a business. A business can seem to be all right. Something can suddenly happen, white suddenly becomes black and the business looks different. Stocks which seem to be good suddenly seem to be not so good. A company which seems to be solvent suddenly becomes insolvent. That is the difficulty.
A director can understand a company in which he has been a director for many years. He can be satisfied that it is trading properly. He can then be asked to join the board of another company where matters are not so clear. If he is likely to be faced with compulsory disqualification because the second business goes wrong, he is likely to keep away from it.
I should like to believe that people can be encouraged to join boards of companies where there may be difficulties. The director may not know which way to look at the hologram because it can change. He does not want to be faced with compulsory disqualification from his existing directorship if the second company goes wrong.
When I was in difficulties, one bank told me that it thought that I could trade through the difficulty, while the other took the opposite view. Most directors would be unhappy at the prospect of finding themselves in court having to argue that they should not be compulsorily disqualified.
We are not being tough enough with the rogues. There is no point in merely removing their right to be the director of a limited liability company. A Mr. Darrock came to see me in my constituency a little while ago. He had been trying to obtain payment from—I do not believe I am being unfair in saying this—a rogue. A Mr. 161 MacDonald, trading as Mac's Engines—not a limited company—consistently did not pay when the bailiffs tried to enforce judgment against him. My friend obtained a judgment for £47 because the man had failed to repair his car properly. He could not get the judgment enforced. When I wrote and asked the Lord Chancellor what could be done, he told me that the court had no power to enforce a judgment.
That gentleman—"gentleman" is perhaps not the right word to use—had been trading continuously on that basis. He lived somewhere in Southport. No one knew precisely where he lived. His plant, equipment and business were on lease and therefore the bailiff could seize nothing. Such people should be stopped from trading. Imprisonment is called for.
The Bill, as drafted, before it went to the other place, was too sweeping. It threw the blanket of automatic disqualification over innocent people whereas guilty people could dodge through and say, "If I lose my limited liability company, I can still trade."
§ Mr. Gould
There is an attractive simplicity in what the hon. Gentleman is saying about the distinction between the honest director and the rogue director. The problem is that in some cases a director gets into difficulties and succumbs, because of the pressure and suggestions made by other less honest people, to a course of conduct which inevitably prejudices his creditors and other people.
§ Mr. Thurnham
The remarkable fact is that Sir Kenneth Cork said that in his vast experience he had met only five or six people who had set out deliberately to defraud. Others had drifted into it. We are dealing with a difficult subject.
It must be wrong for a company director to become insolvent. People do not join boards or set up companies with the intention of becoming insolvent unless they are one of the tiny minority of dishonest people. However, one makes mistakes in the course of trading. I do not suppose that there is one company in which mistakes are not made. Directors will get into a frightful sweat if they think that they will be taken to court for genuine mistakes and dealt with for wrongful trading. As I said, the difficulty is that if something is looked at one way it seems to be all right, but if looked at the other way it is wrong. Rogues can get away with wrongful trading.
The Lord Chancellor said that he had no power to stop the man I have described from trading. He was known to be a rogue. The local newspapers have now stopped taking his advertisements; but fancy there being no power to stop that man from trading. Bailiffs made numerous abortive attempts to enforce judgment. Nothing could be done. The plaintiff was told that he had to bring proceedings again after a year. I am not a lawyer, but apparently after one year the judgment lapses and the plaintiff would have to start the proceedings again. It is unfair to throw that duty on to the plaintiff. The Government should act to stop the rogues. We should take more powers to deal with them rather than throw a blanket of compulsory disqualification which may frighten people.
My fellow director told me that we could forget about the business that we are considering if there were any likelihood of any of the directors being compulsorily disqualified. Courts should have powers to prevent people from trading and to imprison people if they continued to trade against the court's judgment.
162 The idea of an administrator is good. We shall have to see how it works. The Bill is woolly. We need to know more about the period before a petition is presented. We need to know how a company will decide to present a petition, what happens when it has been presented, and how long the proceedings will take. My hon. Friend the Minister said that he could enlighten us further about that. Some of the provisions are vague and impractical. Clause 24(1) calls for a statement of affairs as at the date of the order. Another date might be more sensible. That subsection should be amended to read, "or such other date as may be determined by the administrator."
In a business, stocks are usually taken at the weekend. A court would not make an order at the weekend and therefore the administrator should have the option as to the date when the accounts should be prepared. Clause 23(2) provides that a statement of affairs should be prepared within 21 days. When I was in difficulties it took me two years to produce a set of accounts. Everyone was horrified to see them and I told them that matters must have improved during those two years. I was desperate to produce the accounts. How is that to be done within 21 days? The subsection further provides that they could be prepared within a longer period not exceeding two months.
Generally, when a company is in difficulties the accounting system has broken down. It may be one of the reasons why it got into difficulties. My accounts showed that everything was fine and profitable, but that proved to be wrong because the accountant did not know how to prepare them. If the accounting system is in a shambles, how will anyone be able to produce a statement of affairs within 21 days or two months? A further subsection mentions "reasonable excuse". I do not know who will decide whether the excuse is reasonable—the administrator or the court. The Bill needs tightening up.
I do not know how "wrongful trading" or "knowledge" will be defined. The definitions will probably develop through case law rather than be something that we can pin down.
§ Mr. Thurnham
When one is in a competitive industry one is reluctant to say more than one needs. I am fortunate that the company which I control now employs 500 people. Last weekend I was pilloried by one of the less honourable Opposition Members for talking about the need to abolish wages councils while drawing an increased salary from my company. I started work at £4 5s a week. I cannot see why other people should be prevented from starting in the same way.
I am worried that if compulsory disqualification is lurking, one of two things will happen. Directors will see something that they do not like and clear off the board. They will keep their fingers crossed that nothing will happen in the following two years. I understand that that is the magic period. If the company can get through the following two years, the directors will be all right. The rats will be leaving a sinking ship.
On the other hand, if the directors think that the company will go under in less than two years, they will make a damned nuisance of themselves. They will start to interfere. That is the time when it will be advisable to 163 appoint a chief executive who commands confidence, and let him get on with the job. I would hate to find myself subject to constant interference from a host of non-executive directors demanding the preparation of statements of affairs on a daily basis and querying everything that I did, so that they could prove to some strange court—when the company had finally collapsed under the weight of their interference—that they had taken every reasonable step and were whiter than white. That is another area in which compulsory disqualification could work in an unhelpful way. We need to pinpoint the rogues, and leave the others to make the best of what could well be a difficult job.
The White Paper "Burdens on Business" has just been published. It noted the fact that lack of capital can be a main cause of failure. We must accept the fact that, in many businesses, trading on creditors' capital is all part of the business. One does not pay one's supplier until one has been paid by one's customer, where there is a difficulty with the customer. Although we must pay proper regard to the terms of contract, we must also remember the day-to-day practicalities. There are under-capitalised companies, and we should be able to help rather than to hinder them.
§ Mr. Ian Wrigglesworth (Stockton, South)
I am pleased to welcome the Bill. Although we will wish to consider many parts of it in detail in Committee, as was done in another place, all hon. Members will welcome the general thrust of the reforms.
I first became aware of these major problems through a range of small businesses in the Teesside area, a number of which were members of the Teesside small business club, and also through some constituents who had been hit hard when their small businesses lost substantial amounts of money because other firms went into liquidation.
I became increasingly horrified when some of the practices in which firms indulge were drawn to my attention. I am grateful to the north eastern traders association, and also to David Carter, of Carter Steel, in my consituency and other steel stockholders who drew to my attention some of the activities of Chancery Lane Registrars, who have become notorious for quick liquidations and the equally quick and adroit reincarnations of the same people in a new guise. The activities of such nefarious firms over a long period have led to the undermining of one business after another. Members of the small business club and of the north eastern traders association, and other small business men, will welcome the proposed changes. I will wish to draw upon their experiences during the passage of the Bill in order to ensure that their interests are protected. Firms that are providing employment now and will provide more in the future are being damaged and are unable to grow because of the activities of some nefarious people.
As a result of the tragedy of Stone Platt, for instance, and major collapses such as that of the Stern empire, when people saw either tragedies or abuses occurring, they became aware of the need for legislation. The Stone Platt tragedy was a major catastrophe for the engineering industry, and I hope that we have all learnt from the lessons of the chairman, Leslie Pincott. Many of us believe that that company should have been treated differently by 164 the banks and that it could have continued—at least in part—as the proud company that it had been in the past if it had not been for the way in which the law operates at present.
However, the urgency of the need for reform is also shown by the rapid increase in the number of companies going into voluntary or compulsory liquidation. Since 1977, when Edmund Dell commissioned the Cork report, more than 73,000 companies have been wound up—half of them since the publication of the Cork report in June 1982. Despite possible Conservative protests, I remind hon. Members that the Government have presided over a threefold increase in the annual number of liquidations and that the figure has risen fivefold since the early 1970s.
Such a level of insolvency could be seen as a reflection of a dynamic, flexible, industrial society in which a high level of start-ups reflected a healthy economy. In fact, however, the escalating number of liquidations has far outstripped the increase in the number of companies registered, which has risen from 571,000 in 1973 to 692,000 in 1979 and to nearly 813,000 in 1983. That is an increase of about 20 per cent. The number of liquidations has increased by 300 per cent. We know why that has happened. I do not want to open a general economic debate about the circumstances in which companies have had to operate in recent years, but, as is demonstrated by the unemployment figures, they have been very difficult. Many companies have collapsed through no fault of their own, because of the adverse trading conditions.
§ The Parliamentary Under-Secretary of State for Trade and Industry (Mr. David Trippier)
I have great respect for the hon. Gentleman, but it is wrong to attempt to mislead the House by giving jaundiced figures. As the Minister with special responsibility for small firms, I have said time and again that the latest accurate net figure for births versus deaths in 1983 was 47,000—the highest ever on record. I suggest to the hon. Gentleman that the net figure is the one that matters.
§ Mr. Wrigglesworth
I shall be delighted to stop giving jaundiced figures to the House when the Government stop doing the same. I welcome the increase in new company registrations, and I hope that the rate will increase even more rapidly in future. However, in the past five years there has been a massive increase in the number of liquidations. No one can be pleased about that. That trend points to the need for legislative change such as is encompassed in the Bill.
The problems are complex and on a grand scale. During the coming months, some hon. Members will be involved in a formidable Committee stage. The scale of the problems justified the establishment of the Cork inquiry in 1977 as the first real attempt to consider the harmonisation and reform of the bankruptcy code and the company winding-up code.
What is disappointing—and I have pressed the Minister for action on the reforms for some time now—is the snail's pace at which the Government moved to produce the White Paper in Feburary 1984, nearly two years after the Cork report was published. That slowness was in stark contrast to the haste with which they insisted that comments should be submitted—only six weeks were allowed—and the lack of consultation on the draft Bill. That was remarkable in the case of a measure of such 165 length and complexity which is in no way partisan. Only six weeks, including Christmas and the new year, elapsed between publication and the commencement of the Committee stage in the Lords. That haste resulted in embarrassment for the Government in the other place. They had to withdraw and redraft clauses on the disqualification of directors, and they will now have to introduce a spate of technical amendments in Committee.
Another regrettable feature of the Bill is that, in spite of its long gestation, it relies on delegated legislation on important matters such as company insolvency rules, for which rule-making powers are conferred in clause 89 and schedule 4. We do not know what the details will be, although they are fundamental to the operation of the legislation. Some of the questions that the hon. Member for Bolton, North-East (Mr. Thurnham) asked will be resolved when those rules are published.
Even if the Bill gets Royal Assent in the summer or the autumn, all of the associated rules which are to be made by statutory instrument through the negative procedure will not be promulgated until autumn 1986. When does the Minister expect to publish the details of those statutory instruments? The Government have devalued the role of the advisory committee which was set up under the Insolvency Act 1976 to review and examine changes in the rules. It now has the right only to be consulted. The Lord Chancellor will make the rules. The wisdom of that might be doubted in view of the difficulties with the Bill in another place. I hope that there will be wide consultation on the rules before they are promulgated.
The Government have made no commitment to the drafting of the statutory instruments which contain the rules, and I should be grateful if the Minister could make that matter clear. I strongly agree with the hon. Member for Dagenham (Mr. Gould) that it is a pity that the Government decided not to proceed with the Cork recommendations for insolvency courts. Cork said:The judicial administration of insolvency matters in England and Wales is long overdue for drastic rationalisation and simplification. The striking feature of the present system is the diversity of the tribunals by which such matters are heard and determined.He said that there was limited expertise at county court level among registrars, judges and legal practitioners in dealing with complex and technical law and in analysing transactions which involve commercial sharp practice and dishonesty. He also said that it would have been better if legislation had incorporated the establishment of an insolvency court. The Bill's reforms—introducing the administrator to help prevent firms going directly into liquidation, securing the rights of creditors and the disqualification of directors held to have traded wrongfully—point to the establishment of a court which is able to dispense swift justice and help administrators and liquidators to sort out companies in difficulty. That was intended to be a major object of the Bill. The harmonisation of corporate and individual insolvency is a feature of the principal commercial companies outside the Commonwealth, including Europe and the United States, which have insolvency courts. Their establishment here would have helped with the harmonisation of European Community law. I hope that the Government will think again about that.
As for directors and wrongful trading, the establishment of the new legal framework, which the Cork report said would achieve economies as compared with the 166 present system, could be combined with giving the ordinary creditor—indeed, anybody with a legitimate interest in the affairs of a company—the right of access to an insolvency court to complain of wrongful trading. There would have to be a filter to sort out frivolous or malicious complaints. That would be an alternative to the draconian powers of disqualification which were originally in the Bill and which would have risked congesting the courts with applications for relief from many directors of failed companies.
In its present form, the Bill has perhaps gone too far as a charter for directors, giving the Secretary of State, or the receiver acting on his behalf, the power to apply for a disqualification order. The Cork report proposed power to disqualify after one insolvent liquidation, but only for cases of delinquent conduct, of trading wrongfully or of other unfitness. The Consumers Association suggests a new measure which would disqualify directors who have been associated with two or more failures in a five-year period unless they could demonstrate their fitness to manage another business.
It is difficult to get the balance right between the director who has innocently got into difficulties, the director who has acted incompetently and got into difficulties and the director who has acted wickedly arid illegally and got into difficulties. There is a fine line between innocence, incompetence and wickedness. I hope that we shall be able to pursue this matter further m Committee, because I do not think that the Bill has got the balance right.
One of the Bill's main weaknesses, which the alliance attempted unsuccessfully to remedy in Committee in another place, is that it does little or nothing for the consumer. Nor does it do anything to protect the most vulnerable class of unsecured creditor—the member of the public who puts down a deposit on goods. My noble Friends Lord Taylor of Gryfe and Lord Meston went over the arguments in another place. I am sure that such unsecured creditors should be protected. We shall have to pursue the matter further in Committee.
Large and powerful creditors such as banks are in an extremely favourable position because of their insistence, when granting overdrafts, on being given a fixed charge on a company's permanent assets and a floating charge on its current assets. That enables the bank, on liquidation, to pay off its own debt in full before leaving anything to be distributed to unsecured creditors. The Bill enhances the strength of those creditors. Preferential debts and floating charges have been abolished in the insolvency laws in several other countries, and it is a great pity that there has not been a move in that direction here. VAT preference was limited to six months by amendment in another place, but that does not apply to PAYE and other taxation or rates, which have preference for 12 months. As I understand it, the Government are likely to try to reinsert 12 months for VAT. Perhaps the Minister will clarify that.
There are two ways in which the Bill could be improved to help unsecured creditors. First, it could give depositors the same rights as employees—to a maximum of £800—and, secondly, it could set aside at least 10 per cent. of the funds realised from the sale of assets by the receiver under a floating charge to be distributed among unsecured creditors. I suggest at least 10 per cent., but we can debate what the figure might be.
Like the hon. Member for Dagenham, I hope that we shall be able to approach these matters constructively and 167 find the right balance that takes account of conflicting interests. That balance should also take care of the interests of consumers, business men and directors. It should ensure that those who are trying to do a good job of running a company legally will be allowed to continue to do so. It should ensure that businesses that should be maintained are maintained by the administrator and that those who abuse the system and want to continue to do so are outlawed and prevented from trading.
§ Mr. Neville Trotter (Tynemouth)
Insolvency has a very long history, going back as long as trade has taken place. The first traces of legal intervention in dealing with the problem of insolvency can be found at the time of Henry VIII. For a very long time the creditor had the right to go against either the assets or the body of his debtor, and that took place until fairly modern times—even in the time of Dickens. One can remember horrendous accounts in current novels of those who were unfortunate enough to be cast into the debtors' gaol. In the Cork report there was a reference to an unfortunate debtor who was executed at Smithfield in 1761. Many people have approached me in my capacity as an accountant over the years and suggested not, perhaps, that execution would be appropriate for those who have lost their money for them, but certainly that casting into gaol would be.
The present law on bankruptcy goes back 100 years, to the 1883 Bankruptcy Act. That was the foundation stone of modern bankruptcy and insolvency law, and the company provisions for insolvency followed a few years after that. The Cork report was the first ever major review of the law on this important and obviously distressing subject.
The chairman of the committee, Sir Kenneth Cork—a founder member of the Insolvency Practitioners Association—was a most distinguished practitioner in this field. He and his colleagues on the committee reflected for no less than five years in preparing their mammoth report. I am led to believe that it consists of more than 250,000 words, although I cannot say that I have counted them. The report is based on five years of research and a very large number of interviews with witnesses and papers presented to the committee.
I have always thought it a pity that there is no summary of all the committee's recommendations. Funnily enough, at times recommendations are spelled out in parts of the report and other times they are not. That makes it hard to establish which of its recommendations have not been implemented in the Bill now before us. There have been references to a number of them already in the debate and I am sure that other hon. Members will add to that list.
The consultation that took place over those five years continued with the White Paper that came out afterwards and is now continuing with the Bill. I do not think it at all surprising that the Bill took so long to prepare, since it took the committee five years to complete its inquiry. The Bill is very technical and complex, and also very long. It seeks to simplify the law. I am not sure that the drafting has always achieved this, but I am sure that we shall consider that in much more detail in Committee. There are certainly some parts of it which I do not find easy to follow, but that seems to be fairly common with modern drafting—at least of technical Bills.
168 Many amendments were put down in the Lords and there is now some confusion about the state reached with some of the original provisions. It would be a very good idea if a Bill such as this were to be published the year before it is laid before the House so that there could be a year of discussion on the details of the drafting. I understand the pressures to get the law through and to get the problems dealt with, but on a matter of this nature, which is not partisan, it would be more sensible if the Bill were published in draft and adequate time given in which to consider the drafting.
There was a reference earlier in the debate—I think by the hon. Member for Stockton, South (Mr. Wrigglesworth)—to harmony with Europe. That is a very good point, which had also occured to me. I hope that the Minister will be able at some stage in our proceedings to enlighten us on what has been achieved to harmonise the insolvency laws in Europe—not very much, I suspect.
The aims of this Bill must be generally welcomed. I am sure that all of us who have experience in this field as accountants wholly welcome the intention to license insolvency practitioners. Reference has been made to the particularly disgraceful case of Chancery Lane Registrars—now put out of business, thank goodness. Nefarious liquidators were very small in number, but they needed to be dealt with. We trust that in future, under the licensing provisions in the Bill, this problem will not arise. I believe that there are still people advertising themselves as liquidation consultants and offering help to directors of companies who are in difficulties. Once they have made that contact through newspaper advertisements, they set about their nefarious tricks. They must be stopped.
There is an astonishingly large number of companies in existence. The latest figure I have seen is 965,411 at 31 December 1983. Allowing for the increase last year, it must now be over 1 million. It has been growing at about 1,000 a week net, after allowing for those removed from the list. That is one company for every 50 or so people in the country. Many of those companies are not trading, but a very large, important part of our commercial life is carried on in this form.
The number of insolvencies in a year is significant, but it is far lower than the number of new companies, although the statistics could be argued both ways, I am sure. Certainly there are far more new companies registered than there are old ones going out of business. Nevertheless, the numbers going down are significant. There are some 4,000 solvent companies voluntarily winding up in any year and some 14,000 companies going into insolvent liquidation—5,000 in compulsory winding up by the court and 9,000 in creditors' voluntarily winding up, where the creditors appoint the liquidator. Then there are about 3,000 cases in which receivers are appointed. I have no access to figures which tie receiverships and liquidations together. Often in a receivership there are no funds left for unsecured creditors and, as a result of that, no liquidator is appointed and the company is simply struck off the list without ever appearing in the liquidation statistics. In other cases there are some funds available and a liquidator is appointed. I have thus not got a figure for the total number of insolvencies but it must be between 16,000 and 17,000 companies a year.
I am sure that the main argument about this Bill will be over the question of the privilege of limited liability and what steps should be taken to prevent loss and penalise 169 those at fault who have acted wrongly in the management of a company as directors—those who are not fit to be in charge of companies.
There are two ways in which those who have acted wrongly as directors can be attacked. The first is to disqualify them from acting as directors in future and the second is to make them personally liable for the debts incurred. There is existing law on both these points. It is possible to apply, under section 300 of the Companies Act 1985, to have the director of an insolvent company disqualified. Unfortunately, however, in practice, very few applications have been made under that provision and its predecessor in the Companies Act 1976.
Incidentally, I understand that there will be something like 100 amendments to the Companies Act 1985 as a result of this new insolvency Bill. So here we have, fresh from the printers, a consolidating Companies Act and already holes are being torn in it by alterations through this insolvency Bill. Presumably in a few years we shall need to have another consolidating Act. It certainly is hard to keep up to date with the current law references because the knowledge of most of us is based on the provisions of earlier Companies Acts. I cannot go back to the ones in the 1920s, but I can go back to 1948. When I started as an accountant that was the bible for my generation. Now the bible will be the 1985 Act, with reference numbers which initially mean nothing to those people who have been practising accountancy and law.
In practice, neither the disqualification powers nor the power that exists to require a director to contribute to the repayment of the debts of a company has worked. At present, in order to make a director liable for the debts of a company it is necessary for him to be found guilty of fraudulent trading. The success rate in such prosecutions has been very low indeed because it has to be proved that he knew that the company was not going to be able to pay its creditors. Good barristers have found it easy in practice to convince a court that whatever might have happened, it was not the intention of the director concerned to cause the creditors to lose their money. Prosecutions have been infrequent, and those brought have often been unsuccessful because it has not been possible to prove the amount of knowledge necessary to obtain a conviction.
I welcome the change of emphasis in the Bill. Under the new provision of wrongful trading, a court will have only to satisfy itself that the director should have known that the company would be unable to pay its debts. However, one can see arguments inevitably arising as to what was reasonable in terms of "should have known". Action to be taken against the directors of an insolvent company was the main subject of discussion in the other place—although there were debates on many issues in the Bill—and there will also be a great deal of discussion on it in Committee here.
Over 300 companies a week go into liquidation or receivership, and many directors are involved but I do not believe that many of them give rise to the problems that we are now debating. There are only a relatively few directors who do not care and even fewer who deliberately make off with the assets of the company, or live off them. However, there is a need to encourage all directors to take full care in exercising their privilege of limited liability.
In my experience of many years as an accountant, I have not been involved in one prosecution as liquidator or receiver of a company. There have of course been cases that we have reported to the Department, but not one 170 where prosecution has followed. There was one case where it would have followed if the man concerned had not died. One of the problems is the lack of funds to carry out the lengthy investigations needed. The job takes many months of expensive, highly qualified accounting time. The fraud squads of many police forces are simply not staffed to carry out such investigations on a regular basis.
In the one case in which I was involved, in which we were making progress towards what I am sure would have been a successful prosecution, one of the creditors organised the passing round of a hat—not very successfully. Only one other creditor was prepared to contribute and these creditors paid the whole of the costs of the investigation because they were so outraged at the monstrous frauds carried out by the director concerned.
In some cases in my experience, it has been possible for the authorities to bring a prosecution for an offence such as fraudulent grant claims, something quite easy to prove, and something that the court could understand and the defending barrister could not put over in such a way as to obtain an acquittal. However, on the main issue of fraud, there have been distressingly few cases, and even fewer convictions.
Few directors steal assets. What is more common is for such directors to live on the assets of the company until there is nothing left but an empty shell. Then such people move on and do it again with another company. Over the 20 years that I have been involved in such matters as an accountant, in the north-east, there has usually been someone involved in such activity.
What is even more common is the case of a director who drifts into insolvency. I was struck by the speech of my hon. Friend the Member for Bolton, North-East (Mr. Thurnham). He expressed well the problems faced in practice by an honest and diligent director whose company gets into difficulties. Through my hon. Friend's common sense and determination, he had a successful outcome in his case, but there are many people who do not have adequate competence to handle the problems that they have to face. They can drift into over-optimism and become blinded to what is going on. At some indefinable stage, they move on from that, with which one can sympathise, to a complete disregard of what is happening. There comes a time when they should stop, but they refuse to accept that. In practice, it is hard to say when that time is, but, at the end of the day, the company has collapsed. The director has gone beyond what is reasonable and has continued to trade.
At the time of the Cork report, I was in favour of automatic disqualification, because I started from the perspective of frustration with the people whom I felt should have been dealt with but had not been. However, I have listened carefully to the arguments advanced in the past year or so on behalf of the normal innocent director, and I have come to accept that automatic disqualification is not on.
A register should be kept of the directors of companies that go down through insolvency. The frequency with which this occurs to particular gentlemen is a factor that should be borne in mind. It is not simply a case of noting when two companies have gone down, because quite often a group of companies goes down and a director may be involved in all of them. Therefore, the number in itself is not enough. However, the gentlemen about whom I have been concerned in the north have gone down repeatedly—sometimes four or five times. Sometimes, they have 171 had the wit to move to another part of the country. Therefore, a register is needed. If one knows what is going on in one's area, one will know that a certain gentleman has gone down before. However, if he moves to Hampshire or Lancashire people there would not know him. Keeping a register would help in such cases.
The liquidator of any insolvent company should be required to file a report with the Department. It is only by taking some such positive step in every case that we shall be able to make inroads into the problem. In the vast majority of cases, the report would simply say that nothing needed to be drawn to the attention of the Department. From time to time, there would be cases where the liquidator would say that a director was incompetent. If however that happens several times to the same man, there is surely a case for saying that in future he should not be allowed to exercise the privilege of limited liability.
Whatever the outcome of the Bill and the final wording of its provisions, I am sure that there will be much argument in court on the problems of definition, and what constitutes unfitness, recklessness and reasonable knowledge. These problems are inevitable.
Two problems are indirectly related to insolvency. The first is non-filing of accounts. There are good reasons why the number of accounts filed are hundreds of thousands fewer than the number of existing companies. In practice, a large number of companies are not doing anything. It seems, however, that a significant number of companies are trading, but not filing returns. That prevents those granting credit from having an up-to-date look at the strength or the financial health of such companies. It is quite a common feature of a company that goes into insolvency for it to be late in filing its accounts.
The second problem is the inadequacy of share capital, in many cases, of insolvent companies. I see from the statistics for 1983 that over 60 per cent. of companies registered that year had a share capital not exceeding £100. I know that it is common to register companies with a small share capital and then to increase it a few months later when the company starts to trade, but it is also common to find companies that trade on a wholly inadequate share capital. If one starts business with a share capital of £100, it does not take much in the way of losses for one to be insolvent. One could lose such a share capital in the first week without any bother. Many companies have never made a profit from the time that they have started, and were insolvent from the beginning because they started with low capital and investment from the shareholders.
The accountancy profession in general welcomes the proposals for the new machinery of administrators. All right-thinking people wish to see companies rescued rather than closed down. We would all welcome greater emphasis on that aspect of insolvency law. The workings of Chapter 11 of the bankruptcy legislation in the United States tends to be followed with interest now in this country. That chapter has not been in force for long in America, and it is too early to say whether it has been a success. There have been striking successes, such as Continental Airlines, but others have not been so successful. There is definitely a great deal of work to be done in the drafting of the detailed proposals. The 172 accounting profession is reserving its judgment on the details of the proposals until it sees what amendments will be made to the Bill in Committee.
It would be helpful to the accounting profession if it knew which amendments the Government were thinking of tabling. I know that consultations are continuing day by day. The accountants concerned are extremely busy, and we hope that they are engaged in activities to save companies. It is a waste of time for those accountants to divert time at short notice from trying to save companies to considering the arguments for detailed alterations if the Minister has already taken those alterations on board. It would be much better for the accountants to concentrate on matters about which the Minister is still uncertain rather than on those about which he is already prepared to make changes.
I am sure that the number of amendments will be great. I fully support what the hon. Member for Stockton, South said about the importance of the rules. I cannot see how the legislation can be introduced into practice until the rules are made. I hope that when the Minister replies he will make it clear what sort of time scale he envisages. The rules will be complex and of a technical nature. I trust that there will continue to be consultations with the accounting profession on their drafting.
The cost of investigating companies where there has been reckless or fraudulent management is high. I do not believe that sufficient money is spent on that desirable cause. I fully support the Government's aim to concentrate the services of the official receiver and the insolvency section on protective and investigative work. The Cork report referred to much of the present work of the insolvency service as being bureaucratic and wasteful. I am sure that those who are engaged in it work extremely hard, but accountants with a great deal of experience in that area have suggested that big changes are needed in the work of that department.
§ Mr. Lyell
I have listened carefully to my hon. Friend. Does he agree that if one is to investigate and perhaps bring forward successful prosecutions for fraudulent trading or its equivalent, it is necessary for the officials of the department of the official receiver to remain in post for many years? They should not, for example, move round the Civil Service after two or three years, but should remain in post. They should build up a real body of expertise so that they can recognise the symptoms, sniff out the warning signs and collate the material to bring forward a proper case.
§ Mr. Trotter
It is a specialist area. There can be nothing but credit in the suggestion that those involved should become specialists over a long period of time. Some people in the accounting profession say that the best way to deal with the problem is to transfer people from the Customs and Excise. I give that advice to my hon. Friend the Minister.
According to the 1983 records of the department, only two prosecutions were brought for failing to keep proper books, although both ended in convictions. Yet we all know that is a common occurrence. I am not saying that the majority of companies do it. They do not. However, of the thousands of companies that go into liquidation, a considerable number would not have kept proper books. The fact that only two prosecutions took place shows the present inadequacies. There were 16 prosecutions in 1983 173 for fraudulent trading, but only eight of them produced convictions for the reasons that I have already mentioned. The aim of the Bill—to simplify the procedures—will enable a transfer of official time to this important protective and investigative work.
There are proposed changes on the bankruptcy side, which should reduce the time of the official receiver. In 70 per cent. of bankruptcies there are no funds for the creditors. Unless there is reason to suppose that there has been fraud, they should be dealt with administratively as easily as possible. Many companies have no assets, or assets so small that they are not worth collecting. The Bill provides that those cases can be struck off without the paperwork at present necessary, and often the court work that is involved. That does not mean that such cases should not be examined to see whether offences have been committed but it means that bureaucratic paperwork will be cut out.
The general aim of the Bill is worthy. I shall conclude with two quotations from the Cork report. Both quotations are from earlier documents. As I have said, this is not a new problem, but goes back for many years. The Greene committee was set up in 1925 to look into the unsatisfactory features of insolvency, and reported 60 years ago. It stated:It appears to us, as a matter of general principle, most undesirable, in order to defeat an occasional wrongdoer, to impose restrictions which would seriously hamper the activities of honest men and would inevitably react upon the commerce and prosperity of the country.The original proposals in the Bill for automatic disqualification fall down under that philosophy. However, that does not mean that we must leave the problem as it is. We must ensure that we have effective legislation when the Bill ends its passage through the House.
On the Second Reading of the Bankruptcy Bill 1883 Mr. Joseph Chamberlain, President of the Board of Trade, said:Every good bankruptcy law must have in view two main, and at the same time distinct objects. First, the honest administration of bankrupt estates, with a view to the fair and speedy distribution of the assets among the creditors whose property they were; secondly, following the idea that prevention was better than cure, to do something to improve the general tone of commercial morality, to promote honest trading, and to lessen the number of failures.In other words, Parliament had to endeavour, as far as possible, to protect the salvage and also to diminish the number of wrecks.These words are apt today.
§ Mr. John Fraser (Norwood)
I congratulate Sir Kennéth Cork on the thoroughness and sometimes radical nature of his report, and also on the cunning with which it compels one to read it. Many reports, especially large ones, contain in the first chapter a summary of recommendations and conclusions through which one can glance. That sometimes lessens the necessity to read the rest of the report. Sir Kenneth Cork makes his report a sort of treasure trail and the reader hunts from chapter to chapter picking up the recommendations as he goes. It exercises the minds of hon. Members and makes it necessary to read the entire report, unlike Marxism, the paperwork of which most people cannot get through in order to be a convective Marxist. I am glad that the report has at last seen some legislative light.
174 The Minister dealt with part 1, which is about insolvency practitioners, fairly briefly. I do not complain about that. I think he said that it may be necessary for bonding or insurance for insolvency practitioners. The Minister responsible for consumer protection is an extraordinary man. If one is an insolvency practitioner who is appointed to look after other people's debts, one is bonded and insured, but he claims if one is an estate agent and looks after other people's money, the free market operates in such a way that insurance is unnecessary. That is an extraordinary contradiction. A job of the Department of Trade and Industry should be to operate the law in such a way as to prevent people from getting into financial difficulty, to prevent insolvency occurring, and to avoid people having to use bankruptcy law or insolvency law to exercise their rights.
I give this contrast. Of course, if every estate agent is bonded, which was part of the legislation that I introduced, it would lessen the need for people to have to take bankruptcy proceedings, and it would lessen the likelihood of a customer's money being mixed up with the money belonging to the estate agent. It is an extraordinary contradiction that those who look after people who have nothing are insured for the purpose, but that those who might look after hundreds of thousands of pounds are not insured.
There is a lesson in that, and there are other lessons to be learnt. I agree with the National Consumer Council that we cannot consider insolvency in isolation. One job of Government is to examine the high-risk areas and to say, "Should there not be other mechanisms, such as an Estate Agents Act, which will stop people being duped out of their money?" I have no doubt that in high-risk trades—for instance, mail order trading, where people send money in advance—there should be a different, more stringent regime that protects the deposit paid in advance, so that if there is a bankruptcy that money is not deemed to he part of the company's money but can be repaid to the customer. We have such a system for travel agents, who use as their working capital the deposits which people pay towards their holidays. Luckily, there are few losses because a bonding arrangement operated by the Association of British Travel Agents protects members of the public. But if travel agents did not have that voluntary system, I have no doubt that the Government should impose one. They should intervene in areas where the consumer is at great risk.
Let me give the House another example. Many of my constituents have complained to me about worthless guarantees, for example, from roofing or damp proofing contractors. Many worthless guarantees are also given with televisions and video recorders. In this area, where, if people asserted their claims in full, those who gave the guarantees would become insolvent, it is the duty of the Government to intervene and to invent methods of consumer protection that would prevent the insolvencies and the abuses in the first place.
Those who engage in door-to-door trading—for example, roofing contractors—should be licensed. In South Australia those who engage in house repairs are licensed, especially where the consumer is at a disadvantage, as in the case of roofing contractors. The Government should intervene to prevent insolvencies in the first place, and certainly to prevent loss to the innocent consumer.
175 Individual bankruptcy, not in all, but in many cases, is humiliating, punitive, obscure, almost byzantine and extremely costly. I give the example of one of my constituents. He was a salesman who was advised by his pseudo employer to register for VAT because, although he was not earning £15,000 a year at the time, by so doing he could claim rebates on petrol and other expenses. I shall not weary the House with the details of the story but, because Her Majesty's Customs and Excise failed to take notice of a deregistration letter, he was made bankrupt for non-payment of VAT. I intervened and, as a result of correspondence with the Treasury, the amount of his debt was reduced by about £2,000 to the fairly small sum of £1,500. But the Customs and Excise had made him bankrupt, which precipitated the payment of national insurance contributions and the payment of schedule D tax, which is accelerated when someone ceases in business. He ended up with only a small debt to the Customs and Excise in respect of VAT, but he owed rather larger amounts to the Inland Revenue because of the accelerated payment of tax caused by his insolvency.
That man's only asset of any substance was his dwelling house, which he owned jointly with his wife, which was worth about £30,000 to £35,000. He had almost no debts apart from those to the Inland Revenue and the rating authority, yet I discovered that the cost of administering such a simple bankruptcy was about £3,500. It is extraordinary that about 10 per cent. of a man's assets can disappear in administration costs. In other cases of bankruptcy among my constituents, the administrative costs, sometimes on a fixed scale, were greater than the debt involved.
It must be wrong to have so byzantine and complex a system for dealing with insolvency that a person discovers that he can raise the money to pay his original debt but that he is up to his eyes in administrative costs. Any system that simplifies bankruptcy and removes such high charges must be good. The more the system can be simplifed without creating an injustice, the better.
Will the Minister tell us what has happened to the doctrine of reputed ownership in relation to individual bankruptcies? He is frowning at me. I shall give him an example. As bankruptcy law stands at present, if a man is trading alone and has the goods or stock of another person in his possession, the innocent supplier of the stock who retains its ownership can lose it to the bankrupt under the doctrine of reputed ownership. It would be helpful if the Minister could say something about a system procedure that does not appear in insolvency law for companies but causes hardship to individual suppliers where there is no intention that the stock or other asset should change hands.
Also in relation to individual bankruptcy, I should mention something that is wholly absent from the Bill, but which should be included in it. I shall talk about the rights of women, although I understand that sometimes we may be talking about the rights of men. However, more often women are involved. Of course, sometimes when a man goes bankrupt his wife has been in it up to her neck and has acted as a trojan horse. But in other cases, the woman must commit financial suttee when her husband becomes bankrupt. Women are often responsible for the home and the children, they have lived with the problem of dealing with creditors, borne the worry and often worked to put money into the home to sustain a husband who is faced 176 with insolvency. But if a bankruptcy order is made against such a woman's husband, she risks not only losing the income from her breadwinner and facing the humiliation that bankruptcy inevitably brings, but she will be penalised in practice more heavily than almost anyone else by losing the matrimonial home. That problem is especially acute when she is not the joint owner.
In a compassionate age, we should make allowances for women and their children and dependants in those circumstances. After all, if a woman, knowing of her husband's impending bankruptcy, filed a divorce petition or a petition for judicial separation, she might then be able to gather to herself certain rights. For instance, when young children are involved, it is common for the court to say that the property should not be sold and that the woman should retain possession of it until her children cease full-time education. In extraordinary circumstances, for example, if there is a disabled child or the woman is especially vulnerable, the period can be even longer.
A person who may have lost the support of her husband and who may have gone through a harrowing experience as a result of her husband's insolvency, who is innocent in these matters and who has suffered emotionally as well as financially, should be given protection and support similar to that which she would receive in matrimonial proceedings. I hope that the Government will pay some attention to the difficult position of deserving women in such circumstances.
With corporate insolvency there is a problem with what some people have called, "Change the name and start again." Anyone who has examined company law or had anything to do with consumer protection will know of the appalling stories of those who set up a business under one name, take consumers' money, go into liquidation, and then start a second and even a third business. There is plenty of material from which one could spend hours quoting, but I shall give only one example from "That's Life.".
The programme told the story of the man who was involved in nine different limited companies, the activities of which stretched from mortgage broking to haulage contracting, from building to mail order lingerie and from employment agency to carpet cleaning. As each business collapsed, customers lost money. Some of the companies were put into compulsory liquidation, some were dissolved by the registrar of companies and one simply ceased trading. Despite that, the man in question seemed to go on with such activities, and there are hundreds of stories involving that sort of abuse.
Our insolvency law must stop that abuse of consumers. We recognise the abuse when it takes place, and something must be done to deal with it. One way in which the Government have dealt with it in part is by the concept of wrongful trading. By omitting the fraudulent content of wrongful trading as it now exists—by omitting criminal liability and by defining it simply as carrying on trading when there is little prospect of the debts of the company being met—the definition which makes the directors personally liable is helpful and clearly right.
It is not difficult to analyse the circumstances where wrongful trading takes place. If people advertise mail order goods and seek deposits from customers knowing that the goods are not in stock—knowing also perhaps that their on-going commitments, such as rates and rent and other commitments to their employees, are almost as great as the money coming in by way of customers' 177 deposits—it is clear from any examination of the circumstances that wrongful trading is taking place, and the directors should be personally responsible.
In my view, associates should also be made responsible. Often there are nominee directors, whereas the people behind them are making the real gains. I will give an example of an extreme abuse of which I have knowledge. A well known and prestigious firm of estate agents in London wanted to make some of its rent collectors redundant, but it did not want to meet its redundancy obligations. A limited company was set up to which was transferred the contracts of a number of the employees. As soon as that had been done, those employees were made redundant.
They might have been described as having been unfairly dismissed or made redundant. No matter. The liability was transferred to a limited company, and the employees concerned were not robbed of their redundancy entitlement because those sums were guaranteed by the redundancy fund. The real loser was the taxpayer. I believe that the company in question used nominee directors. The associates, the real people behind the operation, should have been made personally liable for wrongful trading in such circumstances.
Another example where liability should be fixed on others, apart from the directors, is where one member of a prestigious group of companies becomes insolvent. People find it difficult to know with whom they are dealing in a group of companies. They look not at a corporate identity but at a group identity and say, "This is a prestigious group. It must be safe to deal with this set of people." The group then dumps and liquidates one of its companies to get rid of a liability.
Where there has not been a misfortune such as a fire, and where the general ambience of the conduct of the organisation has been such that the consumer thought that he could rely on the prestige of the group, other members of the group should be treated as associates in terms of wrongful trading and personal liability.
In considering the vexatious question of the disqualification of directors, I am the first to admit—I say this having for many years urged disqualification as a remedy from a recent personal experience that the issue is not as easy as it sounds. The example I give has nothing to do with professional work or payment. In my capacity as a Member of Parliament, I was asked to join the board of a company which was limited by guarantee. It was an industrial co-operative in my constituency. I took John Tilley's place on the board when he ceased to be a Member of Parliament.
I was on the board of directors for a few months. Not until there was a change of secretary and I got a fuller picture of what was happening to the company did I realise that somehing was wrong. I immediately suggested that we had an investigation. Within two or three weeks it was obvious that the company was insolvent, and we did the right thing and immediately put it into creditors' voluntary winding-up.
I should be sad if a Member of Parliament could not go on to the board of directors of a company under those circumstances, anxious to do a job conscientiously, without being at great personal risk. It can be shown in circumstances such as those that one should not be disqualified, because one had acted in good faith and conscientiously. However, there are many other 178 circumstances when it is plain, by using accountancy experience and practice, that the directors bore a great share of blame.
The right solution would be to say that where a prima facie case is established on investigation that the affairs of the company were conducted in an irresponsible way which caused loss to those outside, the people concerned in the company should be subject to provisional disqualification unless they can assert, perhaps by filing an affidavit, that they were innocent of blame.
To rely instead on the work of the official receiver or on investigations by officials at the Department of Trade and Industry—the numbers of whom the Government wish constantly to reduce—will result in only a minimal number of disqualifications, and limited company law will continue to be a charter for fraud for the small minority who go in for such activities.
It is a pity that the Government have not found it possible to modify to some degree the advantages and powers exercisable, often by banks, in respect of floating charges. Examples were given in the Cork report of the way in which a bank with a floating charge can wait until a great number of innocent small business men have put their money or assets into a company over which there is a floating charge and can then strike at the point at which the bank can take the greatest amount of money.
I dealt with such a case in correspondence with Ministers. It arose during the Civil Service strike when civil servants refused to accept PAYE and social security contributions. The company in question was subject to a floating charge and the person I was asked to help was a mere employee who happened to be on the board of directors. The directors had taken the responsible step of setting to one side money, within the limits of the company's borrowing, which civil servants refused to accept during the strike.
Because of events entirely outside the control of those directors, the bank exercised its power under the floating charge to appoint a receiver and thereby gobbled up the money which civil servants had refused to accept during the period of their dispute with the Revenue. As a result, the employee directors, who had no personal stake in the company, were liable in some cases for hundreds of thousands of pounds.
The Minister has no need to make further inquiries about that case because, thank goodness, the Government altered the Social Security Act and absolved the directors from having to repay those social security contributions. The case therefore had a happy ending. It illustrates the way in which people—in that case employee directors; in other cases they may be innocent customers—can be disadvantaged unfairly by the exercise of the great power which the banks possess on floating charges, a power which is not possessed by smaller customers and those who deliver goods to companies.
On the whole, I welcome the Bill. I hope that I have not adduced too many Committee points. If I have, it is because I do not particularly want to be a member of the Committee. I wish the Bill well on its way.
§ Mrs. Elaine Kellett-Bowman (Lancaster)
Both sides of the House agree about the urgent priority of reducing unemployment by encouraging the creation of new jobs. The Minister with special responsibility for small firms at the Department of Trade and Industry, my hon. Friend the 179 Member for Rossendale and Darwen (Mr. Trippier), who will be making the winding-up speech, has repeatedly said that one of the reasons why so many new jobs in small companies are created in the United States is that there is no stigma about bankruptcy there, whereas in the United Kingdom the stigma still remains. I am convinced that this is partly because when a man goes bankrupt there is all too often a domino effect. He takes other small companies, his creditors, down with him.
One of the aims of the Government in introducing the Bill, following the Cork report, is to help those small creditors. Another aim is to prevent the bankruptcy from occurring by reducing the positive incentives to preferred creditors to present a petition. However, I am bound to say that the other place is more enthusiastic about this than are the Government. Both of these aims would be achieved by removing the preferential status of Customs and Excise with regard to value added tax. I regret that in another place their Lordships withdrew an amendment to remove its VAT status.
Giving preference to Customs and Excise has two very serious ill effects. First, the fact that Customs and Excise is able to put its shovel into the pile first often means that there is nothing left for the small company creditor who, as Lord Mottistone said in another place, depends heavily upon getting out of the insolvent business some of the money owed to him in order to stay alive. This means that the small company creditor may himself be driven into bankruptcy, with the result that still more jobs are lost.
Equally important is the fact that its preferential position may encourage Customs and Excise to petition for bankruptcy at an early stage when it is still possible for the company to recover. The number of compulsory winding-up petitions presented by Customs and Excise in the last 10 years increased from 91 in 1974 to 1,230 in 1983. The number of bankruptcy notices served by Customs and Excise went up from 357 in 1974 to 2,212 in 1983. It is a staggering fact that if one adds together the number of winding-up orders, following petitions by the Inland Revenue and Customs and Excise, they account for no less than 26.9 per cent., or over one-quarter, of those granted. Similarly, if the two are added together they account for 25.5 per cent. of the receiving orders granted.
Once bankruptcy proceedings are commenced it is extremely hard for the debtor to recover because, as the hon. Member for Norwood (Mr. Fraser) observed, the legal and accountancy charges are so heavy that he probably ends up by owing two or three times the amount of the original debt. If the Customs and Excise preference were removed, it might not be in such a hurry to file petitions, although a Lords amendment to reduce the preference from 12 to six months may accelerate petitions.
It has always seemed to me that the directors of companies that go bankrupt get off very lightly compared with unincorporated traders. Therefore, I regret the fact that their Lordships overturned the Government's attempt to make the penalty more even for both directors of limited companies and unincorporated traders. If this were done, people would think more carefully about becoming directors and, having become directors, would keep a much sharper watch on the company's affairs, because they would no longer get off scot-free. Therefore, I very much welcome the provisions that will make directors personally liable for wrongful trading.
180 Another matter upon which the Cork committee consulted and recommended is the impact of insolvency upon the family home. I am bound to say that I am ambivalent about this. I can visualise only too clearly the hardship that can overwhelm a family if it loses not only the family business but the family home—a fate, incidentally, which has always overtaken farmers who cease farming, although this is often forgotten. Although to protect the family home for the benefit of the wife and children may seem to be eminently desirable, the fact is that if a man may not pledge the only asset he has he may never be able to get started in business. That can only work to the disadvantage of his family. However, the man should not be allowed to pledge the family home unless his wife also signs, regardless of whose name the house may be in. I am glad, therefore, that the Minister has issued a comprehensive consultation document on paragraphs 114 to 131 of the Cork report which deal with the family home, and I look forward with interest to the report on this matter.
Perhaps the most positive part of the Bill is contained in chapter II, clauses 13 to 18, which set up the new business rescue mechanism. It is a very good idea that under these provisions an administrator may be appointed at the request of a petitioner or company when the company is in difficulties. His job will to be rescue the company, or part of it, as a going concern. As the Minister said, this will give the new management a breathing space in which to try to rescue the company, or part of the company, as a going concern. If this proves to be impossible, he must secure a more advantageous realisation of assets than would be achieved under a winding-up.
These provisions give hope to companies which have got out of their depth, despite the immense efforts of the Minister responsible for small firms to give them advice at every possible stage. Sometimes, however, they have not gone beyond recall. I very much hope that the provisions will ensure that small companies have a higher survival rate.
I welcome the Bill as the first attempt for 60 years to make sense of our antiquated and very harsh insolvency laws and hope that the Government will accept amendments to improve it at the appropriate time. Some of the amendments that I should like to be made to the Bill do not appear to find favour in the eyes of the Government. However, a felicitous coalition between the Opposition and Conservative Members may persuade the Government in due course to change their mind.
§ Mr. Allen McKay (Barnsley, West and Penistone)
This Bill has been welcomed by both sides of the House. There must therefore be some good in it. As it is not the kind of Bill which is introduced every year, it is important that we should get it right. Its provisions will affect a great number of people, particularly now, and allow me to raise a constituency matter which on the face of it seemed not to be an insurmountable problem. However, as time went on I found that the circumstances of the case left a great deal to be desired and that the effects of insolvency led to unfairness in the case of workmen. I give credit to the Minister for the fact that after a few months I was able to persuade him that there was merit in my argument. Unfortunately, his decision came too late to help those constituents of mine who worked for the firm in question. 181 However, they told me that it gave them satisfaction that the fact that their plight had been drawn to the attention of the Minister had resulted in a change to the regulations which enabled help to be given to those who were made redundant in similar circumstances.
May I also refer to the problems faced by those who have signed contracts to buy new homes and then find that the builder has gone into liquidation. I refer to the home that was being built for Mr. and Mrs. Barber by Manston Homes, a firm which has gone into liquidation. In July 1984 Mr. and Mrs. Barber bought a plot of land and signed a contract with the builder. In September 1984 they paid a deposit of about £3,500. When they asked how long it would be before their home was completed they were told that completion date would be some time in October 1984. Therefore, they sold their home and moved lock, stock and barrel into lodgings. After a further two or three weeks they found that their home had not been completed and when they made further inquiries they were told that it would be ready on 7 December 1984.
While pursuing that matter, I realised that the firm had ceased trading in November 1984. Therefore, when the firm told the Barbers of the completion date, it must have known that it was running into insolvency. When it told the Barbers that the completion date would be 7 December 1984, there were already insolvency proceedings. I hope that the Bill will be tightened up to make sure that that does not happen again. It will not help the Barbers, but I would not wish to see others running into the same problem.
I talked to the National House Building Council about the case. The Barbers may be able to be compensated by the NHBC, but not fully. They have had to put their furniture in store, and it is still there. There is no home for the Barbers to go into. When I talk to the liquidators concerned, I get the feeling that, in doing their job on behalf of the creditors, and not on behalf of the consumers, they are holding people such as the Barbers to ransom. They are trying to find another builder who will take over the site. Possibly that is as liquidators should work, but those people's homes are nearly complete, and still need a few thousand to be spent on them, which they could get a builder to do. However, that work has been held up by the liquidators in the hope that it is the plum that will attract a new firm to take over the whole site. We should have a measure to make sure that that does not occur. I suspect that that is what is happening now.
The standard of building was fairly reasonable up to a point, but when the firm found that it was running into trouble, the standard of building left much to be desired. As a result those who are now occupying their homes have found water penetration. Walls have to be pulled down and rebuilt because of the type of material used. There is no compensation for that except through the NHBC, up to a limit of £5,000. Therefore, remedial works in the new home that cost more than £5,000 will have to be paid for by the person who bought the house. I hope that in Committee the Bill will be tightened up to make sure that such a situation does not occur again.
I should like to give a further example of transactions in working men's clubs in my area and in other establishments. A firm sold the clubs expensive video and television equipment. The idea was that the clubs would make a monthly payment and, because the video equipment showed local advertisements, the clubs would get a return from those advertisements. Unfortunately, the venture did not succeed. The firm has gone into 182 liquidation. Now the clubs have found out that the expensive equipment that they purchased from the firm has been passed over to another firm so that they do not receive anything from the original firm but owe money to the second firm.
I hope that those points will be taken into consideration and that we make sure that that situation does not recur. The Committee can make sure that it does not happen.
§ Mr. Tim Smith (Beaconsfield)
The hon. Member for Barnsley, West and Penistone (Mr. McKay) has highlighted a tragic constituency case involving the insolvency of a building company and the effect on his constituents. It is impossible to say whether the Bill will have a beneficial effect. It sounded as if the company went into liquidation at a late stage. It may well be that in such a situation the administration procedure proposed in the Bill would have enabled the company to be run by the administrator at an early stage. Some of the difficulties might not then have been encountered.
This time last year, when the Bill was in its gestation period, it was reported that the Secretary of State had offered a prize of a bottle of whisky to anyone who could think of a better title than "Insolvency Bill". We are stuck with the same title, so I can assume only that either the prize offered was an insufficient incentive, or nobody was able to come up with a better title. That is a pity because this is a major Bill emanating from the Department. The title suggests failure and negativism. However, there is no reason why the Bill should be viewed in that light. For a start, the administration order that the Bill introduces for the first time is designed to secure the survival of the company as a going concern. I believe that it fills an important gap in the law.
The Cork committee concluded that in a significant number of cases companies have been forced into liquidation, and potentially viable businesses have been closed for want of a floating charge under which a receiver and manager could have been appointed. The hon. Member for Dagenham (Mr. Gould) mentioned the example of Stone Platt. There have been others during the recent recession. Although the administration order is viewed with scepticism in some quarters, I welcome it as a positive proposal designed to extract success from prospective failure. It will benefit the employees of companies as much as creditors.
Much of the debate on the Bill has been on the disqualification of directors and their personal liability. On the face of it, that, too, sounds negative, and many comments on the Bill have been precisely that. However, what is at stake is the public interest. There has to be a proper balance between the different and conflicting sectional interests. There are several clearly identifiable interests at stake. There are those of the shareholders, directors, employees and creditors of the company. However, there is more to it than just reconciling those different interests. The law confers the privilege of limited liability on the shareholders of companies. For that reason, in the public interest there should be corresponding duties or obligations imposed upon those who choose to take advantage of it, deterrent penalties for its abuse and some means of ensuring that its abuse cannot be repeated.
The Cork committee said that society required to be satisfied in respect of four matters—first, whether there is any blame or fault attaching to the conduct of an 183 insolvent; second, that if his conduct merits it he should be suitably punished; third, that his opportunity to repeat such conduct should be curtailed; and, fourth, whether the responsibility for the insolvency is attributable to someone other than the insolvent.
The committee concluded:there is now universal dissatisfaction and frustration with this branch of the law. This is to be particularly deplored because it breeds both disrespect and contempt for the law in a context where there is a need to enlist public support in an endeavour to promote the highest standards of business probity and competence.The committee highlighted previous attempts to improve the situation and referred to several instances which hon. Members have mentioned in the debate, which have also been raised by consumer organisations and programmes such as "Insight", "Checkpoint" and "That's Life". The Cork committee continued:It will … be a matter for reproach if the law remains complacent and fails to make any attempt to deal with everyday problems created by firms or companies which cease to trade, leaving work which has been paid for in advance uncompleted, but whose promoters are at liberty immediately to start afresh under a new name.The existing law is clearly unsatisfactory. Section 9 of the Insolvency Act 1976, now section 300 of the Companies Act 1985, provides that where a person has been a director of two companies, each of which has gone into insolvent liquidation, the second liquidation having occurred within five years of the first and his conduct as a director of either company making him unfit to be concerned in the management of the company, the court may make an order that he shall not be a director for up to five years. That is unsatisfactory. The courts have made orders under that section on only a few occasions.
The Cork committee said that the court should be required to make an order in such circumstances and that only one company need be involved. The hon. Member for Dagenham seemed to be saying something similar to that which the Cork committee originally recommended. However, the Government departed from that recommendation in their White Paper in which the Government opted for the automatic disqualification of any director in the event of a compulsory winding up, whatever the circumstances. That proposal appears to have been prompted by a desire to reduce public expenditure by relieving the burden on the official receiver. That appears to have been as important a consideration as the point at issue.
As a result, critics were able to say that the rogues would escape before compulsory liquidation. The Minister made some modifications to the White Paper and explained some defences for automatic disqualification. However, he was on the wrong foot. That is a pity because there is nothing wrong with automaticity. It is not a question of assuming guilt. We are talking not about a criminal offence, but, as the hon. Member for Dagenham said, about removing the privilege of limited liability. I am not convinced that the Bill will deal with the abuse that undoubtedly occurs.
My hon. Friend the Member for Tynemouth (Mr. Trotter), a liquidator of many years' experience, said that in no case in which he was involved was a director prosecuted. That is because of the expense involved. A liquidator's primary duty is to the creditors and therefore he cannot go on what might be a wild goose chase.
184 Because clause 7 places a burden on the liquidator to report to the Secretary of State, the provision is unlikely to be effective and it is unlikely to deal with the wrongs about which complaints are made.
It is clear from the debate that the House of Commons takes a more robust view than the other place. Perhaps that is because we have constituents who are consumers and creditors. Constituents have written to us complaining about the activities of liquidators. A consensus has emerged from the debate, and I hope that the Government will accept the need to strengthen the Bill.
Over 1 million companies are on the register. Far too many people become company directors without having a clue about their duties and responsibilities. Company law is immensely complex. The 1985 consolidation measure contains 747 sections and is rightly described as the "Jumbo Companies Act". Section 309, which was section 46 of the Companies Act 1980, states that directors must have regard to the interests of their employees, but, apart from that, the Act contains no general statement about the obligations and duties of directors. There should be a general statement of directors' obligations.
The CBI and the Institute of Directors should do more to educate their members. They have attacked and undermined the Bill. The Institute of Directors, in particular, has an obligation to ensure that its members conduct themselves properly. I am sure that the majority do, but many directors take on responsibility without any idea of what is involved. I know that because I have been a director of a company.
The hon. Member for Norwood (Mr. Fraser) said that he became a director of a company limited by guarantee, and that it took him a few weeks to find out what was going on. Anyone who is invited to become a director of a company, before agreeing to accept the appointment, has an obligation to find out the details of the company's financial position. Many people become directors because they think that they gain status. Unfortunately, following the Finance Act 1984, tax advantages can be gained by trading with limited liability. That means that one can no longer argue that it is wise to disincorporate.
There must be as many as 2 million company directors in Britain. The various bodies responsible for them would do well to consider advising them better about their responsibilities. The Bill should perhaps include a statement setting out directors' responsibilities.
§ Mr. Michael Hirst (Strathkelvin and Bearsden)
I declare an interest—albeit remote—in that I was formerly a partner in Peat, Marwick, Mitchell and Co., the accounting firm which has an extensive insolvency practice. When I was elected to the House of Commons I resigned as a partner and became a consultant to the firm. That firm epitomises the best professional practice. If its professional standards were uniform throughout the country this legislation would not be required.
In my professional capacity I have nursed companies through technical insolvency and undertaken insolvency work. Anything that helps to keep a company afloat and to preserve jobs is welcome. I have seen the unscrupulous activities of rogue directors and the cowboy liquidators. Like the hon. Member for Dagenham (Mr. Gould), I have seen phoenix companies rise, often trading from the same address and continuing to defraud customers and traders.
185 I have written to the Minister on many occasions about flagrant abuses of the privilege of limited liability. My constituents and I have experienced a sense of frustration when the Minister has regretted that there was little that he or his Department could do. I welcome the Government's decision to legislate.
Much of the administrative detail involved in insolvency procedures will be contained in the rules. The Bill makes more than 50 references to the rules so, clearly, they are important. I regret that we do not know the shape or content of the rules, although we know about the main matters with which they will deal.
When will the rules be published? How wide will the consultation he and how long will it take? The views of practitioners must be obtained and appropriate amendments suggested. When will the rules be effective?
That part of the Bill which deals with qualifications for insolvency practitioners must be welcomed by all, because the activities of cowboy liquidators have caused anxiety. I hope that we shall see an end to the abuses which have caused many hon. Members to write to Ministers to complain. When the Minister draws up the rules for eligibility, will he consider carefully the definition of an "associate" in clause 207? Based on an admittedly limited experience, it appears to me that that definition of an associate is unreasonably widely drawn.
I appreciate that it is essential that a liquidator is shown to have independence and to be a man of professional standards. It is clearly undesirable that there should be any evidence of a conflict of interest. But surely it is somewhat unreasonable that a person should be disqualified from accepting a liquidation appointment merely because he has a partner in Aberdeen whose uncle may owe £3 to the insolvent company.
§ Mr. Fletcher
My hon. Friend is right. The rules are drawn too tightly in clause 207. We have it in mind to bring forward amendments in Committee that I hope will be more realistic and will meet the difficulty that we face. We must make sure that conflicts of interest are not allowed to hinder the practice of insolvency and make it possible in reasonable circumstances for people in business to carry out insolvency practices.
§ Mr. Hirst
I am grateful to my hon. Friend for that assurance. I am sure that all reputable and respectable insolvency practitioners will welcome the assurance he has given, which I think is a reiteration of the point that Lord Lucas of Chilworth made in another place some time ago when that Chamber was considering the legislation.
I am glad to note the end of the automatic disqualification of directors. In this respect I appear to be at variance with some of my hon. Friends and some Opposition Members. In a certain number of cases I believe that there would be an adverse effect upon the entirely reputable and innocent director who is often brought in to nurse a company through its difficulties. There is the skilled company doctor who is often put into a company as a director by a major creditor who may not have the right to make a receivership appointment. Such a person is brought in on the basis of his expertise and ability. There would clearly be an unwillingness on the part of such people to be prepared to take appointments as directors in companies which might fail if there was automatic disqualification. Moreover, I believe that there is merit in the view already expressed in the House that 186 automatic disqualification could lead to thorough congestion in the courts by innocent directors seeking relief from disqualification.
I am glad that the Minister has voiced his unhappiness at the wording of clause 7. I too am unhappy. There must be considerable dangers in trying to put into words in a Bill a close specification of the nature and conduct of directors. The definition of "reasonable conduct" can quite properly vary depending upon the different circumstances, the size or the type of business. Many directors of small companies that go under would almost certainly be unable to comply with clause 7 as worded because they would probably not have the accounting resources to provide regular management accounts of any worth.
When the Government bring forward proposals to amend clause 7, will my hon Friend please be careful not to draw the proposals so tightly that the director is effectively inhibited from taking a normal commercial risk, which is the sum and substance of the way in which companies should be run? Indeed, when a company is in a difficult financial position, it may be less easy for it to follow the prudent, conservative trading policies that a larger company might follow.
Having said all that, I share the concern that has been articulated strongly on both sides of the House about delinquent directors. I hope that the wording will enable us to take the firm action that needs to be taken against directors who abuse the privilege of limited liability.
I wish to pick up one matter that was discussed by my hon. Friend the Member for Lancaster (Mrs. Kellett-Bowman) about preferential creditors. My experience of constituency problems and the world in general confirms that many ordinary creditors are desperately upset when they find in a liquidation that all the free assets are being creamed off to pay the preferential creditors, and, almost without exception, they are Government and local government bodies.
The Cork committee urged a substantial reduction in preferential creditors' rights. I note that in another place the preference given to Customs and Excise in respect of unpaid VAT was reduced to six months. There must be a clear anomaly between one Government Department having preferential rights for six months and the collector of taxes having preferential rights for 12 months in respect of unpaid PAYE and national insurance. While I wish that anomaly to be put right, I believe that a delicate balance has to be struck in leaving a preferential right with the collector of taxes for PAYE and national insurance and not harrying a small, growing company to pay promptly its PAYE and national insurance contribution to the extent that the company finds it difficult to grow.
In referring to the preferential creditors, I cannot overlook the position of the public utilities, which invariably find themselves in a position to blackmail insolvency practitioners by use of their monopoly powers. It is frequently the case on an insolvency appointment that the first telephone call that the insolvency practitioner receives is from the gas board, the electricity board or the telephone company stating that it refuses to reconnect the supply until the outstanding account is paid. In my view, that gives the public utilities an improper advantage over all other unsecured trade creditors.
I was glad that the Minister, in answer to a written question last November, stated that it was his intention to introduce in the Bill provisions to prevent this taking 187 place. Moreover, when the matter was discussed in another place, I notice that my noble Friend Lord Cameron of Lockbroom confirmed thatThe Government will be bringing forward some amendments to the Bill during its passage in this House."—[Official Report, House of Lords, 15 January 1985; Vol. 458, c. 876.]I hope that the Minister will be able to give me a positive confirmation that the anomaly of unfair preference accorded to the public utilities will be ended.
§ Mr. Fletcher
Indeed, I confirm that we fully intend to take away what is in fact a bogus preference with regard to the monopoly utilities by tabling amendments in Committee. On the question of the anomaly between VAT and PAYE, I agree that that should be removed. It is proposed to make the period 12 months for both.
§ Mr. Hirst
I think that I can say with a degree of certainty that there will be some very unhappy potential trade creditors after the Minister's words on that point.
I recognise and welcome the intention of the Bill through the administration and receivership procedures to give companies in financial difficulties the chance of recovery. In my experience, one of the reasons for needless liquidations has been the operation of the rule that allowed VAT bad debt relief only in cases of liquidation. There are well documented cases of substantial, unsecured trade creditors getting together to pre-empt the work of the receiver by putting a company in difficulties into liquidation in order to obtain VAT bad debt relief. I welcome the provision in this year's Finance Bill to go some way to relieve the position.
I am sure that the Minister will agree that it can be very difficult at the outset of a potential insolvency situation for an insolvency practitioner to state categorically whether there will be any assets available to the ordinary unsecured creditors. Stock values, the value of property and the goodwill of a business can sometimes take a considerable time to realise. In the early days of an insolvency, it is difficult to ascribe accurate values which would enable the insolvency practitioner to make that sort of statement to an unsecured creditor. It would be much simpler to allow relief on appointment to all trade creditors with them making an adjustment as and when a subsequent dividend was paid.
I echo the comments of the hon. Member for Dagenham about an insolvency court. Sir Kenneth Cork advocated such a court as a forum for the speedy and informal resolution of judicial matters affecting insolvency. If use is made of the Bill to disqualify delinquent directors from holding office, there must be a great advantage in having a court which has specific powers to develop a body of expertise and experience on what should be the conduct of directors. Moreover, it would be able to judge consistently directors' behaviour.
One of the potential flaws in the Bill lies in the references to the High Court or to the appropriate court in Scotland. The judge who hears an insolvency case might not necessarily be able to take an even-handed view of a director's conduct. It is difficult to put into words what 188 constitutes unreasonable or improper conduct. A slightly looser definition in the Bill, supplemented by an insolvency court to judge these matters, would provide a more satisfactory way of taking firm action against delinquent directors.
My hon. Friend the Member for Bolton, North-East (Mr. Thurnham) referred to some of the difficulties of the administration procedure. It is clear from a fairly cursory examination of the Bill that some problems will arise from the suspension of security rights and the subsequent application of the rather complicated procedures for enhanced priority under clause 31. My hon. Friend the Minister may well agree that problems are likely to arise with the position of the holders of second charges, but perhaps it is not appropriate to discuss such matters on Second Reading. That should not be misinterpreted as a request to serve in Committee.
I must take up the example which has already been given of a subsidiary company which can be cut loose from the parent company with apparent ease when it piles up debts. I recently took up with the Minister the case of a company that went under, leaving literally tens of thousands with worthless guarantees. The hon. Member for Norwood (Mr. Fraser) spoke with great conviction about a constituency case where that had happened. I know that many are induced to trade with a seemingly reputable and financially stable company if they believe that it is part of a strong and prosperous group. Often similar trading names are used. It is often, therefore, a rude awakening and a shock for unsecured creditors when they find that subsidiary X, with a similar-sounding name to its prosperous parent, has been put into receivership or liquidation and they find themselves with a credit that is not likely to be realised.
The Bill does not offer protection to creditors—innocent people—when a subsidiary is liquidated in the circumstances that I have outlined. I accept that many hours have been spent considering the Bill, but I ask the Minister whether he can hold out any prospect of action being taken to deal with the dangers that I have put before the House. I hope that suitable amendments will be tabled in Committee.
It may appear that my contribution has been directed almost exclusively to potential problem areas in the Bill and omissions. That does not cloud my general welcome for what I believe is a long-overdue reform of insolvency law.
§ 7.5 pm
§ Mr. Spencer Batiste (Elmet)
I welcome the Bill in its general terms as it is clear that the present state of insolvency law is unsatisfactory. First, I declare an interest as I have been a director of companies of various sizes, holding both executive and non-executive status. I am a vice-chairman of the Small Business Bureau, which has a strong interest in the Bill being right. I am in practice as a solicitor and as such I have seen the effect of many of the inadequacies of the present system. In addition, I am a constituency Member and I have appreciated through the eyes of my constituents many of the problems which have been described during the debate. I shall direct myself to the parts of the Bill that relate to limited liability and disqualification, especially the areas of concern to which reference has been made in another place and elsewhere.
Limited liability is a vital mechanism in the free enterprise system. Without it there would be a much lower 189 level of business start-ups, especially in new technology and small business sectors. The need to promote the new ideas that are so necessary for Britain form an important backcloth to the Bill. Limited liability has been described as a privilege. It is, but it is a privilege which is at the heart of our system and it has been there since the days of the industrial revolution. In assessing a major change, we must consider the effect of the change upon the scope of our economy.
The hon. Member for Dagenham (Mr. Gould) said at the beginning of his speech that currently there is a record number of business failures. That is true. The opposite side of the coin is that there are record numbers of business start-ups. The two go hand in hand. They are linked because more people are being encouraged into business start-ups. That being so, it is inevitable that more businesses will fail, for a variety of reasons. If our priority is to create and preserve jobs, our policies must be oriented towards encouraging more start-ups and to improving the survival rate, which is not high enough. In taking that course, it is almost inevitable that there will be a high rate of business failures. That is a hallmark of a dynamic economy.
The Bill must be judged by the criteria of job creation and job preservation as well as by balancing other competing interests. There is a tendency, unfortunately, to regard all insolvency as being blameworthy. It is not. Insolvency happens for a variety of reasons. Under-capitalisation is one of them. We could increase minimum capital reqiirements for a company formation if we were minded to do so. Other reasons for company failures are market changes that have an effect on a company's products, increases in interest rates, variations in exchange rates, the bad debts of other companies and ineffective strategy on the part of the directors.
When those factors—there are many others—beset businesses, the consequences are often not dramatic or sudden. It is more normal for them to build up over a period. In framing judgments within the Bill, we must distinguish between insolvencies that are due to misfortune, those that are due to wrong judgments honestly made, those that are due to incompetence or negligence, and those that are due to fraud——
§ Mr. George Foulkes (Carrick, Cumnock and Doon Valley)
And those that are due to Government action.
§ Mr. Batiste
—and those that are due to an Opposition who have done nothing but undermine confidence in Britain and its economy from the moment that the Labour Government departed from office in 1979.
It is easy to identify frauds and it is necessary only to recite the facts of frauds to understand that those who have conducted them must be caught by the Bill, disqualified and made to recognise a personal liability for the debts of the businesses which they have fraudulently and often heartlessly run up, at the cost of the innocent consumer.
When we move closer to the borderlines, however, the judgments are not so clear cut, especially when we are drawing a line between incompetence and wrong judgments. That is the territory into which the legislation takes us. We must look particularly at the position of small businesses. The Cork committee was essentially big-business oriented. Labour Governments have imposed on small businesses the ICI's standards of management—a burden for which they are ill-equipped and which they are incapable of sustaining.
190 Small business cannot afford the expensive advice and systems that are available to larger businesses. That is why the Government have undertaken many measures since 1979 to bring relief to small businesses and to provide them with advice and assistance—for example, through the enterprise agencies and the advisory service. Assistance is also widely provided by non-executive directors. It is not feasible for a non-executive director to monitor in detail the activities of a small business. He must be able to rely with reasonable certainty on the fact that he will not thereafter be penalised by law for acting on what he was told by the executive directors of the business.
It is easy to be wise after the event and, with the benefit of hindsight, to double guess what happened in the past. Often timing makes the difference between success and failure. Liability for disqualification and for wrongful trading must only follow genuinely blameworthy conduct.
I disagree with my hon. Friend the Member for Beaconsfield (Mr. Smith) on the issue of automatic disqualification. Automatic disqualification is wrong in principle, and I am delighted that the other place amended the relevant clause and that the Government have accepted the change. Whatever my hon. Friend says about automatic disqualification not carrying a stigma, the fact is that a director who is automatically disqualified and has to justify his position does carry a stigma. It would be widely seen as a stigma. This process would dry up the supply of expert advice which might otherwise be available to company directors.
I agree with my hon. Friend the Member for Strathkelvin and Bearsden (Mr. Hirst) that clause 1(2)(b) is too tightly drawn and that the Government should examine it again. My hon. Friend the Under-Secretary of State has assured us that the Government will do so.
Clause 7(3) provides an important safeguard for directors, although not necessarily in its precise words. Some guidance must be given as to the test that the courts will apply in considering the judgment of directors. This leads me to the general question whether it is appropriate to have criteria to judge the unfitness of non-executive directors and executive directors alike. Last year, there was great controversy about the general questions arising from section 152(4) of the Social Security Act 1975.
The case of the Department of Health and Social Security v. Evans and others, which was reported in The Times, arose from that legislation. The judge's comments in framing a test that was reasonable to impose upon directors' actions are apposite to this legislation. The report of the case states:Under section 152(4) … the question whether any individual director of a company 'could reasonably be expected to have known of that company's failure to pay national insurance contributions was a question of fact which in each case would probably depend on the nature of that director's position and responsibility in regard to the management of the company and the relevant information known to that director'".That is a reasonable basis for a test. I hope that my hon. Friend the Under-Secretary of State will bear in mind that framework and those criteria when applying them to clauses 7 and 9.
When does a company become insolvent for the purposes of wrongful trading? It is easy for a person, with the benefit of hindsight, to look back over a trading pattern and say, "At that time, the company became insolvent:." It is much more difficult to judge that when one is running 191 the business concerned. Often a judgment about whether a company is solvent or insolvent depends upon, for example, the valuation of assets.
A case under section 152(4) which came to me several years ago via the Small Business Bureau related to a company that had believed that it was solvent, based upon a valuation of the company's premises in Sheffield. Because of the activities of the Labour council in Sheffield, which has done so much to demoralise business and to undermine property values, when the business went into liquidation it was discovered that the value of the property was vastly lower than it had been only a few years before. The DHSS sought to recover from the directors the arrears due under that section.
That is merely one example of the way in which directors can, unwittingly, wrongly judge whether a company is solvent or insolvent. This uncertainty could adversely affect the number of people prepared to assist businesses. One of the hallmarks of a successful business is its ability to attract to its board a variety of people, who will not necessarily be adept at all levels of company management or who will not necessarily all be accountants, but will provide a good package of skills. The more risky and more uncertain we make it for company directors to share skills in that way, the more likely it is that they will not do so. Consequently, companies will not prosper.
§ Mr. Lyell
My hon. Friend is dealing with the balance between the onus on a director, which might lead him to be disqualified, and the protection for creditors or others affected by a company's dissolution. I well understand that my hon. Friend is a business man. He is anxious that too great a burden should not be imposed upon directors and that there should not be too great a risk of disqualification.
As my hon. Friend is well aware, this aspect is protected to a great extent by the fact that applications for disqualification under clause 7 must be made by the Secretary of State. At the moment, the initiative comes only from the Secretary of State, if he has information—this is unlikely in most cases—or from the official receiver who is called to wind up or from the liquidator who, by his nature, may not be interested in applying for disqualification. Since the protection of the Secretary of State is available, would there be any objection to a creditor, who had suffered seriously from the defalcations of the company, applying to the Secretary of State and thus initiating a disqualification proceeding?
§ Mr. Batiste
My hon. Friend has made an important and telling point. Although there is the safeguard of the judgment of the Secretary of State on whether to initiate proceedings, the Secretary of State must be able to base that judgment on information in his possession.
Many liquidators and official receivers deal with a large number of companies. Information will often not he in their possession. This happens particularly with the phoenix type of system—a man sets up a business, it becomes insolvent, and he moves on, having milked it of all its assets. I think that everyone agrees that such people should be caught by the legislation. The people interested in passing on information would be either creditors of 192 those businesses or the media, who have been pursuing such people over the years in their consumer programmes. I should have thought that most of them would not be averse to passing their information on to the Secretary of State. I would not think for one moment that, if such information were in the possession of the Secretary of State, he would refuse to consider it. In those circumstances, he should have the power to consult the official receiver or liquidator to see whether an application to the court should be made. I do not think we need include in the Bill the right for a creditor to make an application to the Secretary of State. Creditors will know that the Secretary of State has those powers and will bring the information to his attention if they think it relevant.
§ Mr. Hirst
Does my hon. Friend accept that the liquidator is in a better position to judge the conduct of directors than a creditor or some other third party who might approach the Secretary of State? If he does, does he believe that there is any merit in the proposal that the liquidator should be under a duty to report to the Department of Trade and Industry whether there is anything in the conduct of the directors which suggests that further action would be appropriate?
§ Mr. Batiste
Given the fact that the Bill will strengthen the requirements for insolvency practitioners, the liquidator would be in the best position to judge whether the directors were guilty of blameworthy conduct. In all reasonable circumstances, the liquidators would pass that information to the Secretary of State with a view to his taking action.
A liquidator cannot pass information of which he is unaware. Publicity which surrounds a winding-up, after the liquidator has ceased his involvement with it, may draw the matter to the attention of creditors in other parts of the country. It would be unrealistic to expect the creditors then to return to the liquidator. They should be able to feel that they can go to the Secretary of State directly, or through hon. Members, to explain the circumstances. The Secretary of State may then require further investigation to see whether there is substance in the complaint.
It is clear, as my hon. Friend the Member for Strathkelvin and Bearsden and my hon. and learned Friend the Member for Mid-Bedfordshire (Mr. Lyell) have said, that frauds must be stamped out. This should not be legislation that throws out the baby with the bath water. That is what we are arguing about. We are all clear about the dirty washing that we must clean with this legislation.
§ Mr. Lyell
Before my hon. Friend leaves this interesting and important point, will he turn his attention to clause 7(5), which provides:no application may be brought under this section later than one year after the date upon which there is a resolution to wind up the company".Knowing how quickly time passes and how long it may take a creditor or creditors to get themselves together, or the media to bring pressure in one of these scandalous cases, does my hon. Friend think that one year is rather too tight a time limit? We do not want matters to go on for ever and we do not want directors to feel unduly harassed by long-standing risks. Two years might be more reasonable than one year, or otherwise we might find many of the phoenix operators escaping through the lapse of time.
§ Mr. Batiste
I am grateful to my hon. and learned Friend for mentioning that important point. It must be common ground that there must be a limit to the time during which a person is at risk. A one-year time limit is not unduly out of order. The difference between one and two years is not a great matter of principle. I should be more inclined towards the shorter time limit because people move on and there must be a limit to how long they should be expected to protect their backs from things that happened after they had left a company.
My hon. and learned Friend has brought my attention back to the actions of the DHSS under section 152(4) of the Social Security Act 1975.
§ Mr. Richard Page (Hertfordshire, South-West)
I have been listening with great interest to what my hon. Friend has said about the responsibilities of directors, in particular, those of small businesses. As there is no doctrine of collective responsibility within the board room, does he advise non-executive directors of small businesses to ensure that crucial decisions taken at board meetings are carefully documented within the minutes so that they can make their positions clear if something unfortunate happens later?
§ Mr. Batiste
My hon. Friend has mentioned the point that I made earlier, that the Bill may force upon small businesses a pattern of conduct and management which is different from the way in which they traditionally carried on business. I do not say that all small businesses carry on in a way that a reporting accountant operating on behalf of a large and respected firm of chartered accountants would feel is desirable. Small businesses create a large number of jobs. They are often run by people who have been made redundant and who have taken their redundancy money and set themselves up in business with the Government's encouragement and the enterprise package that they have put forward. Such people are not experts on the drafting of minutes or board room procedure. They know their trade, and they are trying to carry it out for their own benefit and that of the community and their employees.
There will be a problem if we impose upon small businesses hierarchical management practices appropriate to a much larger company. My hon. Friend the Member for Hertfordshire, South-West (Mr. Page), who is vice chairman of the Small Business Bureau, will be aware that in many small businesses formal board meetings are a rarity. Most decisions in small businesses are made informally when the people involved happen to be together. That is one of the strengths of a small business. It can respond quickly to circumstances and is flexible. It does not have to issue notices of directors' meetings and then produce carefully noted minutes whereby everyone protects his position.
In an ideal world, that should perhaps happen. It is unlikely that many small businesses will change their ways of operating to fit in with that. It is more likely that a considerable number of small business men will go bankrupt as a result of the legislation.
§ Mr. Fletcher
My hon. Friend the Member for Elmet (Mr. Batiste) has referred twice to an important point. We should not believe that small businesses are run in the same way as a large company such as ICI, with formal board meetings and minutes passing around the table. I take that 194 point. I wish only to draw the attention of my hon. Friend and other hon. Members to clause 9(4), which lays down a general approach. It provides:the facts which a director of a company ought to know or ascertain, the conclusions which he ought to reach and the steps which he ought to take are those which would be known or ascertained, or reached or taken, by a reasonably diligent person having both—I hope that that shows that the point that my hon. Friend the Member for Elmet legitimately makes has not been ignored in the Bill.
- (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company; and
- (b) the general knowledge, skill and experience that that director has."
§ Mr. Batiste
I welcome that observation. However, I draw a parallel with the provisions relating to unfair dismissal in the general employment legislation, in which very similar clauses were included with a view to allowing industrial tribunals to take account of the size and resources of the businesses coming before them. The tribunals took a considerable time to adapt themselves to the changing standards. I accept what my hon. Friend says. I am delighted that he has made that point and I hope that his words will receive wide attention. I appreciate that he has discretion about which matters go forward and which do not. Civil servants may draft such clauses, but they have to be interpreted by the men who will be affected by them.
Directors will want to know whether they will be more seriously at risk as a consequence of the legislation if they behave in a way that they regard as reasonable and fair in their circumstances. I am sure that they will be comforted by what my hon. Friend has said. However, he should make it clear that the same standards will not be expected when he exercises his judgment on small businesses as would be expected in the case of more substantial organisations with more formal structures.
§ Mr. Richard Page
I welcome my hon. Friend's championship of the cause of not putting more burdens on to the directors of small businesses. However, does he not agree that the small business sector has suffered from a lack of correct, tight managerial control? Numbers of small businesses that have started up and gone bankrupt have been shown to have suffered from a lack of expertise, not about their product or service but in the financial controls on what they were doing.
Management skills and directives would be helpful in making sure that such companies kept going. Close adherence to management rules and regulations might be a real help.
§ Mr. Batiste
Anything that can be done to improve management performance must be welcomed. However, most people setting up their own small businesses for the first time will have had little or no formal training in what is required of a business. Unfortunately, only limited opportunities are available in schools to enable people to learn what is required in management structures, and when people set up their own businesses there are not many obvious places to which they can turn for the advice and training to which my hon. Friend refers.
Since 1979, the Government have done a great deal to help. However, our whole thrust in terms of economic policy, and a great measure of our success in creating 195 600,000 new jobs in the past two years, has been achieved because we have encouraged people to set up new businesses—to have a go. Such people will not necessarily have the background and experience that would enable them to do the things that may be called for in the legislation. Ideas of management accounts and cash flow forecasts, which are very important to the successful running of a business, will be on the whole alien to them. The participation of non-executive directors in small businesses should be encouraged as a matter of major public policy.
Before I was diverted, I was about to explore the possibilities of differences in the period of limitation.
§ Mr. Hirst
I understand my hon. Friend's concern about possible impositions on small firms. Rather than detailed prescriptive legislation about the precise conduct on the part of a director that would give grounds for disqualification, might it not be better if the statutory detail of what constitutes the duties of directors and wrongful trading were looser and if it were left to the insolvency court to make a judgment on the specific circumstances of the case?
§ Mr. Batiste
Whichever course is followed, people will be aware, after three or four years, of what is required of them—if only because by then the courts will have established a pattern of case law that people can observe. The argument against having a general test for the courts to interpret is that many people will fall foul of the law before a realistic framework of case law is established. That was what happened when employment protection was introduced. The legislation caused considerable problems for small businesses while it was settling down. The problems of those early years were largely the cause of general resentment among small businesses about many aspects of employment protection that are no longer justified by the legislation itself, which has long since been changed. It is easy to create a mythology about legislation and much more difficult to kill that mythology when it is no longer justified.
I have already referred to the question of the time limits beyond which a director may be free from attack. We had a debate last year about section 152(4) of the Social Security Act 1975. We had all received many representations about it, not least from the Institute of Directors which highlighted a number of cases that caused considerable concern. I should like briefly to outline one of those cases. A director of undoubted professional competence and integrity resigned from the board of a company when it was solvent. He was unaware at the time that it had substantial arrears in payment of national insurance contributions. Two years later, the DHSS claimed £130,000 from him under section 152(4). Such cases occurred all too frequently under that section. I hope that my hon. Friend will make it clear to those involved in the management of businesses, who regard the Bill with a measure of trepidation, that it will not cause problems similar to those created under section 152(4). I hope that the widespread resentment and concern occasioned by that section is well and truly buried and will not be revived today.
§ Mr. Fletcher
A guarantee such as my hon. Friend asks for would depend upon the position that the courts 196 take in interpreting the legislation, and we cannot know what that will be. However, clause 9 on wrongful trading gives the courts powers to decide whether a director wilfully continued to incur liabilities when he knew, or should have known, that he could not meet them. That is a great improvement on the position under section 152 of the Social Security Act. We have included all the financial penalties in that respect that might apply to directors in one piece of legislation, and indeed in one clause.
§ Mr. Batiste
That is an important point. I hope that once the legislation has been passed the Government will extensively publicise its effects. That would help to set at rest the fears that have been aroused.
I welcome the ending of Government preferred creditor status. Many businesses that experience a considerable bad debt feel that the Government is better able than they are to bear the consequences of the insolvency of another business. The domino effect of an insolvency cannot be underestimated. The Bill provides for the abolition of preferential status for corporation tax, income tax and capital gains tax. That is welcome. My hon. Friend the Minister said today that he will act to prevent utilities from using their monopoly muscle to prefer themselves to other creditors. Small business men might hope that, while the Government are doing that, they will ensure that some local authorities and some larger companies which are in a good state of financial health pay their debts to small businesses more promptly, as such debts are a considerable cause of financial difficulty for them.
Having gone so far, I find it difficult to understand why my hon. Friend the Minister cannot go just a little further and deal with VAT on precisely the same basis. I hope that, as the Bill wends its way through Committee, enlightenment on this matter will come upon my hon. Friend or, more likely, that he will be effective in persuading his right hon. Friends of the sense and consistency of such a proposal.
§ Mr. Hirst
Does my hon. Friend agree that, in most instances of insolvency, the list of creditors tends to produce unpaid PAYE, national insurance and VAT which, by virtue of the preference, extinguishes all of the free assets? Does he further agree that the Government's intention to restore the preference for VAT to 12 months will leave unsecured creditors no better off as a result of the Bill?
§ Mr. Batiste
That is an apt pronouncement, and true. I see no reason why there should not be parity between creditors in those circumstances. I hope that my hon. Friend the Minister's generosity in announcing the relaxation of other aspects of tax will not result in those Departments becoming more trigger happy in winding up companies. He said that he deprecates the unnecessarily early winding-up of companies when it is possible to save them.
There is no point of difference in principle between those who have spoken today. The difference is one of judgment about where the borderline should be drawn and how the competing interests should be balanced. The fraudulent must be stopped and everybody will support measures to do that. The judgments of another place were quite sound on many of these issues and I am glad that some have been accepted by my hon. Friend. I wait with interest to see what improvements he will propose for the others.
§ Mr. Anthony Beaumont-Dark (Birmingham, Selly Oak)
Only one thing amazes me about today's debate—how few right hon. and hon. Members are in the Chamber. I am amazed at that, bearing in mind how full the House is of lawyers. Nearly all of those lawyer right hon. and hon. Members are not here this day. What a bonus the Bill is to them. What a Christmas tree and a feast it will be for years to come.
We wish to simplify matters so that justice can be done. It is right and proper that people in business should be able to get simple justice, but what does it take to get that simple justice, apart from the fortune which will be lost because a person will be put into liquidation anyway? Two groups of people will not lose—Government creditors and yes, you guessed it, lawyers.
The Bill is the East Lyn of company law. It is 211 clauses long. That is what it takes to get simple justice. It also has nine schedules. It has 207 pages, but tucked away on page 201 we read that solicitors can be appointed without anybody's permission, and without the permission of the committee of inspection. It properly says that the committee of inspection must be informed that he has been appointed.
I cannot believe that we need 211 clauses, nine schedules and 207 pages. The Bill costs more than the Holy Bible and it will be more difficult to judge what is right and wrong from it. That is how lawyers will make fortunes yet to come. It costs £10.20. It will take a pretty rich bankrupt to buy it.
Savings have been mentioned. All efficient Governments should talk about savings. Even if it costs £10.20 and it takes 58 lawyers to decide whether somebody is a crook, honest, bankrupt or still solvent, even solvent people will be bankrupt having paid all the charges. We are told on page xix in capital letters—that is how it should be, so that we all know that savings are being made—under:
FINANCIAL AND MANPOWER IMPLICATIONS The Bill is expected"——It is expected, not will or should. We all know what expected means. The Bill is expectedto result in a reduction of 40 staff and a corresponding decrease in staff costs of £280,000 a year. There will be some reduction in the fee income in the Insolvency Service.If you believe that there will be a saving of staff and that there will be a £280,000 saving, you are living in a different world from me, Gunga Din.
§ Mr. Beaumont-Dark
I was not for a moment suggesting that you are Gunga Din, Mr. Deputy Speaker. I was suggesting, through you, that those who advise the House might think like Gunga Din.
§ Mr. Fletcher
No, I am not and I am not the son of Gunga Din either. I know that my hon. Friend is terribly keen on public expenditure savings. That is why he is the only hon. Member to have referred to this matter. Perhaps I might prick his conscience a little. I know that he was glad that automatic disqualification was removed, but the penalty has been a reduction in public expenditure savings.
§ Mr. Beaumont-Dark
I am delighted that my hon. Friend has brought that matter up yet again. I hope that the Government and this Parliament put justice higher than savings of £280,000 or £380,000. If my hon. Friend the Minister is suggesting that we should have one tyrannical clause after another because we might save £100,000 here and £100,000 there, I would ask him not to ask me to search my conscience but to search his conscience to consider whether he is right to suggest that cost is more important than the receipt of justice.
My hon. Friend said that I want to soften some of the Bill. I do not want to soften anything. My hon. Friend said recently to the Financial Times:We have to be careful of those who agree in principle but in detail would hamstring the clause, to the extent that it would be impractical in operation".We have a Bill of 211 clauses and 207 pages, costing £10.20 to buy and with thousands of lawyers having to pore over it before a decision can be reached. It is impractical that we cannot get to the nitty-gritty of this without such a vast Bill. It is bigger than the Finance Bill, in which we are talking about £48 billion.
The CBI does not wish to support crooks. The Birmingham chamber of industry and commerce—the biggest chamber of commerce in the country—does not want to support crooks. Lord Benson, who is one of the most eminent financial men in the country and has led a life of complete financial probity, is not in favour of doing something that benefits crooks.
It is vital that we do not make business failure a near crime. It would be very strange if people willing to strive to build a business were told that if a business succeeded they would get a knighthood or go to the House of Lords, but if it failed they might never sit on the board of any company again. Capitalism can never be built or hope to survive on that basis.
The Birmingham chamber of industry and commerce and the CBI are asking that we, sitting in the cosiness of this House, should recognise that the speed of disaster can often be beyond the powers of reasonable people to remedy even if they act in time. Banks are not the greatest institutions for taking risks or even, very often, for analysing a balance sheet.
§ Mr. Thurnham
The Midland bank recently invested in a speculative proposition in America which showed just how difficult it is to make these judgments.
§ Mr. Beaumont-Dark
I am obliged to my hon. Friend for pointing out that one of our greatest financial institutions did not know whether it had bought a pig in a poke. It turned out that the pig in the poke cost something like $280 million, and it is still counting. So it makes one tremble that people can look at poor Joe Soap's balance sheet and say that he was in business but now he is not.
We need good, qualified business men—and the Institute of Directors, the CBI and the Birmingham chamber of industry and commerce have a register of these—who will help other people with the necessary risk ventures that we all wish to support. Small businesses can grow only if the best people are willing to serve in them. Their Lordships, the CBI and the Birmingham charmer of industry and commerce are not asking that we should let crooks off, but the idea of automatic disqualification—as in the case of drunken driving, because it endangers the 199 lives of others—is not appropriate. If that were done, I believe that those people who were thinking of helping others would decide not to do so.
A very prominent former chairman of one of the great industrial companies agreed to go on the board of a company in order to help it, and it failed. This was not because he was a crook or a fool, but because these things sometimes happen. All venture must mean risk.
We want to be able to get rid of the crooks. We want to stop people bankrupting companies, salting the money away and then setting up in business again. I have the greatest admiration for your officials, but it is amazing that they can, in 204 pages, encapsulate——
§ Mr. Beaumont-Dark
It is amazing that Government officials, Mr. Deputy Speaker, can produce 204 pages and still come up with something which in my view could damage enterprise and people serving on the boards of companies.
From the look of the House, this is not going to be a hugely controversial Bill. I have the greatest admiration for the two Ministers who I know are going to see this Bill through the House. I know that at least one of them has done something about building small businesses and, indeed, has built some of his own. I hope that he will not only act justly for others but will remember the sort of situation he was sometimes faced with when he was in business. I am sure that when this Bill gets to Committee it will only take an hour or two for common sense to prevail, so that businesses can be built on the secure knowledge that crooks will be tackled but those who are willing to risk their reputations and some of their own money and have the courage to build businesses will be given every help. This Bill must not turn out to be something held over them, as a Seventh Day Adventist holds over people the curse of God. It should be used to help honest people to succeed and businesses to grow.
§ Mr. Gould
I believe that we have had a very interesting debate, which in many ways augurs well for the proceedings ahead of us in the Standing Committee. Many of the points made in the debate foreshadowed much more substantial debates in the Committee.
The scale of the problem which the Bill is meant to address was well ventilated by the hon. Member for Stockton, South (Mr. Wrigglesworth) when he cited the numbers of business failures and the increase in them over recent years.
My hon. Friend the Member for Barnsley, West and Penistone (Mr. McKay) gave some indication of the mischief against which the Bill is directed when he drew attention to his own constituency case involving a construction firm. I believe that it is in the construction industry, and perhaps in the clothing industry, that many of the problems have arisen in their most virulent form. It is there that one sees the phoenix syndrome, the rogue 200 director, the cowboy liquidator, the unsecured creditor being left without payment and the domino effect when one company goes down.
As in the debates in the other place, much attention has been directed this evening to the disqualification provisions. I felt that there was again some evidence that the influence of the Institute of Directors and the CBI was perhaps a little too strong and that one could see why the Bill, in its present form, does not go far enough towards reducing the balance of advantage between directors on the one hand and creditors and others on the other. If one agrees with the hon. Member for Birmingham, Selly Oak (Mr. Beaumont-Dark), it is not just the Institute of Directors and the CBI which have had a disproportionate influence; it would seem that the Law Society has also been involved in lobbying the Government.
I remain of the view—and I believe that this view will be reflected by other Members of the Opposition in the Standing Committee—that many of the problems identified by Conservative Members in connection with the principle of automatic disqualification can be resolved—I am thinking particularly of the speech of the hon. Member for Bolton, North-East (Mr. Thurnham)—if we get the criteria and the mechanisms right. On both counts there was a good deal of debate and variation in opinion. I believe that if we got those two things right the general principle of automaticity might well be more acceptable. It may be that that principle has gone and that it is not the Government's intention to revive it, but we still look for some substantial tightening of the rules on this point. After all, we are talking about identifying the criteria that allow us in turn to identify the rogue, incompetent or feckless director. Once we have done that, it becomes important that we have the right mechanism for getting that director disqualified. If we proceed with that process directly, mandatory disqualification, which is what we are talking about, is by no means an objectionable consequence.
As a former journalist, who worked in television and was interested in such problems, I do not feel that we could place too much reliance on the media as the mechanism by which such cases should be brought to light, which is what the hon. Member for Elmet (Mr. Batiste) suggested. The media have a good reputation in this respect, but they are not thorough enough or comprehensive enough to do the job.
§ Mr. Batiste
Is it not important that, whether it be creditors or the media, those who have relevant information concerning a particular insolvency should have access to the Minister, to be able to bring those facts to his attention?
§ Mr. Gould
I have considerable sympathy with that point, and this may be the course that we should pursue. What matters is that the Secretary of State has the widest possible net of information so that he can make the best decision. The Labour party would like to see clause 7 amended along those lines.
The debate revealed the potential for considerable cross-party agreement on a number of issues. For example, I was heartened that the hon. Member for Tynemouth (Mr. Trotter) backed up my point that many directors drift into insolvency. There is no hard and fast, black and white dividing line betwen the honest and competent director and the less competent and perhaps more unlucky director, who eventually sails a little closer 201 to the wind than he would originally have contemplated. However, the fact that there is no such dividing line makes the framing of legislation much more difficult.
The hon. Member for Lancaster (Mrs. Kellett-Bowman) suggested that there might be cross-party agreement between Back Benchers on this subject. I agree, and I hope that there might be some cross-party agreement between the Front Benches. On some of the issues, there may be greater identity between the two Front Benches than there is between the two Houses.
The hon. Member for Beaconsfield (Mr. Smith) made some interesting comments about disqualifications, many of which I agreed with, and some useful comments on the general scope of the obligations of directors. In an interesting speech, the hon. Member for Strathkelvin and Bearsden (Mr. Hirst) made a number of good points, some of which I agreed with and some of which I did not. He suggested, and the Under-Secretary appeared to agree with him, that clause 207 is too tightly drawn. That may be true, but it would be sensible for the House to err on the side of caution and tightness rather than to relax the rules too far. We shall be watching the Government's amendments carefully.
I share the hon. Gentleman's welcome for the Government's confirmation that they intend to accept the point that monopoly suppliers of public utilities should no longer have an opportunity to exploit a market advantage. I was grateful for his support for a specialist insolvency court, an idea to which the hon. Member for Stockton, South also gave support.
The hon. Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) drew attention to the fairly minuscule savings that seem likely to emerge from the Bill. On a rough calculation, the figures of £280,000 and 40 jobs suggest that those losing their jobs will be pretty low-paid. The Bill cannot be advanced as a great exercise in cutting public expenditure or in saving large amounts of manpower.
We have laid the foundation in the debate today for a constructive Committee stage. The Bill has many good things, as one would hope and expect for a Bill that reflects the hard work and useful recommendations of the Cork report. It has deficiencies and omissions, but the Labour party, I hope with some support from Conservative Members, will try to remedy those deficiencies and omissions. The debate today has shown a considerable intention and concern by all hon. Members to ensure that the Bill works. As my hon. Friend the Member for Barnsley, West and Penistone said, we come to this subject rarely enough to make it essential that we get it right this time.
§ 8.6 pm
§ Mr. Deputy Speaker (Mr. Ernest Armstrong)
It is rather unusual for a Back Bench Member to speak now. I thought that the hon. Member for Dagenham (Mr. Gould) was winding up.
§ Sir Brandon Rhys Williams
I am sorry that there may have been a misunderstanding, due to a fault of mine, as to the course of the debate. I think that the hon. Member for Dagenham (Mr. Gould) will agree that his contribution was in the nature of an intervention rather than a fuller summary of his party's position on this subject, which no doubt will emerge in Committee.
§ Sir Brandon Rhys Williams
I did not wish any discourtesy to the hon. Gentleman and I heard a great part of his short, but interesting and apposite speech. There is a great deal of work to be done on the Bill by hon. Members on both sides of the House and we have been set an example by the other place, which has taken its duties seriously and has contributed some interesting thoughts in the form of the amendments that it has asked us to consider.
I wish to take this opportunity to discuss the Government's policy on the protection of investors. I was not, once again through my own fault, able to contribute when we discussed the Government's White Paper on the protection of investors a few days ago. This Bill is part of the strategy that they are pursuing to make the capitalist system on which we rely for the creation of wealth more effective, cleaner, healthier and altogether a safer system, in which people can entrust their savings. I highly commend what my right hon. and hon. Friends are doing in this respect.
I would not like it to be thought that I am being too critical in my remarks. I am sure that the House will bear with me if I dwell on themes on which I have dwelt on many occasions in the past. I have to look back to Wilberforce, Plimsoll and other parliamentary fighters who did not give up, in reminding the House that I have shown a consistent interest in company law reform since I had the good fortune to be elected in 1968. I have introduced a measure in every Session of Parliament since 1969 aimed at the same objectives that the Department of Trade and Industry is seeking to hit in its batch of measures for the protection of investors.
A few days ago we were debating the protection of investors at the stage where their money is being invested, when they are being persuaded by people who operate professionally in this sector as to what they should put their money into and the terms on which they should do it. The Department has made some interesting recommendations on the setting up of regulatory bodies for the conduct of professional people operating in this sector. These were debated in the House, and I am sure that my right hon and hon. Friends will have taken note of what was said.
Now we are considering what happens when enterprises collapse. We have to deal with what happens when a company becomes defunct. It is important, from the beginning of the process of investing one's money in a company, that one should know what will happen if the enterprise founders. One wants to be confident that the people who operate at that stage are also competent and operating within a proper framework of the law. However, there is a tremendous area between launching an investment and extricating one's money from an investment that has failed, if one can. The Department is not giving us a clear enough lead on that.
I am much more worried about companies that are not fraudulent or grossly negligent, but which are not achieving the best that they can with the human and material assets at their disposal. We cannot be satisfied with the recent performance of the free enterprise sector of the British economy. Although there are many reasons 203 why British management has not shone in all the different circumstances of the past 20 years as we may have hoped it would, we should ask ourselves whether the condition of our company law makes a limited liability company as efficient as it can undoubtedly be.
§ Mr. Deputy Speaker
Order. I am listening carefully to the hon. Gentleman. He must relate what he is saying to the Bill.
§ Sir Brandon Rhys Williams
I fully accept the guidance of the Chair. I wish to follow up a remark that my hon. Friend the Minister made in his opening speech, which was that we should take remedial action at the early stages, when financial difficulties loom.
The Bill is not doing enough in that respect. The approach in the Bill is open to criticism, and has been open to criticism in the other place. Although tonight I do not wish to take up the particular issues which are embodied in the Lords' amendments, we should consider the whole question of the Department's approach towards the discipline of directors in companies which are falling below their best. In various speeches my right hon. and hon. Friends made it clear that the Government are anxious that people in charge of capital in the private sector should make the most of it. To frighten such people with penalties and exposure to various punishments is not the only, or even necessarily the reasonable approach. That is why, Mr. Deputy Speaker, I hope you will bear with me if I enlarge on some of the matters that should be in the Bill.
I have a Bill on company law on the Order Paper for Friday. I should be grateful to have the opportunity to inject into this debate some of the ideas that went into making that Bill, because they are precisely opposite to the Government's thinking. I am afraid that if we rely on the punishment of directors who are associated in one way or another with a business which has foundered, ambitious and competent people will be anxious to have nothing to do with problem companies. That point was made forcibly in the other place. The Bill relies too heavily on that aspect of the Government's proposals, and not sufficiently on the modernisation of the mechanism of the limited liability company, which should be constantly considered.
I do not think that I have been challenged when I have said in the past that there has not been any truly radical thinking on British company law since Gladstone. The great leap forward which was made in the 19th century carried us well into the 20th century, and indeed right up to The Companies Act 1948. There was no fresh thinking about the way in which we organise shareholders, managers, directors and the others involved in the production of wealth in limited liability companies so that they operate as efficiently and reasonably as possible. The result was that when the 1948 Act was passed, it was already obsolete. We are only now in the process of consolidating an enormous mass of company law. It now amounts to two volumes. Not many people will ever read the consolidated Companies Act from end to end. Even students would find it impossible.
Parliament is in the process of consolidating law which is obsolete and ineffective. At the same time the Department is introducing a measure which aims in the wrong direction. I am not saying that there are no rogue or grossly irresponsible directors who use other people's 204 money for adventures which are plainly ill-advised or reprehensible. If the Department needs more power to deal with those people or to frighten them off, I should not like to say that that is wrong. However, I have some years of experience in industry and consultancy, and am aware of what happens in companies when their affairs begin to lose their glitter, the atmosphere begins to decline and the tone softens. It is not advisable to frighten directors at that time so that they seek excuses to resign or clear out of the business as quickly as possible. At that moment one wants to attract fresh brains and competent people to the company. However, if such people are afraid of being associated with a firm which is in trouble, the firm will be unable to recruit or retain them. Therefore, I hope that my right hon. and hon. Friends will bear in mind that there is another approach and that it is worth their pursuing it.
It is argued that one cannot legislate to make people efficient, and that that is a matter for them. That is not a true analysis of the position. Table A, which most companies use when they set up their memoranda and articles, is a minutely detailed recommendation about how a company should operate, what should happen in certain circumstances, how shareholders can deal with problem circumstances, the responsibilities of the directors and so on. The Department should examine table A to see how much of it is operable today. I think that much of it belongs to an ideal world which never existed, or if it did, it was in the 19th century, when companies tended to have fewer shareholders, and management problems tended to be much simpler and more comprehensible to shareholders than they are today.
Our company law is like a clock in which the oil has dried up to such an extent that the spring cannot force the hands to go round. We need to lubricate the joints and bearings of the clock by putting some fresh oil into he mechanism so that all the elements which are there can operate and keep good time once again.
I am not saying that there are not hundreds of efficient British companies. However, far too many companies are not as efficient as they should be. They are rather unhappy ships in which the management is not on good terms with the board, or where the board is divided and nothing is decided one way or the other as the years go by. Those organisations will not make the best use of private capital, as the Department would like. I hope that we can persuade the Department to examine the mechanism laid out in table A for limited liability companies to see whether we can make the mechanism work better and faster in many ways.
The other objection that people raise is that it is wrong for Parliament to dictate to private sector management. The way to achieve efficiency is to give people incentives so that they take bigger risks because there is more in it for them if they succeed. The other argument is that one should sharpen competition so that weak and inefficient enterprises are forced to the wall. Both arguments are convincing until one knows what happens in practice in scores of companies. Then they suddenly seem to be arguments that are convincing only to people who have read about industry in books and are not acquainted, from personal experience, or personal responsibility, or from contact with people with responsibility, with the sort of problems that arise and make companies less efficient than they should be.
A firm which is declining in efficiency is a candidate for bankruptcy, sometimes within months, and sometimes within years. We cannot afford to have large lumps of 205 capital under the control of managements which are not operating effectively, and where there is no particular way in which supervisory elements can put things right. If the management of a company enjoys the privilege of limited liability, that is half of the bargain; the other half is that it must comply with certain rules in the way in which it conducts its affairs. I do not believe that my right hon. and hon. Friends would disagree with that, so I hope that it will be constructive if I go on to say a few more things.
The supervisory elements that can bear on an inefficient company can be divided into those inside the business and those outside. Those inside the business are the shareholders, the non-executive directors and the auditors. Those outside the business, which can be increasingly effective—I do not say that they. are ineffective now—are professional analysts working for stockbrokers or for institutional investors. London is especially rich and fortunate as a capital market in the quality, insight and knowledge of the professional analysts who advise the capital market, but they can often be wrong.
During the past 10 to 20 years there has been an enormous expansion in the coverage of company affairs in the press, and that in turn has been extremely helpful in advising shareholders in the private and institutional sectors of what is happening in the scores of companies that are quoted on the London stock exchange. I pay tribute to the work done by the press, and I hope that it continues to become more perceptive and investigative as time goes by.
We have to talk also about takeover bidders. I do not place too much weight on the people who look round for companies that can be broken up by force so that the assets can be redeployed and the staff possibly discharged. Those people are not doctors but butchers, and the future of capitalism should not rest on the threat of the takeover bid.
We must also consider the Department itself. I would like its permanent officials and Ministers to think a little more constructively about company law.
May I say a few words about the responsibility of shareholders in companies that are not achieving as much as they should. The institutional shareholders should bear a much heavier share of responsibility for keeping free enterprise efficient than they do, and private subscribers are diminishing in number and influence and turning into the also-rans of our capital market. My opinion is that they cannot obtain enough knowledge to act effectively and responsibly in the range of problems that gradually lead to insolvency. Therefore, it would not be reasonable, with the present state of company law, to blame the shareholders.
If shareholders get sufficiently inside a business to have a real insight and to make correct recommendations, as likely as not they will have procured inside information, and it would be wrong to trade on that. I do not disagree with the legislation which the House has passed on insider trading, but I believe it inhibits shareholders, especially institutional shareholders, from acting in a nosey and investigative way. If they do, they are probably taking advantage of their status and power in the market to put themselves in a privileged position vis-á-vis other shareholders. It is wrong that private shareholders should have to read their newspapers every day to discover what is happening to the price of their shares and then discover, too late, that the market has moved because someone better informed or more powerful than them has obtained information that the company is sliding to insolvency and 206 has got rid of his shares as quickly as possible before the worst happens, leaving the private shareholder in a position——
§ Mr. Deputy Speaker
Order. The hon. Gentleman is talking about company law. He must relate it to the Bill, or suggest what should be in the Bill, not just give us a general lecture.
§ Sir Brandon Rhys Williams
The question that I am coming to immediately is, should we legislate for more disclosure? Should there be a requirement for greater disclosure in this Bill or in another Bill that the Department might introduce? My view is that no amount of disclosure which can be made statutory would be sufficient to put the shareholders in a position invariably to draw the right conclusions about companies that are in trouble. The Companies Act 1967 greatly increased the disclosure requirements to the point where we are in danger of putting companies at risk that their competitors will find out more than they should know about their financial position and policies. Therefore, I do not recommend that we place more weight on earlier disclosure to the general public of the position of companies. However, I recommend that we put the shareholders in a stronger position to appoint effective supervisors to work for them inside the business. Those agents for shareholders exist in company law, but in many companies they are too ineffectual. They are the non-executive directors and the auditors.
I do not wish to speak for too long on this subject, hut it has concerned me for many years, even before I had the privilege to be elected to the House, and I wish to take the opportunity, as it is germane to what the Department is doing with this Bill, to make some constructive recommendations.
The status of the non-executive director in British companies has changed greatly during the past 50 years. Before the war the majority of British public companies were run by boards consisting of outside directors, who were in a powerful position to investigate what was being done by the permanent officials at the head of the departments. But during the war and subsequently we have had what has been called the managerial revolution, arid now the majority of public companies are managed by people who have worked their way through the business, have become heads of department, and in that capacity have taken their place on the board. Non-executive directors are now a minority.
I can make specific recommendations, and I wish to, as to the way in which we can make non-executive directors more effective in the management of——
§ Mr. Deputy Speaker
Order. Any recommendations that the hon. Gentleman wishes to make must relate to insolvency law. That is what the Bill is about. It does not deal with general company law.
§ Sir Brandon Rhys Williams
I feel that you are hampering me, Mr. Deputy Speaker, in making recommendations that I wish to table in the form of amendments to the Bill in Committee. The essence of insolvency is that a company has failed to manage its affairs in the way that it should——
§ Mr. Deputy Speaker
I am very willing to listen, as the House will be, to recommendations that will amend the insolvency law, but the hon. Gentleman is getting extremely wide of insolvency law.
§ Sir Brandon Rhys Williams
The Bill contains the idea of a rescue operation, and I believe that it should contain other provisions that would replace the final windup of a business. We must look to the Chair to protect minorities, and I realise that I am in a minority in wanting company law to be changed. But I am not the only person in the House who believes that something along the lines of the Bill that I have been trying to promote since 1969 would be right. It is discouraging not to be allowed to say what I think on this subject, when we are discussing the Department's policy on companies that get into difficulty.
I would like non-executive directors to be given more status, more data and better advice, and I have specific recommendations to make on each of those subjects, which I trust I shall be allowed to make. With regard to the status of non-executive directors, I recommend that every public company should be obliged to state in its balance sheet which of its directors are executive and which of them are non-executive, so that the shareholders can differentiate. As for the election or the re-election of directors, shareholders should be allowed to know in which capacity directors wish to serve and whether they are qualified in that direction.
I said that non-executive directors should have more data. Boards are not always given the information about the company that they should have if they are to take a forward look at the way in which the company is heading.
In Bills which I have sought to promote as a Back-Bencher, I have repeated on several occasions a clause recommending that companies should be required to produce more data and estimates of a forward-looking character drawn from the knowledge that they have within the business of its ability to maintain its profitability as time goes by.
I know from practical experience that many companies do that as a matter of normal routine, so much so that the people who work in those companies cannot imagine that there might be companies which neglect those elementary procedures for long-term forecasts of market and profitability, of technical practices affecting the business, of the effects of Government policies, exchange rates and such matters.
But there are, I am sorry to say, a large number of companies which neglect these elementary routines which are standard practice in many companies. We must find a way of putting into law a remedy for this failure to operate a business on effective modern lines. It is possible to do that, but it is necessary to call the auditors into service if we are to require the laggards and inefficient managements to make better use of the data that they have.
I have repeatedly suggested that the auditors should be required to make a statement to the shareholders, at the time of the issue of the balance sheet, about whether they are satisfied that the board is organising the estimates and data which it uses in the management of the business on lines which are appropriate to that business. That could be put in either as a positive recommendation—that the auditors must make such a report; or it could be put in a negative form, which might be equally effective—that they must notify the shareholders if, in their opinion, the board is not obtaining the data which it needs to judge its profitability as a company as time goes by.
I have mentioned the role of the auditors. I suggest that the Department should be placing more weight and reliance on the role of the auditors in the early stages when companies are running downhill. All too often the auditors 208 in the context of British company law consider that they have only a limited function. They are afraid to step outside that limited function because they fear that they will be made liable by the shareholders, or by other interested parties, in the event of the failure of the business because they have not conducted their audit in such a way as to prevent the damage which is done when the business ultimately collapses.
I recognise that the auditors wish to shelter within a limited function which is strictly statutory. In that event, we had better change the statute under which the auditors operate, or else find a way of giving them more protection from liability in the event of errors coming to light. I would recommend the latter alternative.
All too often the auditors are satisfied if they have done an arithmetical job on behalf of the shareholders and have stated that the books are correctly calculated and present a true and fair view. They may know that the business is incompetently run or that its financial future is clouded, but it is not their business to say so, provided that they have said that the accounts are setting out a true and fair view.
Another aspect which is wrong in the requirements that we place on the auditors is the fact that their role is retrospective. They look back at what happened in earlier years, or in the previous year on which they are reporting, and they are not required to make any forecast about where the business is going in the future, with one important variation. That is when the auditors are called in to place their approval on a prospectus, when the company is raising new money. They then have to take a forward look and are expected to tell shareholders what they think about the future. I do not know of any other significant area where the auditors are required to look ahead.
§ Mr. Thurnham
Is my hon. Friend aware of those occasions when auditors must make a judgment about whether the business is a going concern? That must involve them looking ahead, so as to place a value on the stocks and so on.
§ Sir Brandon Rhys Williams
My hon. Friend may have put me in the wrong by pointing to another example of ways in which company practice is beginning to shift, with more weight being put on the auditors to take a forward view. He may be right. Nevertheless, there is a tremendous mileage left in what we could require of the auditors in looking forward.
It is not only I who am saying that, because it is beginning to happen. The profession has been much more absorbed in the last 20 years with the concept of management accounting. All our prominent firms of auditors offer, as a service to management, the concept of a well-managed business which is using financial techniques and projections based on the most efficient use of data, equipment, business theories and knowledge.
They offer that service sometimes as an alternative to the audit function, because there is a difference between the responsibility of a big firm of accountants in serving the board through the services which it offers in the way of management accounting and the services which it offers to shareholders in a supervisory capacity under the terms of normal company law.
I should like to see specific changes made in company law, and I have a recommendation about ways in which 209 we could bring the auditors into a more forward-looking and responsible role vis-a-vis the board and, in particular, the non-executive directors.
I recommend that in British law we follow what has been established practice in American company law for a number of years, particularly on the New York stock exchange, of appointing an audit committee of the board consisting of non-executive directors and representatives of the auditors, who meet under a proper formula as a regular matter. to advise the board formally on questions affecting the financial soundness and financial conduct of the business.
We have much to learn from American practice in this respect, and I am sorry that there has been so much talk in Britain about appointing audit committees—about the advantages of doing it and the ways in which it should be done—yet so few companies are doing it.
In New York, it is a requirement of the stock exchange that if companies wish to be quoted, they must have appointed an audit committee under a properly constituted formula. The New York stock exchange does not take in anything except the largest companies in the United States, but it would be highly desirable if the London stock exchange followed that practice and made it part of its listing agreement that all companies quoted—or certainly the largest—should have an audit committee. I should like the Department to make that a statutory requirement.
If it is afraid of forcing the pace, there are ways in which it could be done which would result in the audit committee being introduced at a more modest pace. I have suggested that it should be a statutory requirement at the annual general meeting of every public company employing more than, say, 20,000 people or using more than £50 million worth of capital or possibly with £100 million of turnover—I do not mind what criteria are used—to consider the appointment of an audit committee; and the Department should publish an addendum to table A. which would constitute the official recommendation as to the way in which an audit committee should be constituted.
I am sorry, Mr. Deputy Speaker, if I have caused you impatience. I have spoken about a subject which is important for the future of capitalism in this country. I am sorry if, as a Back-Bencher and a member of a minority group which is interested in company law, I have incurred your displeasure.
We must bring the poor performers up to the standard of the best. Many British companies are shining examples of what a company should be, yet many are not as good as that, and, among the weakest, we find companies lapsing every year into insolvency. The auditors ought to make recommendations to the directors and shareholders about the way in which the business should be conducted. They should be required to intervene at a much earlier stage. They are, as it were, the priesthood of the financial management of companies and it does not seem to me that they are fulfilling the role that is required of them.
The Department is rightly concerned with misconduct over attracting funds into business and also with fraud, malpractice and all of the winding-up procedures that are dealt with in detail in the Bill which are founded upon the excellent Cork report. However, there is an urgent need to give new leads to top management and to make the supervisory elements in limited liability companies more competent, powerful and effective.
§ Mr. Deputy Speaker
For the benefit of the hon. Gentleman and the House, I ought to say that my patience or impatience has nothing at all to do with any individual hon. Member, or with whether he considers that he is in a minority. It relates merely to the relevance of what is said.
§ Sir Ian Percival (Southport)
I hope that my hon. Friend the Member for Kensington (Sir B. Rhys Williams) will forgive me if I do not follow him down all the paths that he has trodden. He has spoken with great knowledge and sincerity about some very interesting points, but l wish to deal with just one part of the Bill—questions arising under clause 7. I congratulate my right hon. and hon. Friends upon their decision not to restore automatic disqualification and I hope to persuade them to adhere to that point of view and not to yield to the persuasion that I understand is being brought to bear upon them from various quarters.
The primary reasons for not having automatic disqualification were given about as clearly and succinctly as they possibly could be by Lord Benson in another place. He said that if the purpose of automatic disqualification was to drive directors into voluntary liquidation instead of compulsory liquidation, it would be taking a sledgehammer to crack a nut, and that it was also offensive because, to achieve its purpose, it would put the director under the threat of losing his livelihood.
The noble Lord also said that if that was not the purpose of the provision it was offensive because it imposed compulsory and immediate disqualification, with a] the consequential obloquy that then falls upon a director, arid that a director then had within 24 days to prove his innocence at his own expense. He went on to say that he knew it would be urged that that was not proof of guilt but that ordinary individuals such as himself and directors would regard it as conviction without trial.
I quarrel with only one part of the speech of the noble Lord—when he described himself as "an ordinary man". This is no ordinary man, by any standards. This is a man of extraordinary experience and knowledge in these matters and one whose judgment is entitled to the greatest respect. I congratulate the Government upon the respect which they have paid to those views and that judgment.
I was also struck by the fact that both Lord Benson and Lord McIntosh of Haringey agreed on another proposition—that if automatic disqualification remained in the Bill, it would deter people from becoming directors who might have a very useful purpose to serve in rescuing companies which were in difficulties.
It seems that the Government have accepted some or all of those arguments and I congratulate them upon doing so. It is not easy to change one's mind upon something so basic as this. It is much to the credit of the Government that, having listened to the arguments, they have found it possible to accept them. They can the more easily do so here because there is no quarrel about the objectives. As Lord Benson stressed, the provisions of the Bill ought to catch directors who were guilty of fraud, or of recklessness or of irresponsible conduct. All of us want that to happen. The only question is how to achieve it and what is the right approach. The objective is the same as that expressed by my hon. Friend the Member for Kensington.
I wish to refer specifically to one provision which makes a powerful contribution to this end and which, 211 because of its presence, assists the Government in their decision not to restore automatic disqualification. I congratulate my right hon. and hon. Friends upon adopting a suggestion that was put forward by the noble Lord to which he said he attached enormous importance. I refer to the proposal in the noble Lord's new clause 7(6)(c), which is now enshrined in clause 7(2). It is of enormous importance in relation to a point made by the Minister when he presented the Bill to the House.
I apologise to the Minister, to his colleagues and to the House for having missed so much of the debate, but I understand that one of the points made by the Under-Secretary of State was that there is no incentive in law for directors to take early action. I think he was right. The provisions in clause 7(2), which are closely modelled on the provisions to which the noble Lord said he attached such great importance, provide a most simple and effective way of remedying that defect.
The inclusion of that provision means that the director knows that there are three possibilities. If accounts are delivered at appropriate times which reveal the state of a company's trading operations and its financial position, and if the trading operations and financial position, as revealed, are sound and healthy, he is all right.
§ Mr. Thurnham
I am grateful to my right hon. and learned Friend. When I was learning about business on my own account, I found that the problem was to obtain accounts which revealed the true state of affairs. I was presented monthly with accounts which looked wonderful, but I found out some time later that they bore no relationship to what was happening in the business. It took some time for that to become apparent. How is a director to be satisfied that the accounts which he has been given monthly are right? I take it that they will not be audited each month.
§ Sir Ian Percival
I am not an accountant, but I have sufficient experience of accounts through my practice as a lawyer to know how unrevealing they can be. However. I also have sufficient experience to know that it is not too difficult to discover how unrevealing they are by asking an appropriate question or two. This will rightly put directors on inquiry to make sure, so far as they can, that the true position is revealed and to ask a few questions about it. They cannot take accounts simply on their face value.
The second possibility is that if on any reasonable examination the position, as shown, is unsound or unhealthy, the director will know he is at risk unless he takes early action. It is right and proper that he should know that he is at risk and that he should be at risk unless he takes early action. The third possibility is that if accounts are not given at appropriate times, or if he has reason to doubt whether those accounts reveal the trading position or the financial position, and fails to do something about getting better accounts, he will be at risk.
That seems to me to be a very simple and effective method, even if it is not absolutely cast iron. There is, of 212 course, force in what my hon. Friend the Member for Bolton, North-East (Mr. Thurnham) said—that if somebody sets out to deceive directors who do not know anything about accounting, it can be done. But in those circumstances the court would know how to deal with that and who to deal with.
Leaving out such cases, I think that the noble Lord was absolutely right in attaching enormous importance to this simple provision, and that the Government are absolutely right to pick it up and adopt it because it will provide a simple and largely effective means of putting a director at risk of disqualification in the circumstances in which he should be put at risk of disqualification, and in which we would all be quite content to see him disqualified.
Therefore, I congratulate the Government on both those points and hope that they will stick to them.
§ The Parliamentary Under-Secretary of State for Trade and Industry (Mr. David Trippier)
I think that it is fair to say that we have had a constructive and wide-ranging debate. In debates on what are largely technical measures, the House sheds more light than heat on such matters. I compliment my hon. Friend the Parliamentary Under-Secretary of State for Trade and Industry who is responsible for consumer affairs and the hon. Member for Dagenham (Mr. Gould) on setting for the debate a tone that has continued throughout.
Two points in particular have emerged. The first is the general recognition of the urgent need for major reform in this area of the law. The second is the wide welcome—in certain instances with specific reservations—which has been given to the content of the Bill, founded as it is on a broad spread of opinion. It is clear that while there may well be disagreements on particular issues, this is not a measure that incites disagreement on party political lines. The spirit of constructive scrutiny that has marked contributions to the debate will, I am sure, help greatly in securing the passage of this complex and technical measure.
The Bill is, indeed, a substantial measure, as has been mentioned by my hon. Friends the Members for Bolton, North-East (Mr. Thurnham) and for Tynemouth (Mr. Trotter). We are considering the highway code suggested by my hon. Friend the Member for Bolton, North-East. The Department of Trade and Industry intends to issue an explanatory leaflet after the legislation has completed its passage.
I should say to my hon. Friend the Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) that, whereas the Bill will cost 10.20 and runs to 207 pages, it is important to stress that it is based on the Cork report, with which my hon. Friend is familiar, which runs to 461 pages and costs £13.35. So things are getting better. They are improving all the time.
As I said, the Bill is a substantial measure. As the hon. Member for Dagenham and others said, it owes a great deal to the work of the review committee on insolvency law and practice, which dedicated more than five years, under the guidance of Sir Kenneth Cork, to producing its report. I should like to echo the many hon. Members who paid tribute to the review committee for its valuable contribution.
Whereas the Government have been unable to accept all the review committee's recommendations, the majority are reflected in the Bill, which will serve to bring the 213 insolvency legislation into the 20th century and remove the still-pervasive influence of its 19th century origins, a point mentioned by my hon. Friend the Member for Lancaster (Mrs. Kellett-Bowman) and touched on by my hon. Friend the Member for Kensington (Sir B. Rhys Williams), who referred to Gladstone. We went further when my hon. Friend the Member for Tynemouth referred to Henry VIII and the Bill's 16th century origins.
The hon. Member for Stockton, South (Mr. Wrigglesworth) and my hon. Friends the Members for Tynemouth and for Strathkelvin and Bearsden (Mr. Hirst) asked when we would issue a copy of the rules. At this stage we cannot give a definite date of publication, but the target is early 1986.
There seems to be little objection, as far as I can detect, to part I of the Bill, which provides that a person will not be qualified to act as an insolvency practitioner unless he has a certificate authorising him to act and has provided security to protect creditors. That will remove the abuse referred to by the hon. Member for Stockton, South, who also mentioned the Chancery Lane Registrars type of liquidators.
The Secretary of State and the accountancy and legal bodies that are permitted to grant certificates to their members will authorise only individuals who are experienced and fit to practise in insolvency work. We believe that in that way the standards of insolvency administration will be raised. The measures in part I establish a foundation on which the remaining provisions of the Bill can be safely built. That is a most important reform, and I believe that the House will join me in welcoming its introduction.
The hon. Member for Dagenham referred to insolvency courts, which were mentioned specifically in the Cork report. It is true that the recommendation was rejected. The Government considered that the review committee did not establish a strong case for a specialised insolvency court. The introduction of a specialised court would raise problems disproportionate to the need for a separate legal process for insolvency proceedings by reducing flexibility in the court system and potentially increasing costs to creditors and debtors initiating court proceedings because of the need for more court personnel, and because insolvency work would be concentrated at a smaller number of courts. In reply to the question asked by my hon. Friend the Member for Tynemouth about the official receivers' staff, I can give him the comfort that the staff are specialists and spend the whole of their service in the insolvency service.
The Bill's second major concern is to ensure proper conduct by those involved in the management of companies, which is reflected in the provisions dealing with the disqualification and personal liability of directors and others. At this stage in the proceedings, the atmosphere becomes a little strained, as it became in the difference of opinion that was expressed particularly by my hon. Friends. The hon. Member for Stockton, South put it very well when he referred to the fine line between some guilty and some innocent directors. The difference of opinion on that matter was amply demonstrated by my hon. Friends the Members for Beaconsfield (Mr. Smith) and for Bolton, North-East. There is a great difference in opinion and the Government have to try to achieve a balance.
Several comments have been made on those provisions, some of which we shall examine in greater detail in 214 Committee. However, there are several points that I should like to make at this stage. First, in no way whatsoever is it correct to pretend that we have bowed to the directors' lobby in bringing forward revised proposals on disqualification. The Government have accepted as justified the concern expressed that our original proposals might have resulted, in a minority of cases, in the disqualification of those whose conduct was not blameworthy. We have therefore brought forward an alternative provision which maintains our determination that those who demonstrate their unfitness should be disqualified from office. I should like to describe in more detail why, in response to the amendments made in another place, we decided to bring forward fresh proposals of our own.
In carrying out a reappraisal of their policy on the disqualification of directors, as they undertook to do when these clauses were considered in another place on 29 January, the Government took into account not only the views expressed there but the views of those who have commented on the Bill since it was published in December last year. We also re-examined the observations of those who had responded to the invitation to comment on the White Paper published in February last year.
First, it was decided not to pursue the proposal that directors who allow their companies to go into compulsory liquidation should be automatically disqualified. It became apparent that the making of a disqualification order against a person is widely considered to be a criminal conviction, which in law it is not. The only criminal offence is, in fact, to take part in the management of a company when a disqualification order is in force against a director.
Feeling, however, was strongly against any mechanism under which a director had to justify his not being disqualified simply because of involvement in an insolvent liquidation. My right hon. and learned Friend the Member for Southport (Sir I. Percival) stressed that. It is, nevertheless, important for the efficient and healthy functioning of the economy that those whose past conduct is judged to make them unfit to be concerned in, kite management of a company are prevented as speedily as possible from doing so to avoid unnecessary loss being suffered by the creditors of the companies the disqualified individuals might otherwise mismanage.
Bearing in mind the importance of identifying and pursuing the unfit director, the Government took the view that an application should be made in every case where the fitness of a director was in question, and that all relevant factors should be capable of being taken into account in arriving at the decision to make an application. Having put aside automatic disqualification, the Government adopted the principle of considering each case on its merits. This is not a new concept.
§ Mr. Beaumont-Dark
Is it not wrong for a Conservative Government to adopt the view that if one fails something must be wrong? The idea that everything has to be investigated is draconian. Surely it is right to accept that honest failure is more likely and that everyone who fails is not a potential crook.
§ Mr. Trippier
Honest failure is a different matter. We are talking about dishonest failure. My hon. Friend should not become too excited. Apart from being hon. Friends in the House, we are good friends outside. I am appraised of the problem. The Government have a responsibility to 215 balance the fear of discriminating against people who are probably non-executive directors or the entrepreneurs of the future against the problems posed by those people who jump from one company to another leaving failures and bad debts in their wake. That is the problem that Ministers must face. The problem is not as black and white as my hon. Friend suggests.
Since section 9 of the Insolvency Act 1976—now section 300 of the Companies Act 1985—came into force it has been possible to disqualify a person on the ground of unfit conduct, but at present a person needs to have been involved in two insolvent liquidations within a period of five years before an application can be made.
Our proposals have also taken up the helpful suggestions that the liquidator or the official receiver should have a duty to report on a director's conduct to the Secretary of State.
The new clause is designed to give the Secretary of State the appropriate discretion to choose where resources should be deployed to maximum effect. It is for this reason that applications under this clause will be made only when the Secretary of State considers that it is expedient in the public interest to do so. Under clause 7 he will either make the application himself or, if the person against whom the order is being sought is a director of a company which has gone into compulsory liquidation, he may direct the official receiver to make the application on his behalf.
Hon. Members will note that only the Secretary of State can bring or direct applications under the clause as amended. We have done that to avoid the possibility of the threat of an application for the disqualification of a director being used by creditors or liquidators to try to improve their bargaining position when seeking to recover moneys from him.
The prohibition on people acting as directors is, we consider, a matter of public interest. Thus we do not wish to confer the public function of seeking disqualification orders on those who have no public finance with which to exercise it, and we do not wish to provide the means to use this essentially public function in support of private interests.
If clause 7 were to provide that the court should be required to give leave before creditor or liquidator applications could be proceeded with, it would in our view place an unnecessary burden on the courts and add to an already overcrowded court list. Clause 7, therefore, is aimed at the disqualification of persons who in the general public interest should be disqualified, and the task of implementing it is made a responsibility of the Secretary of State.
We recognise, of course, that liquidators do become aware of conduct by a director which they consider makes him unfit to take part in the management of a limited company. Since section 9 of the Insolvency Act 1976 came into force, it has been possible for voluntary liquidators to report suspected unfit conduct to the Secretary of State to enable him to decide whether to make an application for a disqualification order. That point was touched on by several hon. Members. Unfortunately, as has been mentioned by the hon. Member for Dagenham, very few liquidators have chosen to make their views known to the Secretary of State. Whether this was because of doubts about what was required or a reluctance to become involved in law and order issues, I do not know. Perhaps 216 it is that the present legislation states that there is no obligation on the liquidator to report the fact that directors have failed to have accounts prepared, or perhaps it is a problem with clause 9, as mentioned by my hon. Friend the Member for Beaconsfield. There could be a problem with clause 9 in that it states that a person must have been involved in two liquidations in the past. I think that is another reason that many people have not reported their views to the Secretary of State.
§ Mr. Hirst
Does my hon. Friend agree that one of the reasons for the small number of references in recent years probably has something to do with the cowboy liquidators who have conducted liquidations where the directors have behaved in a delinquent way? Does he agree that one of the Bill's principal merits is that it will introduce qualifications for people who can act as liquidators and therefore enhance the professional standing of liquidators?
§ Mr. Trippier
My hon. Friend has a good point. I think it is important to remind him and the House that the licence referred to in the Bill can be withdrawn at any time. That is another important ingredient of the recipe of success in the Bill.
Whatever the reason, we propose to remedy the situation. Under our present proposals, a voluntary liquidator or the official receiver will have a duty to report to the Secretary of State when he is satisfied that a person's conduct as a director of the company makes him unfit to be concerned in the management of a company. To assist liquidators and official receivers to make their report, the Government are considering the establishment of guidelines as to what should constitute unfit conduct. We intend to incorporate these in an amendment which the House will be invited to consider. I hope that this will satisfy my hon. Friends the Members for Beaconsfield, for Tynemouth and for Lancaster, and the hon. Members for Stockton, South and for Dagenham.
We are confident that our proposals will create a strong armoury of provisions to prevent undesirable individuals from taking part in the management of companies and will bring benefits not only for creditors but for the trading community in general.
§ Mr. Trotter
Will my hon. Friend cast his mind to my earlier comments about the frequency of failure, possibly in different parts of the country? It could be that a particular liquidator would not regard any one case as bad enough to be reported but, if no register is kept centrally, the fact that this has happened in other places at other times would not be known.
§ Mr. Trippier
I remember my hon. Friend referring to the register in his speech. We shall obviously consider that. As far as I am aware, we have received no representations on that in the consultation period. We shall certainly take that into account.
The Government accepted the Cork committee's proposals for the introduction of a new concept for wrongful trading. I hope that this may be of some comfort to the hon. Member for Barnsley, West and Penistone (Mr. McKay). Accordingly, clause 9 allows the court to declare a director of a company which has gone into insolvent liquidation personally liable to contribute to the assets of the company if it is satisfied that the company has traded wrongfully. That is if before the liquidation he knew or should have concluded that there was no reasonable 217 prospect that the company would avoid going into insolvent liquidation and did not take steps that he should have taken to minimise the potential loss to the creditors. The application for such a declaration will be capable of being made only by the liquidator whom we consider to be the person best placed by reason of his investigation to decide whether there is a prima facie case to answer.
The Bill proposes a modification of the review committee's recommendation because the Government could not accept the concept of the court being able to grant anticipatory relief. To do so the court would have to make a commercial judgment based only on facts and undertakings given by an interested party, and there would be wide scope for a dishonest director to mislead the court. Even if directors present the facts honestly, there would always be circumstances where, with the benefit of hindsight, the court would have made a different decision.
The Government accept the committee's recommendation to prevent persons acting while disqualified. Clause 11, therefore, provides that those acting while disqualified, or anyone knowingly acting on their behalf, will be personally liable for the debts of the company while so acting. This liability is to be a joint and several liability with the company and with any other person so liable, which is considered more appropriate than the unlimited liability recommended by the review committee.
The White Paper issued in February 1984 explained that the Government were not able to adopt the review committee's proposals for second company liability. Their adoption would certainly curb the activities of the delinquent director, but the lack of certainty of how courts would determine a person's responsibility for the failure of a previous company would also—I draw this to the attention of my hon. Friend the Member for Selly Oak—deter the genuine entrepreneur from risking his capital in a future venture.
A further problem with the review committee's recommendation was that, provided the second company trades for three years before it goes into liquidation, no liability attaches to a director. But if it goes into liquidation within that three-year period any person who is or has been a director of that company in the two years following the failure of the first company would certainly be at risk. To try to avoid becoming personally liable, a person who resigned from a company would have in some way to ensure that debts for which he might become personally liable were paid in priority to the other debts of the company.
It is the Government's firm belief that the Bill's provisions on disqualification and wrongful trading will go a long way to combating the abuses of limited liability which were highlighted by the review committee without stifling entrepreneurs and without hindering the taking of risks, on both of which Britain's economy depends, especially in the small business sector. I have no doubt that in Committee we shall wish to examine closely, when considering clause 7, the guidelines for unfitness, which we shall propose to ensure are correctly drawn.
The third major area dealt with by the Bill embraces business rescue and rehabilitation. It encourages business rescue in two ways. First, it introduces a new insolvency mechanism, the company administration procedure. The principal difference between this new procedure and receivership is that company administration will provide a statutory moratorium on all actions and proceedings against the company and on secured creditors' rights to 218 enforce their security, thus creating the opportunity for companies to be rehabilitated or reorganised. I believe that this will be a valuable addition to insolvency procedures.
As my hon. Friend the Under-Secretary has said, in the light of consultation that has taken place, amendments will be introduced to secure the smooth operation of the new legislation.
My hon. Friend the Member for Bolton, North-East asked about value added tax and wanted to know whether a creditor would have to pay VAT if an administrator were appointed. The answer is an unqualified yes. The creditor will have to pay VAT, but he will be able to recover it when the administrator can issue a certificate that there are no assets available for distribution to unsecured creditors.
§ Mr. Thurnham
Is my hon. Friend aware of how unpopular it is for a small business man to have to pay VAT on a debt which he is not allowed to collect and which may be outstanding for a long period? The petitioner asks for an administrator to be appointed, time elapses and then the administrator is appointed. Time drags on. From where will the business man obtain the money to pay the VAT?
§ Mr. Trippier
I am not absolutely sure that my hon. Friend and I are on the same wavelength. We are probably not talking, in the majority of case, of a vast sum. I am sure that my hon. Friend would be the first to concede that, because of the recent Budget, the position has improved greatly. My right hon. Friend the Chancellor responded to effective lobbying by my hon. Friend the Member for Bolton, North-East because of his heavy involvement in the Back-Bench small firms committee, and by Ministers such as myself and my hon. Friend the Under-Secretary of State for Trade and Industry, the hon. Member for Edinburgh, Central (Mr. Fletcher).
The hon. Member for Dagenham asked about appointing an employee representative to the committee of creditors. The appointment of an adminstrator might make the position more difficult. I have no doubt that we shall return to that matter in Committee. I suggest that my hon. Friend the Under-Secretary and I would not consider that the administrator was likely to be successful in any event, unless he negotiated fully and properly with the employees.
The Bill aims to improve receivership as a business rescue mechanism by adding to the receiver's powers where that receiver is appointed to the whole of a company's property. Such receivers will in future be known as administrative receivers. It also improves the adminstrative receiver's accountability and clarifies the extent of his powers and duties. The work of an administrative receiver to effect rescue will be bolstered by the addition of a power to compel the sale of a charged asset where this will enable him to achieve a more advantageous realisation of the assets, including sale of the business as a going concern.
The last major area of the Bill concerns the simplification and reform of the individual and corporate insolvency procedures. The essential requirement of a modern insolvency code is to ensure that the causes of commercial failure are the subject of investigation, both to detect and penalise fraud and dishonesty and to promote a sound commercial environment in which business may prosper.
The Government accept that, to meet this objective, the existing legislation requires extensive modernisation. In 219 this respect, the Bill implements many of the recommendations of the review committee. In introducing reforms, the opportunity has been taken to harmonise procedures common to corporate and individual insolvency, wherever possible. The result is a simplified insolvency code—simplified certainly in its legal effect—which will enable the official receiver to concentrate on his investigative work and will at the same time enable liquidators and trustees to carry out their work with the minimum of fuss, expense and official interference.
The hon. Member for Norwood (Mr. Fraser) specifically referred to expense and official interference. In talking about insolvency procedures, he made a point about the allowance for the wife. I refer the hon. Gentleman to the words used by my hon. Friend the Under-Secretary in his opening speech when he referred to the matrimonial home and the consultative document that has been published on that subject. I suggest that the hon. Gentleman could make those points in response to that consultative document.
Part II, chapters V to VII of the Bill, contain the changes to be made to corporate insolvency procedures. Part III introduces a new bankruptcy code replacing the Bankruptcy Act 1914.
This comprehensive reform of the insolvency legislation has been anxiously awaited for a substantial time by those who practise in this area. The Bill now achieves this reform and establishes corporate and personal bankruptcy codes appropriate to the late 20th century. The subject is not perhaps attractive, but financial failure is a fact of life. Risk taking is a requirement of a successful economy and it is inevitable that in some cases ventures will prove unsuccessful. We therefore need procedures which deal sensibly with failure. These procedures must encourage the avoidance of bankruptcy where possible. They must ensure investigation of failure so that wrongdoing may be punished and the public protected from incompetence and impropriety. Finally, they must allow the affairs of insolvent companies and individuals to be resolved with the minimum of expense and inconvenience. The Bill makes significant improvements in this country's insolvency procedures in all three areas. I believe that it is warmly welcomed and am sure that it will receive the support of the House.
§ Question put and agreed to.
§ Bill accordingly read a Second time, and committed to a Standing Committee pursuant to Standing Order No. 42 (Committal of Bills).