DUTY OF COURT TO DISQUALIFY UNFIT DIRECTORS OF INSOLVENT COMPANIES (Hansard, 18 July 1985)

§ Mr. Fletcher
I beg to move amendment No. 11, in page 5, line 20, leave out subsection (3).

§ Mr. Speaker
With this it will be convenient to take Government amendment No. 12, amendment No. 259, in page 5, leave out from line 33 to line 12 on page 6 and insert— '(5) It shall be the duty—

(a) of the liquidator in the case of a company which is being wound up voluntarily; or

(b) of the official receiver in the case of a company which is being wound up in the court in England and Wales, to provide a written report to the Secretary of State to indicate whether or not it appears that the conduct of each person who was a director of that company at any time during the two years before liquidation has made him unlit to be concerned in management of a company.',
and Government amendments Nos. 13, 14, 183, 184, 261, 262 and 199.

§ Mr. Fletcher
These amendments fulfil undertakings that I gave in Committee. Amendment No. 12 answers the concern expressed on behalf of directors, that they should not have the threat of being made subject to a disqualification order hanging over their heads indefinitely by preventing an application for a disqualification order being made more than two years after the company has become insoolvent—as defined by subsection (7)—unless the court gives leave for an application to be made out of time.
Amendment No. 199 to schedule 5 will enable rules to be prescribed regarding the reports required to be made about directors' conduct to the Secretary of State by the official receiver, the voluntary liquidator, the administrator or the administrative receiver. The rules will prescribe when he has to report, on which directors he has to report, and the form in which the report must be made. 582 I hope that having explained the purpose of amendment No. 199 the hon. Member for Dagenham (Mr. Gould) will not need to move amendment No. 259, which duplicates in part what amendment No. 199 will achieve.
I know the particular point that the hon. Gentleman will have in mind. It is that there should be an obligation on the liquidator and others to make the report. We are doing that in the rules because of the other considerations that are attached.
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In Committee concern was expressed by practitioners and those speaking on behalf of creditors, particularly prepayment creditors, that the court should be required to have regard to the extent of a person's involvement in other insolvencies and also whether he was in any way responsible for the company's failure to meet its obligations to customers who had paid in advance for goods or services. That point was stressed by my hon. Friend the Member for Oxford, East (Mr. Norris). We have therefore added two items to the schedule of matters that the court must take into consideration when determining whether a person's conduct makes him unfit to be a director of a company.
Amendment No. 185, which introduces paragraph 5A to schedule 2, will require the court to take into consideration the extent of a person's responsibility for the cause of any company of which he was a director becoming insolvent. Paragraph 5B of schedule 2 will require the court to take into consideration the extent of the director's responsibility for any failure on the part of the company to supply any goods or services which had been paid for in advance.
Finally, amendments Nos. 184, 261 and 262 are necessary to allow the schedule of matters that the court has to take into consideration when determining the unfitness of directors to be divided into those matters which are applicable in all cases where an application is made under clause 7 or clause 8 of the Bill and, in part II, those matters which, because of their nature, are applicable only when the company has become insolvent. An opportunity has been taken at the same time to divide further paragraph (b) of part II of the schedule to highlight a director's responsibility to ensure that not only he but his fellow directors comply with the requirements of clause 77 in respect of meetings of creditors in a voluntary winding up.

§ Mr. Gould
The Minister will recall that in the Committee discussion, which was substantial, great importance was attached by many hon. Members to the obligation being placed on the liquidator or the official receiver to make a report in each case on the conduct of the directors. The Minister will recall also that he was persuaded by that argument. I listened carefully to what he said. For the sake of my peace of mind and that of my hon. Friend the Member for St. Helens, South (Mr. Bermingham), who perhaps did not hear him, I ask him to give an assurance and make it perfectly clear that by virtue of amendment No. 199 and therefore the addition of that provision to the schedule, rules will be made to provide for the obligation resting on the liquidator and the official receiver.

§ Mr. Fletcher
I cannot give that assurance, but I shall explain the matter a little more. It was my desire to make 583 the amendment on the face of the Bill rather than in the rules. As recently as yesterday afternoon, I spent a considerable amount of time on the matter.
Clause 7(5) requires the liquidator to report forthwith. When the liquidator has a positive report to make, we do not wish him to delay. We are not saying when he should do so, but we want it to be forthwith. When we consider two other aspects of timing and the fact that the liquidator has a duty to report in every case, it is better with regard to the form of the report and the timing to put that into the rules.
Let me explain briefly. There is a two-year limit on the amount of time that the liquidator has to make his report to the Secretary of State, so that the director of a company that has become insolvent will know that after two years, except by leave of the court, there is no likelihood of a disqualification order being made against him. At the same time, to minimise the number of times when the Secretary of State would be required to seek leave of the court, in the rules we are asking liquidators to give us their report in each case within 12 months. Those two timings, the laying down of the form in which we wish the reports to be made to the Secretary of State, and the provisions on the face of the Bill, with the need to report forthwith where there is a case for disqualification, require the amendment to make it clear that the provisions will be in the rules and not on the face of the Bill.

§ Mr. Norris
I am sure the Minister will be able to satisfy my concern in relation to this new apparent undertaking, just as he was able to satisfy the concern of the hon. Member for Dagenham (Mr. Gould). I took the matter of automatic reporting seriously. Without restating all the arguments made on Report, it is clear that automatic reporting does a lot more than merely fill up a lot of files at a Department of Trade and Industry. If that were its only purpose I would be the last to support it, but there is a significant purpose. Even a collection of mill reports in relation to one person might individually be of no substance, but collectively would be valuable information in relation to the other sections of the Bill. I regard automatic reporting as one of the key undertakings given by my right hon. Friend at Committee stage, and in going through these amendments I looked for it in vain. I am told by my hon. Friend that the form in which it appears in Government amendment No. 199 is as an addition to schedule 5. Schedule 5(21A) would then say, (including, in particular, requirements with respect to the making of periodic returns).". I understand that the expression "including in particular" by definition implies that other returns may be made. But this is an important return and is certainly not a periodic return, but one made specifically in the circumstances outlined in the amendment proposed not only by Opposition Members but by my hon. Friend the Member for Richmond and Barnes (Mr. Hanley) and by me. We want to make it quite clear in the Bill that a liquidator or an official receiver has to provide a written report to the Secretary of State to indicate whether or not it appears that the conduct of each person.". and so on. That is a specific and important requirement and I am less than happy that it is deemed to be implicit in a section of an amendment to schedule 5 dealing with the making of periodic returns. If my hon. Friend can assure me that the point has been accepted in its entirety, I am 584 sure that hon. Members on both sides will not wish to detain the House longer. I would be grateful if my hon. Friend would make that entirely clear, that this has nothing to do or cannot be confused with any other periodic returns that an liquidator or official receiver may be required to make.

§ Mr. Gould
As the author of the original amendment and of the subsequent laying down of this amendment, the point which worries me is that when I looked at Government amendment No. 199 I had not realised it referred back to section 7(5). What worries me is the use of the word periodic in Government amendment No. 199. Under the rules the cut back is from two years to one year. Is the Minister saying that within one year there must be a report from the liquidator? He shakes his head: therefore it must be that within two years that there must be a report from the liquidator. That does not solve the problem about which we sought and received an absolute undertaking in Committee. It now becomes a matter of honour. We had an undertaking and the system works on undertakings. The Minister spoke to me privately and I accepted what he said.

§ Mr. Fletcher
I am aware of the commitment made in Committee, and I agree entirely with what my hon. Friend said about the importance of this return. I have already confessed to the House that I am rather disappointed we are dealing with the matter in the rules, and I took some satisfying that we had to deal with it in that way and not on the face of the Bill. Government amendment No. 199 enables the Secretary of State to make detailed provisions about how insolvency practitioners should carry out their functions when reporting under clause 7(5). In particular we propose to set up a system for returns. At determined intervals practitioners will be required to submit a report on what they have done and what evidence of unfitness has been discovered about the directors of the company concerned during the period reported on. The Secretary of State will thus receive reports on all directors who have been involved in insolvency proceedings. The reports will form part of the data base which will gradually be built on all directors who have been involved in insolvency proceedings. That was one of the key matters that we considered in committee.

§ Mr. Bermingham
I am grateful for the Minister's intervention. As he said, in Committee it became a matter that was fundamental to the Committee, in the collective view of the Committee. It was the general consensus that a rogue or bad director needed to be located and identified as soon as possible so that the various other sanctions against rogue directors could be brought speedily to bear.
At the same time, it is equally right that directors who have no faults—who through adverse trading conditions, the collapse of the market or the collapse of a supplier—can find themselves directors of an insolvent company and should know as soon as possible that their explanation of why the company crashed has been accepted and that their names are clear. In humanitarian terms that is equally important—hence the insistence of hon. Members that brought the matter home in the amendment and in the undertaking.
If I understand the Minister correctly, amendment No. 199 now means that there will be periodic returns throughout the course of the liquidation, and in the questionnaires which the insolvency practitioners have to 585 complete, whether they have been liquidators or receivers, there will be this definitive question about the directors and in each of the returns submitted during the course of the liquidation within the two-year period the same question will be repeated. It must be remembered that it is sometimes not at the beginning of the liquidation that the fault on the part of a director is found. It may come towards the termination of the liquidation, and the evidence suddenly begins to emerge. If the Minister will reassure the House that these questions which will form the data base of the information available to the Department will be repeated in each return throughout the course of the liquidation, I am sure that many—

§ Mr. Norris
I share the hon. Gentleman's concern. But was it ever in his mind when he moved amendment No. 22 in Committee that we should be talking about periodic returns? Where does this business of periodic returns come in? We are saying that in the course of a liquidation a liquidator sends a report to the Department of Trade and Industry saying, "I have looked at this chap and he is OK," or "he is not." It was said in Committee—and column 68 of the Official Report confirms this—that we were thinking in the vast majority of cases of no more than a nil return. That was the expression used. There is no mention there of a necessity for periodic returns. That is the cause of the concern which the hon. Member for St. Helens, South (Mr. Bermingham) is expressing and which is shared by a number of Government supporters.

§ Mr. Bermingham
I am grateful for that intervention. The use of the word "periodic" has prompted a certain question in my mind. If these returns are coming in at various times, what happens if in the first return it is said, "Clear," in the second it is said, "Clear," and in the third it is said, "There is less than clarity in the behaviour of the directors"? Where does that put the directors?

§ Mr. Fletcher
The use of the word "periodic" has not helped the debate. We are talking about any period up to two years, but I mentioned earlier the time factors in our minds. The word "forthwith" provides immediacy in the Bill and when liquidators are filling in general returns and not making a charge of unfitness, they will be advised by the rules to let us have a report "as soon as possible".
The reason why I mentioned a period of 12 months is that if any action is to be taken on a report there will be a two-year limit on when the Secretary of State can make an application without leave of the court. Therefore, the 12-month and two-year periods should both be prescribed in the rules. However, there should be only one report on the directors in each liquidation, and not a series of reports.

§ Mr. Bermingham
I suggest that the removal of the word "periodic" might clarify the situation. The rules could show that at a specific date the liquidator has to return a form covering this matter. All of us will then know that what we sought in Committee has been achieved. The word "periodic" is confusing, and if it stays in the Bill all sorts of things will happen and we shall not get the clarity that we seek in ensuring that there will be a return about the conduct of a director in every case.

§ Mr. Gould
The debate has added to my anxieties. Amendment No. 199 specifies rules that could be made in respect of two types of return—a return under clause 586 7(5), which is clearly not the sort of return that we are talking about, because it relates to specific circumstances, and a periodic return, which is open to all the objections that hon. Members have spelt out. It is not clear to me what a periodic return is and why we should not simply talk about a return specific to each insolvency.
In any case, I am far from convinced that the Minister was right to be satisfied that there was no better way of handling the issue. I cannot see why it was not possible to provide that, having specified in clause 7(5) certain circumstances in which the liquidator must make a report forthwith, words such as "and in each other case shall make a report within two years on whether the directors involved conducted themselves properly" could not have been added. That would have included in the Bill the principle that we all regard as important and that should be given as much prominence as possible.

§ Mr. Hanley
Does the hon. Gentleman remember the contribution in Committee of my hon. Friend the Member for Tynemouth (Mr. Trotter) whose experience in insolvency matters was unrivalled? At our second sitting, my hon. Friend said that this issue was one of the rnost important practical matters to have been brought before the Committee up to that stage. My hon. Friend said that. although 95 to 98 per cent. of reports might have nothing to add, that was the basis of information that, after a repetition of "nothing to add" forms, might provide evidence of a suspicion of wrong behaviour. I am sure that if my hon. Friend the Member for Tynemouth were present today he would make as passionate a speech as he made in Committee. Unfortunately, he is absent on parliamentary business.

§ Mr. Gould
The hon. Gentleman is right. We all saw the importance of a mechanism by which a pattern of conduct could be identified and isolated.
The Minister would help the House if he expressed his understanding of our anxieties. I hope that the Minister will consider whether it is possible to put the provision in the Bill. I am confident that it is possible.

§ Mr. Fletcher
We agree that the liquidator shall report "forthwith". A report by the liquidator will be made in respect of every liquidation about the fitness of the directors. Part of our scheme is to keep on the database a record of those liquidators who make no returns. That is just a little help, but it might enable the Department over a period to say to a professional body that it is odd that Mr. X has been involved in 29 liquidations in the past 10 years but that no returns have been made. I know that the matter is not as simple as that, but since we plan a database that seems worthwhile.
I explain so that the House may understand that our intentions are more than honourable; they are practical. I spent some time considering whether it was possible to put this in the Bill, but for various reasons we decided to deal with the matter through the rules.

§ Mr. Norris
I am reassured by the spirited way in which my hon. Friend said that he intended to do what he said he would do, but I am concerned about the way in which he professes to have achieved that. I located amendment No. 259 in a long list, but I did not appreciate the true significance of amendment No. 199.

§ Mr. Deputy Speaker (Mr. Ernest Armstrong)
Order. The hon. Gentleman must not make another speech.

§ Mr. Norris
I stand corrected, but I want to ask the Minister a specific question. Clause 7(5) states that if the conditions are satisfied, the liquidator shall make a report. The point about clause 7 is that the liquidator shall have to take a qualitative decision. The Committee took exception to that and surely it must be corrected. Amendment No. 199 does not do that.

§ Mr. Fletcher
I am not sure that I understand my hon. Friend. Clause 7(5) makes it clear that the liquidator shall forthwith report when he believes that a disqualification application shall be made. That is clear. The amendment requires the liquidator to make a report in all cases.

§ Mr. Gould
If a liquidator refuses to make a report, how will the Minister persuade him that he has a statutory obligation to make a report? Perhaps that is what the word "periodic" means. If so, it is an ill-chosen word.
None of us has any objection to making additional provision in the rules about keeping a data record of liquidators' actions. That does not preclude the Minister from putting the basic principle in clause 7.

§ Mr. Millan
The use of the expression "periodic returns" is causing difficulty, especially as clause 7 refers to individual reports and not "periodic" returns. There is a limit to what we can do at this late stage of the legislation. It might help us if the Under-Secretary of State said that it would be possible to amend amendment No. 199 in the other place to take care of some of these matters. It would be helpful if he said "I shall look again at amendment No. 199. Perhaps we have not got it right. It is misleading or confusing". As I did not have the benefit of hearing the Committee's discussions, I think that that would help to clear matters up, to some extent at least.

§ Mr. Bermingham
Will my right hon. Friend give way?

§ Mr. Deputy Speaker
Order. As I understand it, the right hon. Member for Glasgow, Govan (Mr. Millan) was intervening during the speech of the Under-Secretary of State. An hon. Member cannot intervene on an intervention. I thought that the Under-Secretary of State had not finished speaking.

§ Mr. Millan
The Under-Secretary of State has been up and down several times. I had not been on my feet until 30 seconds ago. I am not intervening.

§ Mr. Deputy Speaker
Order. As I understand it, the Under-Secretary of State was making his speech and had not finished, and the right hon. Member for Govan was intervening.

§ Mr. Millan
That was not my understanding, Mr. Deputy Speaker, and I do not think that it was the understanding of the Under-Secretary of State either. If my hon. Friend the Member for St. Helens, South (Mr. Bermingham) will simply put his case to me, I shall resume my seat in a few seconds.

§ Mr. Bermingham
Does my right hon. Friend the Member for Glasgow, Govan (Mr. Millan) agree that the simplest solution would be to take out the words "periodic return" and insert the word "report"?

§ Mr. Millan
It would be. I suggested that the Under-Secretary of State might consider whether amendment No. 199 could be amended in the other place so that the wording is made clearer. If the hon. Gentleman does so, that might resolve some of our difficulties.

§ Mr. Fletcher
I do not think that there is anything wrong with amendment No. 199, but I shall certainly look at it again. If it needs to be amended, we shall do so in the other place, having described what we want to achieve.
On the more substantial point made by my hon. Friend the Member for Oxford, East (Mr. Norris) via the hon. Member for Dagenham (Mr. Gould), concern has been expressed about the power of the Secretary of State to ensure that the liquidator carries out this duty. That is provided for in clause 7(6).