PREPAYMENT CREDITORS (Hansard, 18 July 1985)

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

§ Mr. Speaker
With this it will be convenient to take amendment No. 284, in page 61, line 11, clause 81, at beginning insert `In a winding up any deposit of money or pre-payment made before the relevant date (as defined in Schedule 4) in relation to the purchase, leasing, hire or rental of goods from the company or the provision of services by the company for use or consumption other than in the course of business shall, where the goods or service have not been provided to the person who has paid the deposit or made the pre-payment, be returned to that person as his property and shall not be available for the payment of any other debts of the company.'.

§ Mr. Norris
Earlier we heard about the problem that the constituents of an hon. Member were having with their house. He spoke of the distinction between creditors and consumers, which seems to epitomise the problem that the new clause is designed to cure. That may no doubt be a lay distinction worthy of being drawn, but in practice it is not a distinction that the Bill has ever drawn.
574 Creditors are very neatly separated into two types, particularly when dealing with the new clause. There are those who have extended credit for an account which they have submitted for payment for services rendered as a commercial undertaking. Presumably there is an element of profit in the transaction for the creditor, and the creditor has had the usual trade opportunities to decide whether he wants to extend the credit to the company. Indeed, if a person does not like what he sees, he will decide not to extend credit to the company.
In that context I remember the stories of some of the small men in the engineering industry who did not lose money when Rolls-Royce went under. It was largely because, in the years prior to the eventual demise of Rolls-Royce, they had simply found that however hard they tried they did not get paid, and they applied a common sense rule of business. If a firm is not going to get paid, there is no point in its supplying goods or services.
That is a process which a commercial creditor can go through, but I am concerned in the new clause with people who are not in that category. They are people who send money in response to an advertisement which solicits money for goods which they subsequently never receive because, with their money safely lodged in the company's hands, the company goes bankrupt and they are left with absolutely nothing. I have called such people deposit creditors, and it is to them that we should address our minds for a moment, if only because their concern, in terms of the volume of complaint and criticism that we hear of, is probably greater titan any of the other concerns that we have been speaking of this evening.
I was reminded of that when, only two days ago. I read that a man behind a shower blind firm which is going into liquidation just three years after another company controlled by him failed is already back in business. The Daily Telegraph reported how a company called Rollaway Shower Blinds had an estimated deficiency to creditors of £426,949, about £63,000 of which was owed to 1,400 people who had answered advertisements in Sunday colour supplements. Some who had paid by credit card had been charged twice, which was no doubt very convenient for the company, but Mr. Alan Ward, managing director, said that the mistakes were caused by overstrained office administration.
We then discover that the crash followed a 1982 failure of a company called Matador Shower Sytems, of which the said Mr. Ward also happened to be a director. On that occasion, creditors lost £252,000 in the liquidation. The creditors meeting was told that Mr. Ward is now trading with a company called Rollway (UK) which, in the light of our previous discussion, is not to be confused with Rollaway, from The Green, Letchmore Heath, Hefts, where Rollaway conveniently and coincidentally also happened to have been based.
It is widely recognised that such practice is intolerable. Through clause 7, concerning the disqualification of directors, and clause 10, on the reduction of limited liability, my hon. Friend the Minister has made provision to deal with that practice. I hope that, as a result of the Bill, it will be reduced. It is for the 1,400 people who have paid money for which they have received absolutely nothing that I am anxious. I understand that there is a business principle which, for convenience, is referred to as the Romalpa clause. It says that a company may add a rider to its invoices which says that the company retains title and goods until they have been paid for.
575 I have heard what I am trying to do described as a reverse Romalpa clause. We are saying that until a depositor who has sent a cheque to a company gets his goods, he should be treated as though he has retained title in that deposit. He should therefore be able to apply to a liquidator or a receiver and say, "I sent my money. I never had anything in return for it. The company has become insolvent and I should like my deposit back. I retain my claim to it because I have received nothing."
I appreciate that, in those circumstances, trade creditors who would otherwise have ranked pari passu with deposit creditors will be disadvantaged. I regret that, because I am more likely to be a trade creditor than a deposit creditor, but deposit creditors are qualitatively different from those whose invoices have been issued in the nature of trade. Moreover, the vast majority of people believe that they are entitled to be treated differently.
Amendment No. 284 tries to achieve the same end by slightly different means. Without the advantage of detailed advice, I am not able to say which of the two forms of words is to be preferred, but anybody who listens to the consumer programmes that are popular on televison and radio, anybody who reads the newspapers and anybody who has any concern for natural justice, for little people who cannot be expected to have batteries of accountants with a Dun and Bradstreet address facility to establish the status of companies, must want this small protection to be afforded.
I believe that this measure, together with the provisions contained in clauses 7 and 10, will ensure that the Bill achieves its main aim—a greater degree of equity as between those who stand to lose money in a liquidation and those who should be held to blame, if any, in such liquidations.
I commend the new clause to my hon. Friend the Minister. I hope that he will take on board seriously the strength of feeling that there is about this issue.
The other day, the producer of a consumer affairs programme on Channel 4 gave me a large file of correspondence from people who had responded to his invitation and had written on the subject. The diversity of complaints about different industries is frightening. I am aware that the travel and some other industries have indemnity schemes. No doubt such a scheme could be extended. We must have similar protection for all businesses to ensure that what I have described cannot happen in the future.

§ Mr. Gould
As the hon. Member for Oxford, East (Mr. Norris) explained, new clause 26 is designed to achieve the same objective as amendment No. 284. Like him, I cannot distinguish between the efficacy of either of them. I am happy to endorse all that he said. We share an anxiety which is widely felt for—to use his felicitous description—the deposit creditor.
I am sure that the Minister will accept that there is no doubt about the range and scale of the problem. In Committee, the Minister accepted that it was a problem which should be dealt with. We are again faced with the familiar problem of how best to deal with it and whether it can be dealt with in the Bill.
The trade creditor is different. He offers credit in the normal course of business. He knows the risks. He has a clear understanding of what he is doing. He knows the 576 benefits that he seeks to achieve. He has various means available to protect himself. He can make all the usual professional checks on the creditworthiness of the person to whom he is extending credit. He can, if he wishes, avail himself of the Romalpa clause, which is used increasingly as trading conditions become more difficult.
The deposit creditor has no such protection. He would be amazed to be told that in making the deposit for some goods or service he was contributing to the working capital of the firm which was meant to be supplying him. He has no means of checking creditworthiness. He does not understand that he is extending credit. He has never heard of the Romalpa clause. He needs protection. Various suggestions have been made as to how that can be achieved. The earliest one, which commanded some support, was the notion that the deposit creditor should be made a preferred creditor, and should be granted a statutory preference. I found that principle a little difficult to accept, because one of the Bill's objectives is to reduce the scope and number of preferred creditors.
The second suggestion was that a type of tracing principle, relying on the law of trust, should be applied. There is a hint of that in new clause 26 where it mentions the beneficial interest in the deposit". The third suggestion emerged in Committee. It is becoming known as a reverse Romalpa clause. The idea is that the deposit creditor should be given—without having to do anything—the type of protection that a trade creditor might insist upon in similar circumstances by inserting a Romalpa clause in the contracts through which he supplies goods or extends credit. The new clause and my amendment seek to do that. I believe that they provide a neat and elegant solution in principle. I admit that one could question whether that is properly achieved in either the new clause or the amendment, but I hope that the Minister will accept that we must deal with this matter, and that the Bill is the right place to do it. The solution that we offer must be at least acceptable, even if it is not the best solution.
Therefore, despite any drafting deficiencies, which the Minister's expert advisers can remedy, I hope that he will accept the principle of what the hon. Member for Oxford, East (Mr. Norris) and the Opposition suggest.

§ Mr. Millan
I wish to make only two points in support of what has already been said. First, many of the people in this unfortunate position have been misled, because advertisements in reputable newspapers—