SET-OFF OF DEBTS DUE TO AND BY THE CROWN (Hansard, 18 July 1985)

§ Mr. Gould
I beg to move, That the clause be read a Second time.
The new clause is a slight variation on an amendment that we debated in Committee. It is designed, as that 571 earlier amendment was, to reduce the present gross advantage enjoyed by the Crown, in addition to all the other advantages that it enjoys as a creditor, in relation to the set-offs of amounts due to and by an insolvent individual or company.
The Crown enjoys two unfair advantages over other unsecured creditors. First, it may, to its advantage, set off debts due to it for taxes against debts due by it for commercial transactions. Such a set-off is not allowed where the Government might lose out. The arrangement is completely one-sided, and that is where the unfairness lies. Secondly, transactions with the Government are all-pervasive. A right of set-off which may be totally fair in the context of individual creditors becomes an unfair preference when used by each of the many arms of Government to extract their separate and different pounds of flesh. Both of these unfair preferences appear to be contrary to the policy of the Crown Proceedings Act 1947. Both are contrary to the views expressed in the review committee.
The new clause would reduce the effect of these advantages by providing that set-off would be permissible only between obligations of a like nature—between statutory obligations on the one hand and contractual obligations on the other. It is therefore a relatively modest attack on Crown privilege and advantage in this respect, as it leaves many other rights of set-off untouched. It at least makes the distinction between the Crown's role as a revenue raiser and its role as a commercial agent. In that respect, the measure is fair. I hope that it will commend itself to the House that the Crown should be forced to deal with its debtors in separate ways.

§ Mr. Hanley
The Committee discussed this matter at some length, and this new clause encapsulates most of the arguments of those of us who believe that the Crown has many unfair advantages over ordinary creditors. The Bill aims to protect the ordinary creditor from the ravages of the unscrupulous director and, as we discussed in Committee in relation to preferential creditors, certain unfair powers of the state.
It is ironic that my hon. Friend the Under-Secretary of State who declared his interest as a member of the Institute of Chartered Accountants of Scotland should find himself hoist with his own petard, as this measure was suggested by his institute. The speech of the hon. Member for Dagenham (Mr. Gould) followed the institute's advice. The hon. Gentleman has taken a close interest in its advice, and I hope that my hon. Friend the Under-Secretary of State will take an equally close interest in the well-chosen words of the institute of which he has been a successful and famous member for many years. I hope that my hon. Friend will remain a member of the institute for many years, although, by moving against the amendments of his institute, he risks almost certain censure.
The right of set-off is an equitable right in English law. Any equitable right is a right that may be exercised by the courts only if it is fair. With respect to the Crown, that right is established in statute in certain areas. It would be completely unfair if the Crown were to be allowed a right that is not allowed to others. If a holding company has two wholly-owned subsidiaries, one of which owes money to a company that subsequently becomes insolvent while the other subsidiary is owed money by the company that has 572 become insolvent, subsidiary A may not offset the debt against subsidiary B. The two subsidiaries are wholly owned by the same holding company, but in law the right of set-off is exerciseable only by one individual legal person.
In the locus of a holding company, however, the state might have two subsidiaries, one being value added tax and the other the Inland Revenue, or another branch that deals with pay-as-you-earn or national insurance contributions. If PAYE is owed money by an insolvent company but the VAT authorities owe money to the insolvent company, an automatic right of set-off is provided for in the Bill. In other words, what is available to the state is not available in exactly the same set of circumstances to companies. That is unfair and, as I said in Committee, this right of set-off should not exist in a Bill that is trying to protect ordinary creditors.

§ Mr. Millan
I support the arguments in favour of the new clause. The mischief arises from the fact that the Government are treated as a single entity. As a single entity, the Government are far more pervasive than any other single entity, even the grandest holding company. Apart from the mischief that that causes in equity, which the hon. Member for Richmond and Barnes (Mr. Hanley) has graphically explained, there is also the practical question, which many who are experienced in insolvency practice have explained to me, that it is very difficult to get money out of a Government Department that may owe money to a debtor in a liquidation or a bankruptcy. It searches around all the other Government Departments to make sure that nothing is owed on the other side to which they could apply the set-off provisions. Apart, therefore, from equity, it means that in certain circumstances there is difficulty in winding up a particular bankruptcy or liquidation.
For all those reasons, I hope that the Government will be able to accept the new clause. It is a more modest form of the new clause that was moved in Committee. It does not altogether eliminate set-off, but it confines set-off either to statutory obligations on the one hand or to contractual obligations on the other. At the moment the set-off that is available to the Government can apply to all statutory and contractual obligations. A debt in one area can be set off against an obligation in another.

§ Mr. Andrew Rowe (Mid-Kent)
The Government have recently made a welcome change to the VAT regulations. It allows small firms not to be penalised in quite the same way as they were before. This is a welcome move towards recognising the fact that the damage done to a small firm when the Government insist upon taking priority over all other creditors far outweighs the merit of the amount of money that the state receives. The Government should take every opportunity to ensure that innocent sufferers from an insolvency are not put in some cases at a fatal disadvantage when the state insists upon taking its share.

§ Mr. Fletcher
With regard to Crown preference, the Government have gone a long way to making sure that there is a better distribution of the assets in a liquidation.
The right hon. Member for Glasgow, Govan (Mr. Millan) said that the Crown is indivisible, and that is indeed the case. With all due respect to this important piece of legislation, I do not think that that is exactly the way that such a truth may be challenged.
573 The proposed new clause curtails the Crown's right to set-off in a way that the Government consider to be undesirable—indeed, to be absurdly unfair. The new clause would have the effect of placing the Crown in a significantly worse position than that of other creditors. Other creditors would be able to continue to set off contractual debts against statutory debts. To quote an example given in another place by the Lord Advocate, if a local authority as an education authority owes a bankrupt builder £5,000 for work done by him on a school, and the builder owes the local authority as a rating authority £5,000 in rates, the local authority can set off the debt owed by it against the rates owed to it. That, as the House will know, is something that can also be done by commercial businesses. I cannot see why the Crown should be placed in a worse position than other creditors in this respect. Therefore, I cannot commend the clause to the House.

§ Mr. Gould
I fear that the Minister was no more persuasive on this occasion than when he addressed himself to the same problem in Committee. In particular, it is a little difficult for him to claim credit on behalf of the Government for having reduced the ambit of Crown preference when that was forced upon him by the fact that there was a majority vote against his view. Unfortunately, as I cannot be sure that we have such a majority of votes available to us this evening, I fear that I must beg to ask leave to withdraw the motion.