Insolvency (Hansard, 26 April 1994)

§ Mr. Julian Brazier (Canterbury)

I beg to move, That leave be given to bring in a Bill to make the holder of a floating charge liable for the fees of any administrative receiver appointed by him, such fees tó be recoverable by the chargeholder from the assets of the debtor company, the debt ranking pari passu with unsecured creditors; to introduce a lien system into contract law so that contractors, sub-contractors and suppliers in the construction and building industry can register a lien against an employer's interest in the land or property, ensuring that, in the case of the employer failing, such contractors, sub-contractors and suppliers are repaid before any floating charge on the development project; and for connected purposes. The purpose of the Bill is to correct some of the injustices that have crept into our law on insolvency and receivership. No insolvency system will ever satisfy everyone as, by definition, there is insufficient money left in an insolvent company to pay everyone. Nevertheless, a string of cases that have been brought to my attention convince me that there is a fundamental imbalance in the law and that this leaves insolvency practitioners, particularly when they are acting as administrative receivers, with no incentive to keep their fees at a reasonable level, no incentive to secure a decent price for assets that they sell and, in the ultimate insolvency case, no incentive even to expedite their work.

Many hon. Members have expressed concern about the Maxwell case in which the work appears to drag on and on and most of the money seems to be going to the insolvency practitioners. I have reports on three cases in my constituency, ranging from a retail chain to a property developer, which between them have run for 17 years. Only one of them has been completed. Huge sums of money are still locked up in the other two.

The Government have, rightly, brought forward some proposals of their own. Their consultation document considers the question of how potentially viable companies can be kept going—a noble aim. I am concerned here with a quite different matter—the interests of the trade creditors and, indeed, individual creditors, who may be pensioners or even workers. I am concerned about the fact that, by appointing an administrative receiver, the holder of a floating charge—in plain English, the bank—can sweep everyone else aside and come to the top of the queue.

I propose two changes in the law. The first is to make the bank appointing insolvency practitioners working as administrative receivers liable for the fees. Thus, for the first time, the people to whom the practitioners report would have an incentive to persuade them to keep their fees down. In addition, as they would be able to recover their money only as a result of the company's becoming viable again or at the end of the queue along with the trade creditors, they would have an incentive to encourage the receivers to secure sensible prices for assets sold.

My second proposal concerns the building and construction industry, which, in many ways, is the worst insolvency area of all. Such cases often involve tens of millions of pounds. Very often construction projects are financed largely by trade creditors through the supply of goods on short-term credit. The banks often have a relatively small role, yet, through the legal devices that I have mentioned, they can secure priority. But the particular problem in the building and construction industry, unlike, for example, manufacturing, is that it is not possible to secure what is called a Ramalpa clause.

108 If I were a shoe manufacturer supplying a retailer, I could have a Ramalpa clause written into the contract. It would provide that the title to the goods would not pass until I had received my money. If the company were to go under, I would send a lorry round to pick up my shoes. English common law does not allow this in the case of any goods that have been united into the land—bricks that have gone into a house, cement that has gone into a structure, or tarmacadam that has gone into a road.

A company in my constituency supplied goods to a contractor working on the Thanet way in my constituency. An independent credit agency told the company that the contractor was good for at least half a million pounds' worth of credit. The contractor's bankers sent the company letters assuring it that the contracting company was fully viable and had no financial problems. In less than three months that same bank had appointed an administrative receiver. The company was given only 24 hours to pay. Of course, it could not do so within that period, although there were some who felt that it was a viable company. My constituency company, which had delivered a quarter of a million pounds' worth of goods, saw the only asset—the finished product—sold for a derisory sum. It received no payment of any sort.

I propose introducing a Canadian-style lien sytem which would allow contractors and suppliers to register where they have delivered goods and services to a construction project. It would prevent a bank that appointed an administrative receiver from taking precedence on a floating charge over the suppliers receiving payment for the goods and services that they had provided. There need not be compulsion. There is no reason why developers should not be free, with the agreement freely entered into of the suppliers, to opt out. The important feature is that the option would exist, as it does with the supply of manufactured goods in other areas of business. Such a system would prevent a bank that perhaps had provided only a relatively small proportion of the total credit from pulling the rug and appointing its own administrative receiver. That receiver would then pay off the bank, fill his pockets with an enormous fee, and sell the product for a derisory sum.

The lien system was introduced in Canada, which has the same system of common law as the United Kingdom, against cries of anguish from many vested interests in the financial system. That happened four years ago. The system has been a great success ever since. I have copies of the Canadian Act that sets out the lien system, which is the second of my two proposals, if anyone would like to read them.

Our insolvency system is inefficient and unfair to the trade creditor and the individual creditor. Above all, it is manifestly unreasonable that someone appointed by the banks should have so much power without any accountability in terms of whether a reasonable fee is charged, whether a reasonable price is obtained for the asset that is sold and whether the person appointed gets on with the job in an ultimate insolvency case. In many instances the insolvency practitioner wears the same hat as the administrative receiver at the final stage.

There is no magic solution to the problems that I have mentioned. I believe, however, that the two changes in the law that my Bill offers would do a great deal to right the significant imbalance in an important area of the law.