HC Deb 14 March 1994 vol 239 cc619-24 3.30 pm
The President of the Board of Trade and Secretary of State for Trade and Industry (Mr. Michael Heseltine)

With permission, Madam Speaker, I should like to make a statement on the Insolvency Act provisions relating to employees' rights as regards administrators, administrative receivers and, in Scotland, receivers. The need for this statement arises out of a recent judgment by the Court of Appeal in the administration of Paramount Airways Ltd. For the House to appreciate the importance of this, let me first set out the legal background.

Under the Insolvency Act 1986, an administrator may be appointed to manage the affairs, business and property of a company in financial difficulties with a view to the survival of the company or its business, the approval of a voluntary arrangement or the sanctioning of a compromise or arrangement with its creditors.

The administrator has to consider the basis of continuing the business and, in particular, the position of the employees. Under the Act, he has 14 days from his appointment to decide whether to adopt contracts of employment. Where the business is continued with a view to its successful disposal, it hasbeen the practice of administrators formally to notify employees that, while they would continue to be employed by the company and to be paid their wages and so on, their contracts of employment would not be adopted by the administrator.

In the event of the survival of the company or a successful sale of its business, employees would continue with the company or the purchaser and their contracts would be maintained. If, however, the administrator concluded that survival or safe was not possible, he would, as was done in the Paramount case, have no alternative but to dismiss employees. The administrator would, of course, expect to pay employees' wages or salaries for the period of their employment under the administration. But, before the Paramount judgment, it was not thought that other payments, such as pay in lieu of notice and redundancy pay, would have priority.

The result of the Paramount judgment, subject to the outcome of any appeal by the administrators to the House of Lords, is that the entitlements arising out of dismissal would rank on the cessation of the administration as a first charge against the assets in the administrator's possession. This would place them in priority to all other claims against those assets.

At first sight, this may be thought to have advantages for employees. In practice, however, administrators will feel that they have little alternative but to dismiss the company's work force within the first 14 days and either close down the business or look to new terms of contract. Employees' rights in such circumstances in relation to termination entitlements will rank only as a claim with other creditors.

Indeed, the real position may be far bleaker. Because of the weight of the claims that would arise on dismissal and which would be a first charge against the assets, companies considering administration may conclude that it does not offer a rescue route and may simply move to liquidation, termination of the business, dismissal of employees and a break-up sale of the assets which will not be in the interests of anybody.

It is also necessary to deal with the position of administrative receivers. There are 3,000 receiverships in this country every year. In almost half of them, it has proved possible to save all or part of the business. This practice will be placed in jeopardy, with all that that means for jobs, commercial activity and business confidence. We must, therefore, remove this uncertainty as a matter of urgency.

Accordingly, I intend to introduce legislation at the earliest opportunity that will enable an administrator or a receiver to adopt a contract of employment with more restricted effects than at present. The change will allow him to adopt the contract with the effect that only wages, salaries and pension contributions falling to be paid thereafter will qualify as expenses of the procedure. Other liabilities arising from the contract of employment will remain, but will be treated as an unsecured claim against the company.

As regards administrative receivers, in addition to the need to limit the extent of the expenses that have priority, it is intended to restrict the receiver's personal liability to the same expenses as for administrators. What that means in practice is that the administrator or receiver will not have to renegotiate contracts of employment within 14 days from the date of appointment.

The proposed change will have only the limited effects that I have described. It will not affect the employee's position under employment law.

In view of the immediacy of the need for this legislation, I propose that, when enacted, it will have effect in relation to any contract of employment adopted after today. I am sure that the House will recognise the need for the measures that I have proposed and that right hon. and hon. Members on both sides of the House will wish to see them brought in at the earliest opportunity.

Mr. Robin Cook (Livingston)

I welcome the fact that the President of the Board of Trade has made a statement on a ruling that has caused alarm to receivers and to some of the unions that represent the work forces most at risk. We accept that it is plainly impossible for receivers to provide a business plan to rescue an enterprise within 14 days, and that the effect of the ruling will be to oblige them to close the business rather than to try to trade out of bankruptcy.

Does the right hon. Gentleman accept that it is perhaps particularly important for the Government to remove the threat to receivers as total bankruptcies are still running at the rate of one every 90 seconds of the working day and no longer show any signs of reducing, despite all the promises of recovery?

In the circumstances, we will not resist the proposed legislation, but will the President clarify three points that arise from it? First, for the avoidance of doubt, will he confirm that any legislation that takes effect from today's date will not remove the legal rights of Paramount Airways' employees or of any other company put into receivership before today's date?

Secondly, does the right hon. Gentleman recognise that there is genuine bitterness among workers who, after many years of loyal service, are made redundant by a company in receivership and who receive only statutory redundancy, despite an entitlement to much more under their contracts? Before introducing legislation, will he therefore review the limit on statutory redundancy pay, which is still based on a maximum wage of £205 per week? Is he aware that last year was the first for a decade in which that statutory limit was not uprated and that it now sets a maximum that is well below the average wage of industry?

Finally, will the right hon. Gentleman circulate his warm words about the success of receivers, which I endorse, to his ministerial colleagues, particularly those with responsibility for the Inland Revenue and Customs and Excise, which in the past five years have achieved a staggering fourfold increase in the number of companies that they have put into bankruptcy? Almost always, those companies were wound up straight away; they rarely went into receivership.

Now that the President has rescued the function of receivers, will he remind the tax authorities that it is in everyone's interest, including their own, that businesses should be kept as trading enterprises rather than put out of business by the Government?

Mr. Heseltine

I am grateful for the way in which the hon. Member for Livingston (Mr. Cook) welcomed my proposals and for his assurance that the official Opposition will in no way obstruct the rapid progress of legislation through the House.

I can give the hon. Gentleman the answer that he sought in response to his first question: there will be no change in the legal position before today's date. From midnight tonight, my proposals will affect new arrangements, but will not upset previous ones as we are not indulging in any sort of retrospective legislation.

The hon. Gentleman raised a number of much wider issues. My right hon. Friends in the Department of Employment and in the Treasury will no doubt read with interest what he said. I think that it would be wrong for me to widen the narrow suggestion that I have put to the House.

Sir Anthony Grant (Cambridgeshire, South-West)

Is my right hon. Friend aware that he is to be congratulated on taking such speedy action but for which a large number of firms that might have survived would have undoubtedly gone to the wall and have been abandoned and many thousands of employees would have lost their jobs? Therefore, does he agree that it is essential that hon. Members on both sides of the House who believe in maintaining employment and helping firms to survive allow the Bill the speediest passage through the House?

Mr. Heseltine

I am extremely grateful to my hon. Friend and to the officials of my Department and a number of other Departments who have worked through the weekend to bring us to the point at which we could make the statement today.

Mr. Malcolm Bruce (Gordon)

Does the President of the Board of Trade accept that I, on behalf of the Liberal Democrats, very much welcome his prompt statement today? There have already been announcements in the past week and during the weekend of receiverships that would have been banded into liquidation and jobs would have been lost. I must echo the view of the hon. Member for Cambridgeshire, South-West (Sir A. Grant) that it is vital that the Bill goes through quickly and urgently and that all hon. Members support it and recognise that it is an issue of jobs. Nevertheless, will he confirm that, when he brings forward the legislative proposals, he can guarantee that where a receivership is successful in bringing a business to its ultimate sale the rights of employees will be fully safeguarded? That assurance is necessary as people would want to know that, if the receiver is successful, they have the right to share the net benefits of the receiver's success. How many receiverships in administrations lead to a successful onward sale? We still have far too high a level of bankruptcies and not enough successful rescues.

Mr. Heseltine

I am most grateful to the hon. Gentleman for his words of support. Of course, he is right: the proposal has behind it the real chance of saving many more jobs. In answer specifically to the question about the number of receiverships that are, in practice, likely to be successful, may I say that it appears to be approaching half which lead to on-going opportunities for companies concerned. The existing rights, under the Transfer of Undertakings (Protection of Employment) Regulations 1981, for example, would not be affected by what I have said today. I am dealing specifically with the narrow aspect which I outlined in the statement.

Mr. Spencer Batiste (Elmet)

The speed with which my right hon. Friend has acted is welcome and will save many jobs in the future when receiverships occur from today's date. Does he agree that one of the problems of judge-made law is that it is retrospective? Will he give some indication of what the situation will be for companies for which receivers have been in place for more than 14 days already, and for receiverships over the past few years that have been concluded on the basis of the law as it stood before the Paramount judgment was the one with which they complied?

Mr. Heseltine

My hon. Friend raises a most important point. I must consider the principle of retrospection and, as I have made clear to the hon. Member for Livingston (Mr. Cook), the changes that I am proposing will come into effect only from midnight tonight, if Parliament legislates in the way in which I hope that it will. The specific answer to my hon. Friend is that the law will remain what it is until the process of change comes into effect at 12 o' clock tonight.

Mr. Terry Davis (Birmingham, Hodge Hill)

Given the importance, not only of saving as many jobs as possible but of providing as much compensation as possible to people who lose their jobs after years of loyal service to companies that go into receivership, does not the President agree that it is a good opportunity to improve compensation rights for redundancy?

Mr. Heseltine

It would be an abuse if I were to try to use the expedited processes which I am asking the House to consider for anything other than the most narrow of purposes which justify asking Parliament to move at such speed. There are plenty of other opportunities for my hon. Friends to consider the wider issues in a timely way.

Mr. John Marshall (Hendon, South)

I congratulate my right hon. Friend on seeking to preserve the system of receivership, which has saved tens, if not hundreds, of thousands of jobs in high-profile cases such as Leyland DAF and Rolls-Royce plc, as well as in many smaller receiverships. Does he agree that 14 days would be too short for any potential purchaser to carry out a duly diligent investigation when he is thinking of buying a business from the receiver and that liquidation and jobs losses would be much speedier if he had not acted this afternoon?

Mr. Heseltine

I am most grateful for my hon. Friend's support. I join him in paying tribute to the work of extremely professional receivers in finding ways to keep businesses going and seeking negotiations which, as we have said, happily are successful in a high proportion of cases. There have been some very well-publicised events recently, perhaps most significantly that of Leyland DAF, but there are others. We are all in the debt of the very skilled men and women who carry out that work.

Mr. Dennis Skinner (Bolsover)

It is a bit rich for a Minister who has just sacked 31,000 miners to be telling us that he is concerned about employees' jobs after 15 years of Tory rule and when 4 million casualties are looking for work. Will he answer this question? If the Major Government go into receivership this summer through lack of support, will he act as administrator?

Mr. Heseltine

The hon. Gentleman, on reflection, will realise that the people who lost their jobs in the coal industry received very generous redundancy terms which were far in excess of those available to the vast majority of people. The hon. Gentleman will welcome, as I do, the fact that unemployment is now falling.

Mr. Julian Brazier (Canterbury)

In welcoming my right hon. Friend's very prompt statement, may I put it to him that it is important that, in the medium term, we have a thorough review of insolvency law because the present bias towards the banks and away from trade creditors, much of which is built on case law, provides a very strong disincentive for unscrupulous bankers to put companies into receivership and instead to place them straight into liquidation?

Mr. Heseltine

I am grateful to my hon. Friend, who I know has a particular interest in the subject. We are consulting at the moment on the wider issues that he raises. The consultation period is due to end on 31 March and we will then be able to reach what decisions are appropriate.

Mr. John Gunnell (Morley and Leeds, South)

Having asked for a statement during business questions last Thursday, I thank the President for making it today. I hope that any questions that I put to the Leader of the House in future will receive such a speedy response.

Does not the judgment of the Court of Appeal reveal that the drafting of the insolvency legislation was inadequate?

The right hon. Gentleman will be aware that several important receiverships are on-going. The present situation covers half the receivership and the Court of Appeal judgment, which one hopes will be appealed against in the House of Lords, while the other half will come into effect at midnight tonight. What will happen in the case of constructive receiverships, such as that at RFS Doncaster, which are on-going at the moment and in respect of which vital jobs are at stake?

Mr. Heseltine

The hon. Gentleman will have heard my earlier reply when I said that I am not seeking to change the law retrospectively. The law is the law and receivers will have to make up their own minds, in the light of their best judgment and best professional advice, how they continue the receiverships in which they are already engaged. As for the hon. Gentleman's second point about the inadequate original drafting, I could not for a moment consider the possibility that anything that this Government had done was in any way inadequate. Nevertheless, on mature reflection, we have decided to have another look at it.

Mr. Michael Fabricant (Mid-Staffordshire)

I congratulate my right hon. Friend on bringing legislation forward and on not being tempted to wait until the House of Lords gave its judgment. However, will he now give a very clear signal to receivers currently investigating companies that it is the will of the whole House that the legislation should go through and therefore their actions should not in any way be influenced by the Paramount case?

Mr. Heseltine

My hon. Friend raises a most important point. I am aware that there is one case—there are probably others—in which receivers are under pressure to reach judgments because of the near expiry of the 14 days. I have asked officials to consider how we can draw the attention of such receivers to the statement that I have made this afternoon.

Mr. Andrew Miller (Ellesmere Port and Neston)

In view of the stress and strain that is put on families and workers by receiverships, and of course the inadequate drafting that has been referred to, can the President of the Board of Trade assure the House that he will consult widely as a matter of urgency, and especially consult the Trades Union Congress, prior to publishing the Bill? Can he tell the House when he intends to publish the Bill?

Mr. Heseltine

The House realises that there is a dilemma about consulting widely on such a matter where urgency seems to be so important. There is bound to be an opportunity for people to make representations. We will publish the Bill and the House will then be invited to consider it speedily. We will do our best to take account of representations from any sources where people wish to make them. I do not have a specific date because that is a matter for my right hon. Friend the Leader of the House. However, I have given the clearest indication I can that the Government consider this to be a matter of great urgency.