MORATORIUM WHERE DIRECTORS PROPOSE VOLUNTARY ARRANGEMENT (Hansard, 16 November 2000)

§ Dr. Howells
I beg to move amendment No. 5, in page 11, line 37, at end insert— '"money market contract" and "money market charge" have the meanings given by the Financial Markets and Insolvency (Money Market) Regulations 1995 ("the 1995 regulations"),'.

Mr. Deputy Speaker
With this it will be convenient to discuss the following: Government amendments Nos. 6 to 9.
Amendment No. 1, in page 12, line 24, after "small", insert "or medium".
Amendment No. 2, in page 14, line 12, leave out "28" and insert "90".
Government amendments Nos. 10 to 12.

§ Dr. Howells
The Bill already contains provisions to prevent the moratorium prejudicing the existing modifications of insolvency law applicable to contracts undertaken in connection with certain key operations on the financial markets. The modifications to insolvency law are contained in part 7 of the Companies Act 1989 and the provisions in the Bill are to be found in paragraphs 2 and 23 of the proposed schedule A 1 to the Insolvency Act 1986.
The purpose of the modification of insolvency law is to protect the integrity of the financial markets, to provide an appropriate framework to deal with the possibility that a market participant may default on his obligations, and to avoid systemic risk. However, a little more is needed.
1157 The amendments are intended to ensure that the moratorium does not prejudice the existing modifications of insolvency law relating to "money market contracts", "money market charges" and "related contracts" as defined in the Financial Markets and Insolvency (Money Market) Regulations 1995, and "system-charges" as defined in the Financial Markets and Insolvency Regulations 1996.
The amendments are necessary to enable financial markets to continue to function in the event of the insolvency of one of the market participants. The Government do not believe that these exemptions will have a significant effect on the operation or effectiveness of the moratorium, because it is to be an option for smaller companies that would not normally participate in such markets.

§ Mr. Chope
I beg to move amendment No. 15, in page 13, leave out lines 6 and 7 and insert— '(a) such information as is necessary for a nominee to be able to judge if there is a reasonable prospect of drawing up a workable voluntary arrangement which warrants being submitted to creditors,'.

Mr. Deputy Speaker
With this it will be convenient to discuss the following amendments: No. 16, in page 13, leave out lines 16 and 17 and insert— '(a) there is a reasonable prospect of a workable voluntary arrangement being drawn up which warrants being submitted to creditors,'.
No. 34, in page 13, line 16, leave out "the proposed" and insert "a".
No. 17, in page 13, line 24, at end insert— 'but he shall take steps to assure himself independently of the validity of information submitted by directors in relation to subparagraph (2)(b).'.
No. 44, in page 13, line 35, at end insert— '(iii) a statement from the directors of the company stating that the nominee is independent of the company's officers, the company, its subsidiaries and associated companies.'.
No. 35, in page 13, line 39, leave out "the proposed" and insert "a".
No. 36, in page 20, line 6, leave out "the proposed" and insert "a".
No. 37, in page 20, line 27, leave out "the proposed" and insert "a".
No. 38, in page 33, line 39, leave out "the proposed" and insert "a".
1158 No. 39, in schedule 3, page 39, line 5, leave out "the" and insert "a".
No. 40, in page 39, line 5, leave out— 'which the debtor is proposing'.
No. 41, in page 40, line 2, leave out "the" and insert "a".
No. 42, in page 40, line 2, leave out— 'which the debtor is proposing'.

§ Mr. Chope
The amendments are motivated by the unanimous recommendations of the Select Committee on Trade and Industry. They are designed to ensure that a moratorium works better in practice than we fear that it will work under the Bill as drafted.
Paragraph 19 of the report refers in detail to the concerns that were expressed to us by, among others, the Institute of Chartered Accountants in England and Wales. We reached the conclusion that a balance is required between the recognition that a moratorium may he needed urgently to give time for a nominee to sit down with directors and others to find out whether proposals can be put to a creditors meeting with a chance of acceptance, and a limitation on the possibility of making the protection of a moratorium available simply on demand. In that case, there would be no chance of other arrangements subsequently being accepted. Unfortunately, the Bill does not deal with that concern in the way that we hoped it would. Despite having talked about consultation, the Government have dismissed rather peremptorily the concerns that have been expressed.
The Institute of Chartered Accountants in England and Wales supports a moratorium as part of the existing procedure for company voluntary arrangements, but it does not believe that the Bill will achieve the right result. It says: In order for the company to obtain the moratorium, the directors are expected to submit to the nominee the terms of the proposed voluntary arrangement and a statement of the company's affairs. The nominee is expected to provide the directors with a statement indicating whether or not, in his opinion, the proposed arrangement is reasonable and the company is likely to have sufficient funds available during the moratorium.
The institute—the experts—went on to say: The implications of these requirements are that, before the moratorium begins, the directors will have to have obtained all the information they need to formulate a proposed arrangement and to prepare the statement of affairs. Similarly, the nominee is expected to have been able to form opinions before the moratorium begins. This seems contrary to the purpose of the moratorium which is to allow time for the directors to put together a voluntary arrangement. We consider that all that should be necessary to obtain a moratorium would be a requirement for the directors to submit to the court a petition giving the reason why a moratorium is necessary, the name of the nominee and a letter of acceptance of appointment from the nominee and a funding proposal for the 28 days of the moratorium.
If the Government had listened to the evidence that the Select Committee received, and taken note of the Committee's conclusions after it had heard that evidence, the Bill would be more likely to succeed in its avowed purpose. It would be much improved if the amendment were accepted.

§ Mr. Butterfill
I support everything that my hon. Friend the Member for Christchurch (Mr. Chope) said. The evidence that we heard at the Select Committee hearings was very powerful. The Committee was 1159 unanimous in its concern that a moratorium would require funding. A moratorium is not of itself necessarily a panacea—indeed, it could make the situation of creditors worse.
The fact that there is a 28-day delay while a funding proposal is produced is frightfully important. In a large number—if not the majority—of cases the rescue attempt will probably not succeed. That is not to say that it may not be worth trying, but if the procedure is used frequently, and, in particular, without sufficient deliberation beforehand, some people may end up worse off than they would have been. That is why the Government should have taken more notice of the Select Committee's recommendations and why I support the amendment.

§ Dr. Howells
The obtaining of a moratorium will result in significant restrictions being imposed on the exercise of creditors' rights. For that reason, we consider it important that there should be reasonable grounds for confidence that a voluntary arrangement is likely to be approved and implemented at the end of a moratorium. The formulation of amendment No. 16 would only require the nominee to express a view on whether what is likely to be put to creditors would be workable. It does not ask him to say whether he thinks the directors' actual voluntary arrangement proposal, once provided, is likely to be approved and implemented.
The requirement is important because the moratorium is not intended to be a refuge for hopeless cases. A proposal could be workable but it might be evident that it would not be acceptable to creditors, perhaps because it would pay them less than they would get in a liquidation. Only companies that are eligible and whose rescue proposals have a reasonable chance of success should be able to obtain a moratorium. That is why we believe that a company should not be able to obtain a moratorium unless the nominee considers that a voluntary arrangement proposal, as provided by the directors, stands a reasonable chance of being approved and implemented.
Given the key role of the nominee in that regard, it would not be acceptable to expect him to express such a view on anything less than a properly worked out proposal. Therefore, information indicating that it might be possible to put a proposal together once a moratorium has started will not be enough. We wish the nominee to be able to see exactly what the directors propose by way of a voluntary arrangement and then use that document as a basis for expressing his opinion on whether a successful rescue is likely to result.
If a company is to have the benefits afforded by a moratorium, there should be reasonable grounds for confidence that a voluntary arrangement is likely to be approved and implemented. There was disagreement in the Committee about whether the amendment that the hon. Member for South-West Hertfordshire (Mr. Page) proposed to the paragraph would introduce a lower or higher hurdle, but I do not think that there is much doubt about whether the amendment would result in an easier text; it does not offer that assurance, and I therefore urge the hon. Member for Christchurch (Mr. Chope) to withdraw it.

§ Mr. Chope
We again have the Minister's views on record. At least he is being consistent by taking the same 1160 line that he took in response to the Select Committee report, which is more than can be said for his approach to an earlier amendment. Although the debate occasionally seemed like a dialogue of the deaf, in the atmosphere of benevolence that is developing, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.

§ Mr. Page
I beg to move amendment No. 18, in page 16, line 33, after "enforced", insert— 'against a liquidator representing interests including interests of creditors of the company at the time of the moratorium'.

§ Mr. Deputy Speaker (Sir Alan Haselhurst)
With this it will be convenient to discuss the following amendments: No. 19, in page 16, line 33, leave out "that" and insert "the".
No. 20, in page 16, line 33, after "time", insert "of its grant".
No. 31, in page 16, line 34, leave out "it" and insert— 'the consideration for which the security was granted'.
No. 32, in page 16, line 34, at end insert— 'or if, at any time, the security is approved by the committee established under paragraph 35(1) or, where there is no such committee, by the nominee.'.

§ Mr. Page
The amendments touch on matters that I raised in Committee, and to which I believe it is important that we return.
The parts of schedule 1 that provide for invalidating a security to be granted during a moratorium seem at first glance to be sensible enough. They would ensure that a company under the protection of a moratorium would not be able to grant security to one preferred creditor to the detriment of others. That is fair enough. However, there is the fundamental point that the company's other creditors need protection primarily in circumstances arising from the failure of the moratorium. If the moratorium succeeds, cheers all round. The loans will be safe and they will be repaid in due course.
In its present form, the schedule seems to protect companies under the aegis of a moratorium irrespective of the outcomes. A company that has experienced a moratorium and subsequently has grown will be under no obligation to meet its freely negotiated dues if the schedule is unaltered. I believe that the amendments address the issue. They will remove an anomalous and unnecessary advantage that may accrue to companies that successfully recover from a moratorium. There is no good reason for creating that extra protection for companies and I would be glad to hear what the Minister has to say, working on the assumption that I have interpreted this part of the Bill correctly.
Amendment No. 32 is closely related to amendment No. 18. It deals with the key issue of the likelihood of banks or other institutions lending to small companies during the moratorium. It is clear from the present drafting of the relevant paragraph in the schedule that the Department has missed the point. Under these provisions, the banks will be less likely to advance funds available during the moratorium rather than more likely. It will be on the banks and other lending institutions that the duty of determining whether there are reasonable grounds for making loans will fall.
1161 Hon. Members on both sides of the House who have experience of running small firms will know how lengthy and time-consuming such inquiries can be. Lenders will not have access to the papers and statements that are available to the nominee, and may not necessarily be able to rely on information offered by the directors. Quite often it is the breakdown in communication between the directors and the banks that is partially responsible for the situation arising in the first place. In these circumstances it is understandable that banks will be highly cautious about lending.
It is one of the potential ironies of the Bill that it may reduce the flow of money to small companies when they are most likely to need it. A little experience in business suggests that that could well happen. The amendment will go some way to remove a future difficulty. I hope that the Minister finds it in his heart to accept it.

§ Dr. Howells
The purpose of amendment No. 18 is not clear. It appears to suggest that security granted by a company during a moratorium could be enforced only against a liquidator. That seems not to make sense. Security granted by a company over its assets is enforced by the holder of the security against those assets and not by a liquidator. Furthermore, a liquidator would not have been in office at the time that the security in question was given because a moratorium was in force. So we are left asking ourselves what security could be enforced and against whom if the amendment succeeded. The proposal could also be read as suggesting that security is generally enforceable other than against a liquidator. If that was what was intended, the amendment does not seem to achieve it.
It is also not clear what interests in addition to the interests of creditors it is intended a liquidator should represent. We consider that paragraph 14 should not be amended in that way.
Amendments Nos. 19 and 20 are simply unnecessary. The use of the phrase "at that time" in paragraph 14 is a clear reference to the time at which security is given by a company during a moratorium. Both amendments would only add unnecessary words.
Amendment No. 13 adds nothing. The granting of a security and the security itself are inextricably linked. A security could be of benefit to the company only if the company got something in return for granting it—for example, the funds necessary to enable it to finance a viable business. That security will either be of benefit to the company, or it will not. If it were not, we would want the security to be enforceable. Therefore, no more is needed to achieve the intended effect and I hope that the amendment will be withdrawn.

§ Mr. Page
In view of the Minister's response, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Amendments made: No. 10, in page 19, line 33, at end insert— 'a money market contract or a related contract,'. No. 11, in page 19, line 35, after "charge", insert— ', a money market charge or a system-charge'. 1162 No. 12, in page 19, line 46, after first "charge", insert— ', a money market charge, a system-charge'. No. 13, in page 22, line 8, leave out from "period" to "and" in line 9 and insert— 'for the time being specified in paragraph 8(3))'.—[Mr. Pope.]

§ Mr. Page
I beg to move amendment No. 30, in page 28, line 33, leave out— 'to the value of £500 or more'.

§ Mr. Deputy Speaker
With this it will be convenient to discuss amendment No. 21, in page 28, line 35, leave out— 'to the value of £500 or more'.

§ Mr. Page
One of the penalties of growing older—albeit not old—is that one's memory starts to play tricks with one. I have a persistent memory of the then Labour Opposition claiming that they would be tough on crime and tough on the causes of crime—indeed, I seem to recall their making such statements in government.

§ Mr. Butterfill
rose—

§ Mr. Page
Perhaps my hon. Friend is about to tell me that my memory is not playing tricks and mention the reduction in police numbers.

§ Mr. Butterfill
I am tempted to do so, but I think that I should be likely to incur your wrath, Mr. Deputy Speaker, were I to pursue that route. However, I can confirm that my recollection of the Government's words is precisely the same as that of my hon. Friend.

§ Mr. Page
I thank my hon. Friend for assuring me that I am right, which enables me to proceed with greater confidence—I would have hated to start on dodgy or shaky ground.
In Committee, I definitely remember the Minister defending the £500 minimum in respect of the offence of removing any part of a company's property. He appealed to the provisions of insolvency law dating back as far as the Bankruptcy Act 1914.

§ Dr. Howells
I have no desire to delay the House, but I am delighted to be able to tell the hon. Gentleman that we have tracked back as far as the Bankruptcy Act 1824, which also imposed a £10 threshold.

§ Mr. Page
I am glad to learn that the Minister has been ferreting around, but I, too, have done a little ferreting and it may be that I shall be able to trump him by going back a few more years.
The Minister has now told us that the £10 threshold was in place almost 100 years before the Act to which he referred in Committee was passed. However, my historical research has revealed that, in 1811, Members of Parliament debated at some length whether stealing goods from a house to a value of more than 40 shillings should be a capital offence, whereas the threshold in respect of stealing from a shop was only 5 shillings. Evidently, they were worried about their servants stealing from them—the Minister will understand that problem. I wonder what punishment those Members of Parliament would have 1163 thought appropriate had they heard today's news that a wedding gift worth £1 million has gone walkabout from a house in London.
However, life moved on and in 1860, stealing goods worth £10 or more led to hard labour or transportation. The judiciary was obviously having difficulty in obtaining convictions leading to capital punishment for the theft of sums larger than 40 shillings, so transportation was introduced. As the crime was stealing goods worth £10 or more, that meant that we were sending only the bigger and better operators over to Australia. That must be the genetic reason why the Australians regularly thrash us at all forms of sport.
I make no apology for returning to the subject. Although the Minister's historical examples were extremely interesting, they were not matched by the soundness of his arguments. He told us that during a moratorium, directors were unlikely to spirit away the various assets. Human nature being what it is, if a director thinks that the moratorium will fail, the temptation to spirit away assets during that period of grace will in certain cases become irresistible.
As I understand it, it is the nominee's duty to monitor the company's affairs so that he or she may come to an opinion whether a proposed voluntary arrangement has a reasonable prospect of being approved and implemented. Furthermore, the nominee is required to be satisfied that the company will have sufficient funds to carry on its business during a moratorium. In reaching those conclusions, the nominee must rely on the information supplied by the directors.
I am therefore curious to learn where in the Bill the nominee is granted powers to make his or her own inquiries and to watch over the physical assets of the company worth £500 or more. The Minister surely does not believe that the directors or anyone intending to remove property from the company's premises will be daft enough to inform the nominee of the plans.
A moratorium may provide more opportunities for a director or employees to remove property than would occur when an administrative receiver or provisional liquidators were appointed. It would be so easy to get the proverbial white van up to the door, open it and steal items worth up to £499.99. It is still not clear from the Bill whether a blind eye will be turned to the removal of items with a cumulative value of £499.99, or whether that represents a single item. I naturally condemn such offences.
In certain respects the Government have been generous and given a 100 per cent. write-off. A piece of electrical equipment could appear on the books at zero, having been written off during the year. If such an item were stolen from the company, would that be stealing, or would it be taking away nothing? I do not condone such activities, but they are a fact of life.
We discussed the matter in Committee. I raise it again in the hope that since then the Minister will have read his various manifesto commitments and will present a more powerful argument, supporting our police force and the law and order of this land. I look forward to his response.
1164 There is another gap in the Bill which we did not discuss in Committee. I refer to the concealing of part of a company's property worth less than £500. We hope that the Minister will tell us what he intends to do to block that loophole. If it is not blocked, it will be exploited by unscrupulous people during a moratorium.
Under the Bill's provisions, holders of floating charges cannot appoint administrative receivers. I remind the Minister that administrative receivers have powers to prevent directors from concealing any part of a company's property. In the Bill directors are given the open door. Small items will undoubtedly go missing. We do not believe in turning a blind eye to crimes. We do not believe in supporting moves that will enable the white van to come to the door and pick up goods that will later be sold as having fallen off the back of a lorry.
The Government have an opportunity today to eschew the spin and put some substance behind their law and order policies.

§ Dr. Howells
This issue was raised in relation to previous amendments, which were debated extensively in Committee and another place. We are puzzled by the hon. Gentleman's concerns about the £500 limit referred to in paragraphs 41(4)(a) and (b) of proposed new schedule Al to the Insolvency Act 1986. I put it to him that such provisions have worked perfectly satisfactorily for at least the 176 years that I managed to track them back, and I do not understand why he should find the £500 limit unacceptable.
I remind hon. Members that similar offences exist elsewhere in the 1986 Act, which was enacted by the previous Government. Both measures involve a £500 minimum limit and have worked perfectly satisfactorily. Those provisions were introduced by a Conservative Government, and I find the hon. Gentleman's objections odd.

§ Mr. Burnett
For the benefit of those hon. Members who were not in Committee, does the Minister agree that it might be wise to remind the House that there is such a thing as the Theft Act 1968, and that the theft of any item, of any value, is an offence and is punishable as such?

§ Dr. Howells
Absolutely. The hon. Gentleman gives us a valuable lesson in the law—and for free, despite the fact that he is a lawyer. We should be grateful for that.
The amendments do not address the issue across the piece. There are similar offences in sections 206 and 354 of the 1986 Act, but the amendments would not apply to them. The issue has been debated extensively in Committee and in another place and I give the hon. Member for South-West Hertfordshire (Mr. Page) the undertaking that we shall consider it in the context of the two reviews that my Department is conducting. I hope that that will satisfy him and that he will withdraw the amendment.

§ Mr. Page
In view of the fact that the Minister will consider the matter in the context of the reviews, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
1165 Amendment made: No. 53, in page 30, line 21, at end insert— '() Where paragraph 39(3) (implementation of voluntary arrangement) applies, the persons who may apply to the court include the Authority. () If a person other than the Authority applies to the court under that paragraph, the Authority is entitled to be heard on the application.'.—[Mr. Pope.]

§ Dr. Howells
I beg to move, That the Bill be now read the Third time.
The Bill contains all the provisions necessary to deliver what we intend. In particular, it will ensure that the rescue of a small company will not be lost for the want of a short breathing space within which a rescue plan could be agreed. When there is agreement between the Secretary of State and an unfit director, disqualification can be achieved without the need to involve the courts.
The Bill contains other important provisions, but I shall not detain the House by repeating them. Those provisions were considered by a range of interested parties before the Bill was introduced in Parliament. The Trade and Industry Committee also considered them closely and they were scrutinised carefully in debate in the other place and in this House. As a consequence, the Bill has been amended as it has progressed through Parliament. It is better and more effective legislation because of that scrutiny and amendment.
I thank all Members on both sides of the House who participated in our good-humoured and interesting debates on the detail of a very technical Bill.

§ Mr. Burnett
I, too, shall not detain the House for long. The Bill's main thrust is to introduce a moratorium, which is welcome, although the approach is pretty half-hearted. If creditors disagree with members, the courts will decide. Obviously, the strength remains with creditors, and the moratorium could be said to be too short. Nevertheless, we agreed in Committee that our business culture is particularly creditor friendly. The Bill represents a small step in the other direction and, as such, is welcome.

§ Mr. Chope
I should like to make only a few brief remarks—particularly on the retrospective element remaining in the Bill after the Minister's insistence on rejecting amendments moved in Committee and, today, by my hon. Friend the Member for South-West 1166 Hertfordshire (Mr. Page). I hope that we will see the Bill again in this Session, after amendments are passed in the other place to remove that retrospective element. That element vitiates what is otherwise useful legislation, piecemeal though it is.

§ Mr. Page
We broadly welcome the Bill, which obviously aims to widen the range of rescue provisions available to small business. However, we have made it perfectly clear that, as anyone listening to today's debate will know, we have considerable reservations about some of the Bill's detail—including the significant matter, with which my hon. Friend the Member for Christchurch (Mr. Chope) has just dealt, of retrospectivity.
It is not clear from our debates whether Department of Trade and Industry Ministers really understand how small businesses work and the effects that the Bill may have on the practices of those who lend to small businesses.
As we said, this is only half a Bill. We wish that there had been another half, to create a full picture and to endorse some of the amendments moved by the hon. Member for Great Grimsby (Mr. Mitchell). Although we are worried about how some of the provisions may work, we will support any action to try to help small business and companies in need of rescue. As such, we support the Bill's passage.
Question put and agreed to.
Bill accordingly read the Third time, and passed with amendments.