§ Mr. Waterson
I beg to move amendment No. 85, in page 174, leave out line 12 and insert—
- '(a) in the case of an individual whose bankruptcy arises from the closure of a business or trade established or operated by that individual, one year beginning with the date on which the bankruptcy commences: and
- (b) in cases not falling within subsection 1(a):
- (i) where a certificate for the summary administration of the bankrupt's estate has been issued and is not revoked before the bankrupt's discharge, two years beginning with the date on which the bankruptcy commences; and
- (ii) in any other case, three years beginning with the date on which the bankruptcy commences'.
§ Madam Deputy Speaker
With this it will be convenient to discuss the following: Amendment No. 86, in page 174, leave out lines 13 to 16.
Government amendment No. 371.
Amendment No. 87, in schedule 20, page 292, line 32, after "knew", insert—
'or ought to have known'.
Amendment No. 88, in clause 252, page 175, leave out lines 18 and 19.
Amendment No. 411, in clause 253, page 175, line 38, leave out from beginning to end of line 2 on page 176 and insert—
'(6) An incomes payment order must specify the period during which it is to have effect which period may end after the discharge of the bankrupt.'.Amendment No. 412, in clause 254, page 176, leave out lines 30 to 34 and insert—'(5) An income payments agreement must specify the period during which it is to have effect which period may end after the discharge of the bankrupt.'
§ Mr. Waterson
No doubt the Minister will intervene if any of these amendments have already been accepted by the Government, although I somehow doubt that that is the case. I shall speak mainly to amendments Nos. 85 and 86. Government Amendment No. 371 and our amendment No. 87 are basically identical, which seems to suggest another acceptance by the Government of our ideas.
§ Miss Melanie Johnson
In the spirit of my regularly helping the hon. Gentleman, I can confirm that that is the case.
§ Mr. Waterson
Splendid. Even I managed to notice that. Our amendment No. 88 basically repeats what is in amendment No. 86. I shall deal with amendments Nos. 411 and 412 later.
We touched on the distinction between business and consumer bankruptcies—a term which does not exist in the Bill—in Committee, but it is sufficiently important to 84 return to it on Report. In Committee, the Minister rejected our amendment seeking separate discharge periods for business and consumer bankrupts, saying that it was impossible to disentangle business and consumer debts. The experience in the USA, when the rules were changed in a similar fashion, was that there was an explosion in the number of consumer bankruptcies—people who had run up too many credit card debts, or whatever—and a slight reduction in the number of strictly corporate insolvencies. We take the view, as does the Consumer Credit Association, among others, that it would make enormous sense to try to find a way of separating out the two, so that we can test the Government's intentions.
We are told that the reasoning behind the Bill is to encourage a culture of entrepreneurial activity and risk taking. The difficulty with that is that, whatever the result might be in the corporate sector, all the changes in the rules would have to apply in equal measure to personal, consumer-type bankruptcies. If, however, we could apply a longer period of time to the duration of individual bankruptcies—with all the consequences that would follow—and single out the very sector that the Government are trying to help, that is, corporate bankruptcies, presumably we should be doing everyone a service.
We are not necessarily suggesting that these amendments represent the best provisions that can be achieved. It is certainly open to the parliamentary draftsmen to come up with something better. The model that the Consumer Credit Association has put forward, which we are happy to adopt, contains proposals thatthe debtor states, in the bankruptcy application form, if he is in business;making a false or misleading statement would be an offence;creditors have a right to challenge the debtor's statement. Most would be able to do so on the basis of information in their own customer databases;if so challenged, the debtor must produce evidence that he was in business. Even those who have not kept formal accounts should be able to do so, by producing, for example, an appointment book or purchase receipts or tax return.That seems to be a commonsense approach, because it is actually quite difficult in real life for someone to pretend not to be in business when they really are. The Consumer Credit Association goes on to state:On that basis, there would be no need to disentangle individual debts. Anyone in business would benefit from the shorter discharge period, whether or not they also have consumer debts. But the credit industry would also have the important safeguard of being able to challenge those applicants whom it believes are not genuinely running a business. In this way, those looking to abuse the system…could be deterred.Abuse in these circumstances can work in two ways; it can damage the credit industry, and it can also damage other consumers.
I want to ask the Minister two or three specific questions, given that, for these purposes, we accept the Government's basic premise, which is that the aim of these far-reaching changes in insolvency law is to encourage entrepreneurs to go out, start a business and take the risk of it failing through no fault of their own.
Is the Minister prepared to accept the amendments as they stand, or to return with amendments of her own? Will she at least indicate her view on the principle? If not, will she consider returning with proposals if, as we predict, there is an explosion in the number of consumers, 85 rather than businesses, seeking bankruptcy? Does she accept as a matter of principle that people with only consumer debts should not be able to benefit from the short discharge period enjoyed by entrepreneurs—for the straightforward reason that the only purpose of that is to encourage entrepreneurs to take risks? If she believes that those with only consumer debts should also enjoy the shorter discharge period, what benefits does she think that will bring to the economy and, indeed, to consumers?
In Committee, it was argued that there was no solid or practical way of distinguishing between business and consumer debtors. In consultation with the consumer credit industry, we have come up with what we consider to be a reasonably watertight solution, but we need to know not just the Minister's problems with the drafting of the amendment but whether she has any problem with the principle.
Amendment No. 86 also returns to an argument we had in Committee, but it too is extremely important. The aim is to ensure that the official receiver conducts a proper investigation in the case of each bankrupt. Without that there would be a real risk of, in effect, rubber-stamping of bankruptcies—first because the period involved could be much shorter even than 12 months, and secondly because we can expect an explosion in the number of cases to be considered.
According to PricewaterhouseCoopers,Warnings should be heeded from America, where a more friendly attitude towards consumer debt has led to a bankruptcy rate which is about 10 times the rate in the UK in relation to population"—and we all know about the enormous increase in consumer debt in this country.
I do not want to go into too much detail, but I think that the Government are still in denial over important points of principle. We raised three of them in Committee. First, should stigma be attached to personal bankruptcy? Secondly, what would the effects in the real world be? Would we end up with a rogues' charter? Thirdly, would resources be available to deal with those effects? We feel that the best way of testing what the Government are really trying to do is to offer them a straightforward, practical way of distinguishing between business and consumer debtors.
We have received representations from MBNA Europe Bank Ltd, which represents more than 13 per cent. of the UK credit card market and has more than £6 billion in outstanding loans. It is very concerned about the experience of the United States, and how it would apply here. It saysIn the US…it requires on average 33 debtors who pay their debts to cover the cost of one debtor that defaults. In practice, personal insolvency costs every US household $400 per annum in higher prices for goods and services".It calculates that therewill be a minimum of an additional 15—20 per cent. increase on existing bankruptcy levelsif the Bill is passed unamended.
We heard all the arguments in Committee about the likely effect not only on the industry but on borrowers. We discussed whether it would be more difficult for people to borrow money, and whether—as happened in the United States—we would see the emergence of a predatory part of the lending industry, preying on people 86 who could obtain no credit anywhere else, charging high levels of interest and generally making those people's circumstances much worse in the long run.
My hon. Friend the Member for Cities of London and Westminster (Mr. Field) mentioned student loans. An article in the April edition of Credit Today states:Government plans to introduce commercial rate loans for better off students may be shelved because of fears the debt would be uncollectable".It says that the Department for Education and Skills is currently examining the position, and adds that a spokesman for the Departmenttold Credit Today: 'We will be putting plans out for consultation later in the year. We are aware that if a student is declared bankrupt they will not have to pay back their student loan and are looking at the impact this might have for student loan legislation…Borrowers who entered higher education prior to 1998 will be able to escape repayments by making themselves bankrupt…credit manager of Cornwall County Council, which processes student loan applications, claims students will have nothing to lose by going bankrupt because few are homeowners.'I am concerned the student loans system would become so open to abuse it becomes impossible and this would herald a return to the grant system which would be administered by us in local government,' he said.7.15 pm
Those are just some examples of what we think might result from the proposed changes, across the board. There are a number of possible ways of dealing with them. We have suggested amendments involving a minimum bankruptcy period of a year, for example. There would, of course, be a full investigation in each case. One solution, however, would be a separation between business and consumer debtors.
Amendments Nos. 411 and 412, concerning income payments orders, are strongly supported by the CBI—which, indeed, proposed them in the first place—and are supported particularly by CBI members in the consumer finance industry. They specify a maximum of three years for the duration of an income payments order or income payments agreement. There is no clear or sensible objective reason for the limitation, says the CBI, which thinks that the duration is best left to the court's discretion. Why should an extraneous limit be placed on the period? The CBI says that the amendments are driven by the simple rule that when a debtor can pay, he should pay.
The Minister has talked a great deal about striking a balance, but I think we are in danger of shifting the balance dramatically between debtor and creditor. As I have said, we should not think just about the consumer credit industry, although naturally there will be consequences: if the number of bankruptcies and uncollected debts rises, banks and other lending institutions wil have to make adjustments accordingly, and it will become more difficult for the very people who find it hardest to raise money to obtain credit. As I have said, however, we should always remember the creditors who are not lending institutions—friends and family, for instance, who would suffer far more proportionally than such institutions if someone were unable or unwilling to pay debts.
87 I make no apology for raising again issues that were raised in Committee. We do not think that the Government have taken them seriously enough.
§ Dr. Pugh
The debate has been dogged by the tendency of many people to regard bankrupts as a homogeneous group. The thrust of the Bill is that they are not. Some people lose money through no fault of their own—for instance, the thousands of victims of the Wall street crash. Not all of them were foolish; many were just downright unfortunate. It has been said that we should distinguish between the reckless, the foolish, the careless and the negligent, but of course there are many shades of grey.
If we look at the whole picture, we see that there is a simple view throughout the House—that, from the moral point of view, not everyone merits the same treatment. What has dogged both sides today, however, is the question whether it is possible to distinguish between the categories. The hon. Member for Eastbourne (Mr. Waterson), indeed, asked whether we should differentiate. Was it worth while? I should have thought that the Tory answer would be no—that there should be no distinction between those who are bankrupt through no fault of their own and those who have lost their money, and other people's money, through negligence of one kind or another. It has been argued that there would be practical difficulties and dangerous consequences and that it would not be worth the candle—that the benefits of better enterprise and greater social justice that the Act was meant to ensure would not outweigh the snags.
The argument of the hon. Member for Eastbourne was reasonably consistent with that, in that he seemed to suggest that differentiation was not possible, but now he is arguing that it is possible to differentiate the consumer bankrupt and the business bankrupt. That differentiation is apparently practical, worth while, in line with the overall objectives of the legislation and not dangerous. He has effectively reversed his arguments.
A consistent view, which the Minister may be tempted to take, is that it is certainly possible to distinguish between bankrupts. If we can differentiate those who have been reckless and those who have been unfortunate in pursuing a business enterprise, it is surely not beyond the wit of man to differentiate those whose bankruptcy is largely the effect of bad consumer spending patterns and those who have suffered from unfortunate business dealing. It would certainly be legitimate for the Minister to consider whether the amendment is worth pursuing.
§ Miss Melanie Johnson
We tabled Government amendment No. 371 in response to points made by the hon. Member for Cities of London and Westminster (Mr. Field) in Committee. It extends slightly the grounds for courts to consider hearing a bankruptcy restriction order application. It takes on board the point about ensuring that the BRO regime has similar grounds to those for wrongful trading for limited companies in section 214 of the Insolvency Act 1986. I hope that the House will support it.
Amendments Nos. 411 and 412 are designed to ensure that an income payments order or agreement can run for any period, potentially until all the bankrupt's liabilities are discharged. I said in Committee—I have heard nothing 88 today to change this view—that it is right for bankrupts who are able to make contributions from their income to be required to do so, but setting a three-year limit to the agreement recognises that there must be a balance between the benefits brought to the creditors and the rehabilitation of the individual bankrupt. Currently, IPOs tend to run until discharge—about three years—and it would hardly be fair or consistent with the Government's aim of helping bankrupts to make a fresh start if we imposed a far more stringent regime, as could be the case under the amendments.
The provisions in the Bill make it clear that the Government support the principle of "can pay, should pay" for bankrupts. The amendments could result in IPOs and IPAs lasting longer than is reasonable. If the intention is to ensure that bankrupts with a high potential future income—for example, those in the professions—make payments to the estate, the amendments are misguided, because they could make all bankrupts entering into IPOs or IPAs subject to the longer time scale. If a debtor wants to make payments for a period beyond the three years provided for in clauses 253 and 254, it would be more appropriate to use the individual voluntary arrangement regime, which would allow flexibility in setting out a programme of payments that is acceptable to the creditors.
Amendment No. 85 was debated at length in Committee, and again today. I remain unconvinced of the case for drawing a distinction between business and consumer bankruptcies for the purposes of discharge. It has been suggested that without such a distinction there is likely to be an increase in bankruptcies brought about by a headlong rush of consumers seeking to take advantage of some perceived easy ride. There is no reason to believe that consumers would act in that way. Bankruptcy is not an easy option, and in some respects the new regime makes it more rather than less severe.
As my hon. Friend the Member for Hemel Hempstead (Mr. McWalter) said, there is a difference here. In particular, the proposals contain no changes to the assets that will be included in the estate on the making of a bankruptcy order and they do not shorten the period over which the bankrupt is liable to make payments out of income. The proposals make it easier for the trustee to ensure that the bankrupt makes payments out of future income by introducing income payments agreements. Consumers who behave recklessly or dishonestly run the risk of being subject to a bankruptcy restriction order for a longer period than the current discharge period and may damage their credit rating. I do not think that the majority of consumers are as short-sighted as some Opposition Members would have us believe.
The hon. Member for Eastbourne briefly regaled us with the position in the United States, but the comparison with the US is not a valid one. There are many differences between our proposals and the US regime. In the US, there is no real concept of a discharge period and individuals can opt either for an asset-based regime under chapter 7 or for an income-based regime under chapter 13, depending on their circumstances and what would be better for them. There is no investigation to speak of in the US. Our proposals do not allow debtors to choose the option that suits them best. If they can pay, they should pay. We also provide for proper investigation into misconduct and for effective sanctions where necessary. For those reasons, we do not think that bankruptcies here will reach levels equivalent to those in the US. There are significant differences.
89 We believe that the aim of reducing bankruptcy should apply to the majority of bankrupts, regardless of whether they are in business, where no misconduct or criminal behaviour has been identified. People can have bad luck in their personal lives—the unexpected loss of a job or the breakdown of a personal relationship can often lead to financial problems. The advice agencies all say that those are major reasons why people find themselves in that position. Such people are as entitled to a fresh start as a business person would be under parallel circumstances. It would not be fair or equitable to stigmatise them through a tougher regime.
§ Dr. Pugh
Although we may not want to distinguish in moral terms, surely the object of the Bill is to make business bankruptcy less of a problem, rather than to deal with consumer bankruptcy. There is a distinction. When the Bill was conceived, there was no thought of making it easier for people to overspend.
§ Miss Johnson
We are trying to make it easier to distinguish in both areas between those who face bankruptcy unexpectedly, through no fault of their own, and those who have behaved recklessly or wantonly. The distinction suggested in the amendment is entirely artificial, and we think that it would be unworkable in practice. The experience of the official receiver shows that the self-employed do not operate their business and professional lives in conveniently separate compartments—as we discussed at length in Committee, they are often inextricably linked.
For all those reasons, I do not believe that the amendments would work well or that we should accept them. I hope that hon. Members will not press them to a vote.
Amendment No. 86 was also discussed at considerable length in Committee. We do not support it, as it would effectively continue the one-size-fits-all approach. As I said in Committee, early discharge will occur only in straightforward cases where debtors co-operate with the official receiver. In cases where the administrative work is complete and the issue of public protection does not arise, there is no merit in preventing bankrupts from getting through the process as quickly as possible, or in not helping them to promote rehabilitation of their financial affairs. In almost all cases, such administrative work will be completed in under a year. One exception might be cases where the bankrupt has failed to co-operate fully with the official receiver. Such individuals would be subject to the suspension of discharge provisions, and would not be discharged until they have co-operated fully. Similarly, in most cases an investigation decision is made in the first few months after the bankruptcy order. Again, if investigation matters are outstanding. there will be no discharge within the 12-month period.
Amendment No. 88 was also considered at length in Committee. The Bill will remove provisions relating to summary bankruptcy and introduce instead a general discretion for the official receiver to investigate cases as he or she sees fit. This is not a new concept. Sections of the Insolvency Act 1986 dealing with summary bankruptcy currently provide that, in cases involving unsecured liabilities of less than £20,000, the official 90 receiver need only investigate if he or she sees fit. The advantage of the Bill's proposal is that resources can be used more effectively by looking at each case on its merits, rather than on the current basis of an arbitrary financial limit. The amendment would require an in-depth investigation in all cases, including those currently dealt with under the summary regime. It would therefore seek, for no good reason, to engage the official receiver in investigating cases that do not involve issues of public protection or criminal behaviour. That is at odds with the professed concern of Opposition Members to ensure that the official receiver is properly resourced to carry out his or her functions.
Finally, amendment No. 87, about which I have already spoken, is very similar to Government amendment No. 371.
§ Mr. Waterson
The Minister's response to amendment No. 85, which deals with the distinction between business and consumer bankruptcies, was extremely revealing. As I predicted, she mentioned the practicalities and difficulties involved. We are prepared to concede that such problems exist, and I am sure that they can be addressed. However, so far as the principle is concerned, she made it entirely clear that there is no intention to distinguish between business and consumer bankruptcies. That seems to undermine one of the few bases on which the word "enterprise" is justified as forming part of the Bill's title. This part of the Bill has consistently been spun over many months as a means of encouraging entrepreneurs. It is not supposed to encourage people to spend far too much on their credit cards, only to find that they cannot pay their debts.
The Minister is of course right to say that the analogy with America is not completely on all fours—no comparison between countries ever is. Major differences exist, but it is clear that a system that makes it easier to become bankrupt, and which removes the associated stigma, will lead to a very large growth in the number of bankruptcies. I challenge the Minister to say that her Department firmly predicts that the passage of the Bill as it stands will not lead to a very substantial increase in bankruptcies.
There is a clear conceptual problem. The Government have rowed back from the suggestion that they are trying to encourage entrepreneurs. I am happy to leave the practicalities of the amendments to parliamentary draftsmen, so long as the Minister is prepared to accept the principle behind them. However, as was underlined by the hon. Member for Southport (Dr. Pugh), it is clear that the Government's commitment to that principle is only skin deep. They do not care that, in fact, many more consumer bankrupts than business bankrupts will be drawn into the system. I suspect that, in practice, the impact on entrepreneurs will be largely negligible. The only effect will probably be that people will escape the net simply because far more bankruptcies will have to be processed. There will be insufficient resources, and the period of examination of bankrupts' assets will again be foreshortened by other provisions in the Bill.
I was very disappointed by what the Minister had to say, but in a sense I was heartened. Her comments support the point that I argued consistently throughout the Bill's passage: that, as the Confederation of British Industry said, the name "Enterprise Bill" is a complete misnomer. However, having made those points, I beg to ask leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.