LIQUIDATOR'S POWERS (Hansard, 30 October 2002)

§ Miss Melanie Johnson
I beg to move, That this House agrees with the Lords in the said amendment.

§ Mr. Deputy Speaker
With this it will be convenient to take Lords amendments Nos. 162 to 164, 174, 175 and 229 to 264.

§ Miss Johnson
Before detailing the amendments and the thinking behind them, I wish to thank the Opposition parties for their keen interest in the fine details of this legislation. I am extremely grateful for the various amendments that have been tabled in both Houses relating to the corporate insolvency provisions of this Bill.
I am grateful because those amendments have provided us with an opportunity to revisit the drafting of the provisions and to refine it so that our policy aims are clarified in the Bill. Indeed, this process was started way back in the summer, during the debates in this House. It was at that time that our attention was drawn to the potential pitfalls that we faced in seeking to make the administration procedure practicable and workable while ensuring that it remained both fair and focused. I believe that we now have a Bill that is exactly that, and it is for that reason that I am grateful to hon. Members and to those in another place. I shall now turn to the details of the amendments in question.
The need for Lords amendment No. 161 was recognised following an amendment tabled, but not moved, by the Opposition in the Lords Committee. It gives the office holder the ability to apply to the court in order that he does not have to implement the ring fence in instances where, despite the net property exceeding the prescribed minimum, he or she feels that the costs of distributing the prescribed part would outweigh the benefits.

§ Mr. Djanogly
In what circumstances is the provision likely to apply? I agree with the thinking behind the amendment, but its application is quite general.

§ Miss Johnson
I believe the provision could apply in cases where there is a huge number of unsecured creditors. In such cases, the costs of distributing the prescribed part may be disproportionate to the benefit gained from the distribution and the office holder should be able to take action to disapply this new section.
In order to obtain an order under this subsection, the office holder will have to satisfy the court that the costs of distribution would be disproportionate to the benefits.
We are grateful to the City of London Law Society for bringing the need for Lords amendments Nos. 162 and 163 to our attention. Our policy has always been that the calculation of the prescribed part will not apply to charges created before the section's commencement, but that it is to apply to any floating charge created after the section's commencement. An existing floating charge granted prior to commencement will not be subject to the new section.
948 Where a company has granted both pre- and post-commencement floating charges, an insolvency office holder would pay out to fixed security holders, then pay the expenses of the winding up, then pay any remaining preferential claims, then pay out to the pre-commencement floating charge holders, and then he would apply the prescribed part to the net property available to the post-commencement floating charge holders.
It is not anticipated that there will be a problem with pre-commencement charges that have subordinated their claim to a post-commencement charge. They will have done so in the knowledge that they will be waiving their right not to be subject to the new section 176A.
Lords amendments Nos. 164, 174 and 175 are consequential and technical amendments necessary to ensure that the appropriate insolvency provisions extend to Scotland in addition to England and Wales, to align the Bill with the Insolvency Act 2000 and facilitate the drafting of insolvency rules. They are consequential on other amendments to the Bill.
Lords amendment No. 164 applies to clause 249. It will ensure that the powers that a Scottish liquidator has to take antecedent recovery actions against a company are also included in part I of schedule 4 to the Insolvency Act 1986 and will, as a result of clause 249, need the sanction of the court or the liquidation committee, or a meeting of creditors where there is no committee, before taking any such action. The reason for the amendment is to ensure that the benefit flowing to unsecured creditors from the abolition of the Crown's preferential status cannot be used for such actions without creditors' approval.
Lords amendments Nos. 174 and 175 ensure that provisions in clauses 249 to 251 will extend to Scotland.
Lords amendments Nos. 229 to 234 deal with purposes of administration. Lords amendments Nos. 235 to 240 and 242 to 245 deal with time scales, while amendments Nos. 241 and 246 to 258 are technical and relate to schedule 16, which deals with the detailed processes of administration.
Lords amendment No. 241 applies to the types of payments to be made to an administrator, and Lords amendments Nos. 246 and 252 deal with various matters which would normally be required in accordance with the Insolvency Act 1986 when a company goes into creditors' voluntary liquidation but which, where that liquidation follows immediately after administration, are not necessary or appropriate.
I should be happy lo give the House further details of the amendments in this group if hon. Members wish.

§ Mr. Greg Knight
I am grateful to the Minister for her lucid explanation of the amendments, but I am suspicious by nature and I seek clarification and reassurance in respect of Lords amendment No. 161, which states that the subsection shall not apply to a company if (a) the liquidator, administrator or receiver applies to the court for an order under this subsection on the ground that the cost of making a distribution to unsecured creditors would be disproportionate to the benefits". 949 8.30 pm
Can the Minister tell us the precise scope of that provision? My concern is that if a liquidator has inflated his or her fees, or has a large fee built in, inflated or not, could that be an argument for the liquidator saying that a distribution to unsecured creditors would be "disproportionate to the benefits". I am concerned that a fat-cat liquidator could use that provision to deny a payout to a small, unsecured creditor solely on the grounds that he or she wished to be well paid for the work undertaken. I hope that the amendment would not lead to that situation.

§ Mr. Eric Forth (Bromley and Chislehurst)
I am interested in the concept of proportionality in that context. Has my right hon. Friend given any thought to, or is he concerned about, the validity of the mechanisms that are available to judge proportionality in that case? While I follow his argument and share his concern, I am interested to know whether the judgment of proportionality will be appropriate in such cases.

§ Mr. Knight
Perhaps I have not given that matter the depth of thought that I should have done. I will no doubt want to reflect upon it later.
What I find slightly sinister about the provision is the requirement for the court to have a role. We all know that a liquidator can make all sorts of applications to a court—after all, he is not paying and the costs will come out of the general funds. What about the poor unsecured creditor? How does the creditor have a voice to tell the court that it should not go down that road, as the liquidator is using the provision as an excuse for not paying him when he should be paid—the liquidator is merely ensuring that he gets his own fees? I hope that the Minister will be able to reassure the House that the Government are not introducing a loophole that would allow fat-cat liquidators to ride roughshod over the poor unsecured creditor.

§ Mr. Mark Field
It is a great pleasure to join in debate with my right hon. Friends the Members for Bromley and Chislehurst (Mr. Forth) and for East Yorkshire (Mr. Knight). I suspect that they are already having withdrawal symptoms at the prospect of not being able to speak at such a late hour on Wednesday evenings. I was intrigued to see a long-lost interest in insolvency matters coming to the fore.
I am glad that the Minister has agreed with many of the Lords amendments. We discussed this matter at length in Committee and there were clearly some technical concerns. On a personal level, I am grateful to the Minister for thanking those hon. Members who contributed to the Standing Committee. I confess that on my website, which I have got up and running recently—I am sure that the hon. Lady is a regular and has logged on to it to find out what is going on in the Cities of London and Westminster, and I only wish that many other people were similarly minded—I made it clear that one of the least glamorous aspects of parliamentary life is being involved in a Standing Committee, going through legislation line by line. When I say that it is the least glamorous, it is not a reflection on the Minister, of course; it is because one has to grind through the technical amendments.
950 I hope that we were able to make some positive contributions to the insolvency provisions in the Bill. I pay tribute to a number of law societies, in particular the City of London Law Society, to which the Minister referred. Its contribution on the technical aspects of floating charges will, I hope, ensure, that the insolvency provisions will remain intact for some time.

§ Mr. Robathan
I wish to put right an earlier omission. I paid tribute to my hon. Friend the Member for Eastbourne (Mr. Waterson), who took this Bill through the Standing Committee for the Opposition, but I did not mention those who sat with him on the Benches in Committee and did very valuable work, in particular my hon. Friends the Members for Cities of London and Westminster (Mr. Field) and for Huntingdon (Mr. Djanogly).

§ Mr. Field
My hon. Friend the Member for Huntingdon (Mr. Djanogly) and I are in a nice position—we find that we are positive experts on this legislation since the Opposition Front-Bench trade and industry team has changed entirely.
Crown preference is one area that we discussed at some length in Committee that has not been mentioned—apart from a tangential reference by the Minister earlier. I appreciate that some of the amendments would protect the position of unsecured creditors to a certain extent in the event that Crown preference was done away with. When we first considered the provision, the Minister was keen to make it clear that there would be a windfall of about £70 million to £100 million a year on which the Crown would no longer be looking for first preference.
One of the potential problems with Crown preference is that a number of smaller companies—indeed, they need not be particularly small—have a good arrangement with the local Customs and Excise and Inland Revenue and thus have an arrangement by which they do not have to pay all their outstanding debt to the Government up front.
The football sector has been depressed recently and constant concern has been expressed about it. The Minister may have read in the financial press of the worry about some football clubs, which had come to positive agreements with their local Inland Revenue office about large sums of money that were due at a particular time. The imposition of Crown preference will mean that if a football club looks as though it is about to go into administration or even to go bankrupt, the Inland Revenue or Customs and Excise may decide to pull the plug earlier. That will be the result—no doubt unintentional—of the imposition of Crown preference. One of the underlying intentions of the measure, rightly, is to stop failing companies going to the wall either unnecessarily or too soon.

§ Mr. Hoban
Before I became a Member of the House, I had personal experience of working with companies that did not have a high asset base—their principal assets were people. I am concerned that not only football clubs but IT companies, architects and design companies will be affected. A slight pause in their income flow and in the collection of their debts might give rise to the situation to which my hon. Friend 951 refers—triggering bankruptcy by the Inland Revenue or Customs and Excise, to get the money immediately rather than letting the business trade through.

§ Mr. Mark Field
I thank my hon. Friend, who has articulated my point rather more clearly than I could. I hope the Minister will be able to draw something from what has been said and that she will be able to deal with the genuine concerns that have been expressed about Crown preference.
The subject is extremely technical and I applaud the Government for holding large-scale consultations during the past few months and especially over the past two or three years. I have already referred to the local law society in my constituency, but several professional bodies, in particular the Association of Business Recovery Professionals has also made constructive comments that will ensure that our amendments make the law much more workable.

§ Mr. Djanogly
The Minister kindly offered to give us further explanations if required. I should appreciate her further comments on the provisions on administrators in amendment No. 241, as those provisions have been developed since we last discussed them. Will the Minister also explain why, in amendment No. 244, a decision was taken to insert the words "one year", while amendment No. 245 specifies six months?
I concur with my hon. Friend and the Minister as regards the comments about the input to the Bill.

§ Mr. Greg Knight
As regards amendment No. 241, I am troubled by paragraph 65, which states: The administrator of a company may make a payment otherwise than in accordance with paragraph 64 or paragraph 13 of Schedule 1 if he thinks it likely to assist achievement of the purpose of administration. What does that mean? If an unsecured creditor becomes an irritant and is becoming belligerent with the administrator, could the administrator pay them off to get them off his back? That could happen if my interpretation is right. I think that it was an American politician who said that his concern about democracy was that the wheel that does the squeaking is the one that gets the grease My concern is that the provision might mean that the belligerent unsecured creditor always got his money, while the reasonable person who tried to obtain a payout by moderate dealings with the liquidator was left out in the cold.

§ Mr. Djanogly
I thank my right hon. Friend for that intervention, and he makes a very good point. I note that the administrator could make such a payment if he thought that it would be likely to help to achieve the purposes of administration. Again, I reiterate my original request: I would appreciate it if the Minister would explain that issue.

§ Mr. Hoban
My right hon. Friend the Member for East Yorkshire (Mr. Knight) suggested that, under Lords amendment No. 241, a belligerent creditor could put pressure on an administrator to settle his debt early. However, would not Lords amendment No. 242 provide 952 a means by which a creditor could become an irritant to a liquidator? Could not a creditor start to make noises about making claims to the court, saying that the administrator was not performing his functions as quickly or as efficiently as reasonably practicable? So there could be opportunities for the creditor and the administrator to play off against each other to reach a good deal.

§ Mr. Djanogly
I thank my hon. Friend for his worthwhile comments. The instances could vary, and it would be most helpful if the Minister could provide an explanation. Other hon. Members and I raised concerns in Committee relating to the ability to question the administration costs that could be involved.

§ Mr. Tony McWalter (Hemel Hempstead)
It is as though we are back in Committee talking about all the problems that might arise with lousy administrators. Does the hon. Gentleman agree that the whole object is to try to ensure that other companies are not pulled down when a company goes bust? That should not happen unnecessarily if the administrator has the power to make such judgments.

§ Mr. Djanogly
The point of administration is that the company has the best possible chance of survival. The administrator will come in, and he has powers to let staff go and to run the company in place of the directors. However, when he has been appointed, the company is very often at his mercy in cost terms.
It is interesting that most administrations end in liquidation. The Bill may change that—that was one of the purposes of the Government's changing the administration process—but one of the main reasons why companies are finally forced into liquidation is often that, once administrators are involved, they are very expensive and that the money ends up in their pockets instead of going to the creditors.

§ Mr. McWalter
I obviously did not make myself clear. I was talking not about companies in administration but about other companies that want administrators to carry out their jobs in such a way as to rescue them from the difficulties that they may face if the first company goes under completely. That was the point that I was trying to make.

§ Mr. Djanogly
The hon. Gentleman makes a fair point in so far as the implications of an administration may be that the company continues to trade, so its creditors will benefit to the extent that they will not be pushed under by the fact that the first company does not survive, although that is not always the case in practice.

§ Mr. Greg Knight
The hon. Member for Hemel Hempstead (Mr. McWalter) has made a telling point. We should have concerns not only for other companies that may be pulled down but for other small businesses that are not incorporated, such as the sole trader or the man who runs a corner shop and who may lose his livelihood as a result of these provisions. Lords amendment No. 242, for example, states: A creditor or member of a company in administration may apply". 953 Is there not a case for saying that anyone aggrieved in this process may apply—for example, someone who is not a creditor or a member of a company but an unsecured creditor who may lose his business? Those are serious matters.

§ Mr. Djanogly
Indeed they are, and I thank my right hon. Friend for making that point. The situation is serious, and, to that extent, I would be most appreciative if the Minister could reply to our points.

§ Miss Melanie Johnson
I am enormously grateful to Opposition Members for their questions on these matters.
First, I want to respond to the question asked by the right hon. Member for East Yorkshire (Mr. Knight). Lords amendment No. 161, to which he referred, was brought forward by his noble Friends in another place in response to the debate. I am not sure how his paranoia is progressing—I think he described himself as paranoid, or used words to that effect—and I do not know whether telling him that his noble Friends were responsible for the amendment will help or hinder his condition, but I offer that as a reassuring titbit.

§ Mr. Knight
I am grateful to the Minister. I have never described myself as paranoiac—I think that I said that I was suspicious by nature, which is slightly different. My party colleagues in another place have made several improvements to the Bill. The context of my question to the Minister was whether those changes went far enough. Is she satisfied that Lords amendment No. 161 contains sufficient safeguards to prevent the sort of harm that I fear?

§ Miss Johnson
I think I entirely understood the right hon. Gentleman's remarks, and I note that I should have described him as suspicious by nature. To reassure him, only the court can disapply the prescribed part. In response to his point about so-called fat-cat liquidators, the court will be able to consider whether the office holder fees are fair and reasonable. The office holder will have to make the case to the court that it should make the order sought. It will therefore be for the court to consider the reasonableness of what is being laid before it. I hope that that reassures even a right hon. Gentleman of suspicious mind.
On the points made by the hon. Member for Cities of London and Westminster (Mr. Field), I reiterate our thanks to the City of London Law Society, particularly in relation to Lords amendments Nos. 162 and 163, and, no doubt, in relation to other work that it did on improving various aspects of the Bill. I hope that our thanks will be passed on. On Crown preference and the issues that he raised in relation to the football sector and related difficulties, the revenue departments have assured us that, in pursuing outstanding debts after abolition of preference, they will continue to offer help and support to vulnerable businesses facing genuine temporary difficulties. That includes support for business rescues via voluntary arrangements and for companies in administration. It must be remembered that the Crown Departments will not lose out 954 altogether, because they will benefit from money becoming available to all other creditors. The provision covers the issues that the hon. Gentleman raised.

§ Mr. Hoban
The Minister has partly reassured Conservative Members who expressed concerns about early triggering. She referred to formal voluntary liquidation and administration, but I am particularly concerned about the informal arrangements that the Crown Departments might reach with a football club or an IT company. What guidance have they issued to show that they will continue to be as sympathetic to businesses as they were before the abolition of Crown preference?

§ Miss Johnson
I do not have any guidance in front of me, but I have placed on record the fact that we have been assured about the way in which the Crown Departments will deal with such matters. I hope that the House will accept that assurance.
The hon. Member for Huntingdon (Mr. Djanogly) asked about time scales and the six-month extension. This part of the Bill was subject to consultation following the Lords Committee, and the amendments were tabled to reflect the outcome of those discussions.

§ Mr. Djanogly
Will the Minister give the House an explanation of the outcome of those consultations?

§ Miss Johnson
I cannot respond in detail to that point, but I shall see what I can do to deal with the matter.
On the point about belligerent creditors, simple belligerence will not allow the administrator to pay. The payment must assist the purpose of administration. For example, it could be used to pay the supplier of something that the administrator could not obtain from any other supplier. The administrator must believe that payments will achieve the purposes of administration.

§ Mr. Knight
The Minister has been generous in giving way, and I appreciate that. I am heartened by what she has just said. Is she arguing that an administrator or liquidator could not say that time taken up corresponding with a vexatious unsecured creditor was not assisting the administration and that to pay that person off would assist the process? Does she confirm unequivocally that the administrator or liquidator could not use that as a reason?

§ Miss Johnson
It is difficult to comment without knowledge of individual cases. The right hon. Gentleman seeks an assurance in relation not to the Bill but to the judgments taken on individual cases by those qualified to interpret or discharge the provisions in the Bill.
To return to the point made by the hon. Member for Huntingdon, the outcome of the consultation is reflected in the time scales as amended. I hope that that point meets his concerns, and that the House will agree to the amendments.