HL Deb 28 March 1972 vol 329 cc1020-32

6.33 p.m.

THE MINISTER WITHOUT PORTFOLIO (LORD DRUMALBYN)

My Lords, I beg to move that this Bill be now read a second time. This Bill has its origins in the Companies (Floating Charges) (Scotland) Act 1961. Perhaps I should begin by reminding your Lordships of the main provisions of that Act. The Act made it competent under the law of Scotland for a company to give security for any of its debts by creating a floating charge over all or any part of its property. The Act provides that on the commencement of the winding-up of the Company the charge shall "crystallise"; that is, that it shall cease to float and become a fixed security over such of the company's assets as are then subject to it. The holder of a floating charge is therefore a secured creditor in a winding-up; and, provided that ground for a winding-up exists, the holder can enforce his security by putting the company into liquidation. The 1961 Act also provides for registration, with the Registrar of Companies in Scotland, of charges over the property of companies registered in Scotland and of charges over the property in Scotland of certain other companies. The charges to be registered are certain fixed charges and floating charges.

By 1966 it was evident that some of the provisions of the 1961 Act were giving rise to difficulties. So the then President of the Board of Trade asked the Scottish Law Commission to consider and advise on the provisions of the Act. The Commission's Report on the Companies (Floating Charges) (Scotland) Act 1961 was made in January, 1970, and presented to Parliament in April, 1970. The Commission said in their Report that they proposed such extensive changes to the Act that they considered that it would he unsatisfactory to give effect to them merely by amendments. They therefore proposed that the Act should be repealed and re-enacted with the amendments. The Commission also considered whether receivers should be introduced into Scotland. As I have said, under the 1961 Act the holder of a floating charge can enforce his security by putting the company into liquidation. He cannot enforce it by appointing a receiver. The Commission came to the conclusion that it was desirable that the holder of a floating charge should be able to appoint a receiver. They gave as the two main arguments for their conclusion that the appointment of receiver and manager might in some cases revive the fortunes of a company and prevent unnecessary liquidation; and that the rights of a holder of a floating charge are weakened by his inability to take possession of and realise the security without liquidation.

Her Majesty's Government accept the Commission's recommendations, both as regards the re-enactment of the 1961 Act and as regards the introduction of receivers into Scotland. The Bill before the House is substantially the Bill which the Commission drafted and appended to their Report. I take this opportunity to express Her Majesty's Government's appreciation of the work done by the noble and learned Lord, Lord Kilbrandon, and the members of the Scottish Law Commission.

I now turn to the Bill. Part I of the Bill and the Schedule re-enact with modifications the Companies (Floating Charges) (Scotland) Act 1961. Part II of the Bill provides for the appointment and functioning of receivers in respect of companies which the Court of Session has jurisdiction to wind up. Part III of the Bill repeals the 1961 Act and preserves the validity of anything done under it. It also makes provisions concerned with interpretation, commencement and extent. So far as Part I of the Bill and the Schedule are concerned—that is, so far as the provisions relating to the creation of floating charges and the registration of charges are concerned—I need explain only those provisions which differ from the provisions in the 1961 Act which they replace.

Clause 1 makes it competent under the law of Scotland for a company to create a floating charge for the purpose of securing any debt incurred, or to be incurred, by the company or by any other person. The reference to a debt incurred, or to be incurred, by any other person is new. One of its effects is that a subsidiary company will be able to create a floating charge over its property to secure a debt incurred by its holding company. Clause 2 states how a floating charge is to be created. The section which it replaces requires the instrument creating the charge to be in the form set out in Schedule 1 to the 1961 Act. That Schedule is not re-enacted and the clause does not specify the form the instrument must take. The effect of this change is that a company wishing to charge only part of its property has greater freedom as to the way it specifies what is and what is not charged.

Clause 5 deals in more detail than does the section which it replaces with the ranking of a floating charge with other charges, whether fixed or floating, over the same property. It provides that the instrument creating a floating charge, or a subsequent instrument which alters it, may contain provisions which prohibit or restrict the creation of any other charges, or which regulate the order in which the floating charge shall rank with other charges. Where the instruments contain provisions of this kind, the ranking is determined by those provisions; where the instruments do not contain provisions, the ranking is determined by the provisions in the clause. This clause will remove doubt as to whether it is competent in the instrument creating a floating charge to reserve the right to create a limited amount of fixed security which will rank in priority to or equally with the floating charge. There is no explicit provision in the 1961 Act for the registration of instruments which alter floating charges. Certain instruments are registrable as their effect is to create new or further charges. But there are others, such as those which affect the ranking of charges or release property from a charge, which ought to be registered.

Clause 7 states how an instrument of alteration is to be executed, and it requires it to be registered if it prohibits or restricts the creation of other charges, or affects ranking, or releases property from the charge, or increases the amount secured by the charge. Clause 10, in addition to making consequential changes, makes a small substantive change in the Industrial and Provident Societies Act 1967. The time within which a charge created by a Scottish society must be registered is increased from 14 days to 21 days.

The eleven clauses in the Schedule to the Bill will, if the Bill is enacted, become Part III of the Companies Act 1948. They will replace the existing Part III, consisting of eleven sections, which was added to that Act by the 1961 Act. The Schedule provides for the registration in Scotland of certain fixed charges and floating charges created by Scottish companies and of fixed charges over property acquired by Scottish companies.

Clause 106A in the Schedule requires charges to be registered and defines the charges which are to be registered. The greater part of this long clause effects no change. The main new provision is in subsection (9), which resolves a difficulty that exists where there is an ex facie absolute disposition or assignation qualified by a back letter or agreement. As it has been judicially decided that it is the constitution of the real right under the ex facie absolute disposition or assignation which creates the charge, where the back letter or agreement limits the amount for which security is granted a further loan cannot be secured by executing a further back letter or agreement. The reason is that under the law as it stands the further back letter or agreement cannot be registered as it does not create a charge; and if it is not registered, the lender of the further loan would be unsecured as against a liquidator of the company. Subsection (9) deals with this difficulty by stating in effect that the further back letter or agreement shall be held to create a further charge and that the further charge is registrable.

Clause 106F is concerned with memoranda of satisfaction. It adds to the existing provision by stating that the registrar shall not be satisfied that a debt secured by a floating charge has been paid unless the creditor certifies as correct the particulars on which the registrar would rely if he were to enter on his register a memorandum of satisfaction. The existing Section 106K aims to extend the provisions for registering floating charges to floating charges created by companies not registered in Scotland. This meaning of this section is not at all clear. It is replaced by Clause 106K which extends the duty to register charges with the registrar of companies in Scotland to any company incorporated outside Great Britain which has a place of business in Scotland. Such a company is required to register any charge which it creates over property in Scotland. Such a company is also required, if it acquires property in Scotland which is subject to a fixed charge, to register that charge.

I turn now to the subject of receivers. The law in force in England on receivers has not been codified. The Scottish Law Commission did not consider it essential that before providing for receivers in Scotland the English law should have been codified. They considered that receivers could be introduced by legislation which defined the circumstances in which a receiver could be appointed and the rights and duties which would attach to his appointment. Part II of the Bill contains proposals for legislation on these matters. Clause 11 makes it competent under the law of Scotland for the holder of a floating charge, or the court, on application of the holder, to appoint a receiver; and Clause 12 sets out the circumstances in which the appointment may be made. Clause 11 applies even although the charge was created prior to the coming into force of the provisions of this Bill and, because the instrument creating such a charge may well contain no reference to the appointment of a receiver. Clause 12 sets out events, such as interest due and payable on the debt being in arrears, which justify an appointment. I should draw the attention of the House to the retroactive nature of these provisions. The Scottish Law Commission suggested that the justification for the retroactive element is that if it did not exist holders of floating charges might well call up their loans and grant them as of new, so as to have power to appoint receivers. This would cause needless work and expense.

Clauses 13 and 14 deal respectively with the method by which an appointment of a receiver is made when it is made by the holder of the charge, and when it is made by the court. In either case the holder is required to notify the registrar of the appointment and the registrar is required to issue a certificate of the appointment. The appointment becomes effective when the registrar issues his certificate, and the charge then operates as though it were a fixed security over the property to which it has attached. A charge will often be in favour not of one person but of the holders of a series of debentures. Clause 28 so defines the expression "holder of the charge" as to enable the trustees to act for the holders of a series of debentures or, if there are no trustees, for the holders to act through those of their number who hold a majority of the debentures. This should enable a receiver to be appointed quickly when speed is important.

The powers of a receiver to carry out his duties are dealt with in Clause 15. He will have such powers as may be given to him by the instrument which created the charge in respect of which he was appointed, together with nineteen powers set out in the clause, although he cannot exercise any of those nineteen powers which are inconsistent with the instrument. One of the nineteen powers is power to carry on the business of the company: in general a receiver in Scotland will be a receiver and manager. As the property of a company may be sub- ject to two or more floating charges, there may be two or more receivers of that property who may or may not have been appointed to act jointly. Clause 16 deals with precedents among receivers in these situations.

In England a receiver may at different times he regarded as a principal, or an agent for the company whose property he deals with, or an agent for the debenture holders who appointed him. However, it is usual practice for the debenture deed to state that he shall be an agent for the company. Clause 17 adopts this practice and makes the receiver an agent for the company whose property he deals with. The clause also sets out his personal liability on contracts entered into by him or by the company, and his right to be indemnified out of the property in respect of which he was appointed. The remuneration of a receiver will normally be determined by agreement between him and the holder of the charge. Where this is not so, Clause 18 provides for his remuneration to be fixed instead by the Auditor of the Court of Session. An application to the Auditor may be made by anyone interested: the receiver himself, the holder of any floating charge or fixed security over any property of the company, the company, or, if there is one, the liquidator.

Clause 19, which is based on Section 94 of the Companies Act 1948, places on a receiver of a company not in liquidation a duty to pay those debts of the company which would rank for preferential payment if the company were being wound up. The preferential payments are payments in respect of taxes, and employees' salaries and wages. Clause 20 states how a receiver is to distribute the moneys which come into his hands, not all of which are moneys payable to the holder of the floating charge in respect of which he was appointed. The receiver must have due regard for the rights not only of preferential creditors for taxes and wages but also of other creditors, such as the holders of fixed securities over the company's property. Clause 21 assists a receiver who finds that he is unable to sell or dispose of some part of the company's property because it is subject to a charge, or encumbered in some other way, and the creditor concerned will not give his consent.

The clause provides that the receiver may apply to the court for authority to sell or dispose of the property free of charge or encumbrance. Clause 22 permits a receiver to resign and empowers the court, on the application of the holder of the charge, to remove a receiver. The clause provides for the consequences of the resignation or removal of a receiver.

Clause 23 provides that the holder of a floating charge may apply to the court for directions in any matter arising in connection with the performance by the receiver of his functions. Clause 23 also deals with the position of a receiver who is appointed under a charge which is afterwards discovered to be invalid. Such a person may incur heavy liabilities. The clause enables the court to relieve him from his personal liability in respect of anything which he did if that thing would have been properly done had he been validly appointed. The court can then make the person who made the invalid appointment personally liable to the extent that the receiver is relieved.

Clauses 24 to 27 are based, with some modifications, on provisions in the Companies Act 1948. These clauses are concerned with notification on business letters that a receiver has been appointed, with the preparation by a company in receivership of a statement of its affairs, the preparation by the receiver from time to time of abstracts of his receipts and payments, and the enforcement by the court of the duty of a receiver to make returns and give notices.

My Lords, I thought it right to go into some considerable detail in introducing this Bill because it is being introduced into this House for the first time, and I hope that that will enable its provisions to be studied. I commend the Bill to the House as one which will re-enact with improvements the provisions of the 1961 Act and will enable receivers to be appointed under the law of Scotland. I beg to move.

Moved, That the Bill be now read 2a.—(Lord Drumalbyn.)

6.53 p.m.

LORD HUGHES

My Lords, I am grateful to the noble Lord, Lord Drumalbyn, for having explained in such detail the purposes of this Bill. It is one which is of particular interest to lawyers and to accountants in Scotland, but even more so to those who are running companies. I must say that I continue to marvel at the extent to which matters undertaken in the time of the previous Government are still resulting in legislation from this Govenment which would have been introduced in any event even had the Election resulted in a different way. This is yet another of those Bills.

The Bill differs very little from the draft Bill contained in the Report of the Kilbrandon Commission, to which the noble Lord referred. I suspected that the noble Lord would find it necessary and desirable to go into some detail in explaining the purposes of the Bill. I also suspected that it would not turn out to be the sort of listening, or the sort of reading subsequently in Hansard, which would keep one entranced out of one's bed at a late hour at night. I therefore resolved that I would not be any longer in replying than absolutely necessary, and I did write to the noble Lord indicating the points which had occurred to me for querying. It seemed to me that there was little between the two Bills, the draft Bill and the published one, which was other than of an obviously drafting nature, but there were a number of clauses, to which I directed the noble Lord's attention, where some changes may be drafting but to a layman it was not obvious that they were merely drafting.

I noticed, for example, that the noble Lord said that the 1961 Act was repealed. In the draft Bill the 1961 Act was repealed, but in the Bill before your Lordships it is not completely repealed. Clause 30 is in a changed form, as published, from the recommendation of the Kilbrandon Commission, and in the Bill as it stands Section 7 of the 1961 Act remains. It seemed to me that if it were possible to remove the 1961 Act in its entirety instead of letting this one little section remain, the Commission might have hit on the better way of doing it. On the other hand, it may be that there are sound reasons why the 1961 Act should survive in this attenuated form.

The other point to which I wish to refer is a reference in Clause 11. I must admit that I missed one part of what the noble Lord, Lord Drumalbyn, said, because a remark was made to me by a colleague; I missed a few words of what the noble Lord said. I hope it was not an explanation of what I am now about to talk about. In Clause 11, the first clause dealing with the appointment of receivers, there are those who are disqualified from being appointed, and among those disqualified, along with "a body corporate" and "an undischarged bankrupt", are "a Scottish firm". The Law Commission pointed out that it was not necessary to disqualify a Scottish firm because it is in terms of the law of Scotland a legal persona, which is not the position South of the Border, so that it could quite competently have been appointed. In other words, a firm of accountants could be appointed as receiver, whereas if the firm is disqualified it would need to be an individual partner of that firm.

It was suggested to me that in seeking to put the new Scottish law in line with the English law—to which, I may say, I have no objection—this particular form of words might have the effect of disqualifying a Scottish firm but not necessarily disqualifying a firm from somewhere else. If, for instance, there was a German company set up in Scotland, and the German firm had the same sort of status in Germany as a Scottish firm has in Scotland, it would not be disqualified in terms of the Bill. I do not know whether that is the effect, but obviously the intention is that firms, whatever their place of functioning, should be disqualified. It may be of course, on the other hand, that the Bill is so drafted that only a person doing business in Scotland should be a receiver; I do not know. Perhaps the noble Lord would deal with that point, and perhaps he would also tell me just why it was decided to keep the rump of the 1961 Act in existence rather than have the Bill in the form in which the Law Commission proposed.

6.59 p.m.

LORD DRUMALBYN

My Lords. I should like to thank the noble Lord for his welcome to this Bill. As he says, it results from action taken by the previous Government. The Kilbrandon Commission was set up in 1966. This is really just another example of the continuing work of the Law Commissions, which goes on, I am glad to say, whatever Government is in power, and which produces a good deal of useful legislation as a result. The noble Lord asked first about the proposal in the original draft Bill which was attached to the Report on the abolition of the 1961 Act. There is no substantial reason for this. I think it has been purely a question of taste in drafting. The effect of Clause 9 of the Bill as introduced, together with the saving from repeal of heads (b), (c) and (d) of Section 7 of the 1961 Act, effected by Clause 30, is exactly the same as the Commission's Clause 9 would be. As the noble Lord will see, what is retained is Section 7(b), (c) and (d), which refer respectively to the preferential creditor's provision in Section 319 of the Companies Act; the definition section of the 1948 Act, which is Section 455 as to floating charge; and thirdly, the provisions in Schedule 15 which relate to the Section in the 1948 Act regarding false statements made. It is a penalty section. It has been thought easier to deal with it in this way.

LORD HUGHES

My Lords, I just do not understand that. It seems to me that it is always easier if people have only to look at one Act of Parliament to decide, and the Commission proposed a way in which everything could be contained in the new Companies (Floating Charges and Receivers) (Scotland) Bill 1972. The way in which the draftsman has chosen to do this is going to keep a part of the 1961 Act in existence and, if the Law Commission are right, unnecessarily in existence because it could have been incorporated in the Bill which is before us. While the noble Lord is telling me what is being kept, he is not telling me why, other than as a matter of preference, it is felt better to do it in this apparently more complicated way.

LORD DRUMALBYN

My Lords, I certainly take note of what the noble Lord says in this matter. I should have thought that this was not an unusual procedure. I should have thought that the direct references to the three places in the 1948 Act are as well preserved by the one way as the other. I think we must leave it like that for to-day at any rate.

The second point that the noble Lord made concerned the disqualification of a Scottish firm from being appointed as a receiver. Perhaps I should explain that in this way; when Sections 366 and 367 of the Companies Act were enacted—those are the ones which disqualified from appointment as receivers bodies corporate —because there were no receivers in Scotland Parliament had in mind only receivers in England. There is no explicit disqualification of an English partnership or a Scottish firm. In practice, in England a receiver is invariably, I am told, an individual. The introduction of receivers in Scotland makes it more important than it has been hitherto to consider whether a Scottish firm should be qualified to be appointed as a receiver. The Commission evidently considered that as a Scottish firm is a separate legal persona, and therefore has some of the characteristics of an individual, it might be possible to regard it as qualified. But they nevertheless thought that it should not be qualified. They did not say why they thought that, but one reason may well be that it would be more difficult to pin responsibility on a firm than on an individual. The Commission evidently thought it desirable to remove all doubt, and therefore in their proposal disqualified explicitly in Clause 11(3) a body corporate, an undischarged bankrupt, and a Scottish firm, and the Bill, as introduced, does the same.

The noble Lord asked whether a German firm, or a foreign firm of one sort or another, is excluded—or an English firm, for that matter. In terms, there is no such exclusion, but in practice as only individuals are appointed as receivers in England it seems likely that this will be the same in Scotland. The disqualification of firms should cause no difficulty in practice as it is always possible to appoint a member of a firm, or even two members who would act jointly. As the noble Lord knows, under the Act of 1890, in Scotland: Persons who have entered into partnership with one another are, for the purposes of this Act, called 'a firm'". I should add that the section expressly preserves the rule of law of Scotland that a firm is a legal personality distinct from the persons who compose it, and that this is a principle which is not recognised in the law of England. Therefore, there is this distinction here. I suggest to the noble Lord that the Commission were right, in the circumstances, to exclude a Scottish firm.

I hope, with that explanation, that the noble Lord and the rest of your Lordships will be willing to give this Bill a Second Reading.

On Question, Pill read 2a, and committed to a Committee of the Whole House.