HL Deb 04 December 1975 vol 366 cc758-71

3.29 p.m.

The LORD CHANCELLOR

My Lords, on behalf of my noble friend Lord Beswick, I beg to move that this Bill be read a second time. My Lords, this Bill is concerned with bankruptcy, winding-up of companies and also sequestration in Scotland. Its most important object is to bring certain monetary limits into line with present day values. An expected result will be that the work-load of the Insolvency Service is brought more into line with available resources. Your Lordships will be. doubt have been pleased to note that in its Explanatory Memorandum it states that the Bill is expected to result in a reduction of 100 to 150 staff over the next three years, at a total saving of up to £750,000 a year. The Bill also gives effect to a number of other urgently needed changes in insolvency law.

The present system of bankruptcy law in England and Wales was settled in 1883. Since then, three different Committees have considered the relevant legislation. Two resulted in the passing of Bankruptcy Acts in 1914 and 1926. The third Committee reported in 1957 and said: We are satisfied that the basic structure of the Bankruptcy Law, apart from that relating to discharge, is generally sound and well suited to its purpose. It continued: Our suggested Amendments are designed to remove, so far as possible, administrative difficulties and irregularities, some of which have been inherent in a system of law which has to service a two-fold purpose, on the one hand of protecting a bankrupt from anything in the nature of persecution by his creditors, and on the other, protecting creditors from the dishonest or fraudulent financial dealings of their debtor. It is a sad fact that successive Governments since 1957 have not found time to introduce the legislation to give effect to these suggested Amendments.

In Scotland, the term "bankruptcy" is often used indiscriminately to mean insolvency, not our bankruptcy and the judicial process of sequestration. I hesitate to enter into the mysteries of the law of Scotland, but I understand that not our bankruptcy originally designated the condition of a man who, to avoid imprisonment for debt, had retired to the sanctuary of the Abbey of Holy-rood. Such a means of avoidance is no longer open to him, I understand. His insolvency thereby became notorious or "notour." So far as this Bill is concerned, however, such of its provisions as will apply to Scotland relate only to sequestration. This judicial process has been developed since it was first introduced in 1772, and the basis of the present system was, and still is, enacted in the Bankruptcy (Scotland) Act 1913.

A Working Party under the chairman, ship of Lord Kilbrandon was appointed in November 1968 by the Scottish Law Commission, "to examine the law relating to Insolvency, Bankruptcy and Liquidation in Scotland." The Report of this Working Party, published in November 1971, concluded that the 1913 Act operated satisfactorily, but recommended certain simplifications and improvements. Although there is some similarity between bankruptcy in England and Wales and sequestration in Scotland, there are significant differences in both law and practice but, in so far as the provisions of this Bill are appropriate for Scotland, they will take effect in Scotland as well as in England and Wales.

Bankruptcy applies only to individuals and partnerships. Companies are wound up under the provisions of the Companies Act 1948. A Companies Bill to implement a number of the recommendations of the Jenkins Committee which reviewed the 1948 Act and reported in 1962 was Introduced in your Lordships' House in December 1973, but it was not proceeded with following the change of Administration in February 1974. Some of the non-controversial measures contained in that Bill have now been included in this Insolvency Bill. The Department of Trade is conscious of the need for major changes in insolvency law and work is starting on a review to achieve this end. It will prove to be a major task.

My Lords, the monetary limit for the minimum debt required to found a creditor's petition in bankruptcy, which is at present £50, was fixed before 1914: it is now completely out of date. Today, a creditor can bring bankruptcy proceedings against his debtor even though he is only owed this comparatively trivial sum. By increasing monetary limits as this Bill does, there will be a considerable reduction in the number of the more trivial domestic and consumer credit cases made subject to bankruptcy proceedings. These cases do not usually involve a wide circle of trade creditors or the general public. There are few or no assets from which to recoup costs and the proceedings, which require a good many skilled officials, are expensive to the public purse.

The work of the Insolvency Service Division has been growing for a number of years, particularly as a result of the slide in real value of monetary limits set out in the relevant Statutes. This workload must be brought more nearly into line with specialised staff resources and the most ready way of doing this is to restore the value of these limits. The restoration of the value of limits will also raise the amount of wages or salary allowed as a preferential debt to employees, as I shall explain shortly. Also it will affect the amount of necessary goods a bankrupt may retain and the minimum amount necessary to constitute the offence of obtaining credit whilst an undischarged bankrupt.

These, then, are the primary reasons for introducing this Bill. But the opportunity has also been taken to effect other urgently needed reforms of insolvency law. The Bill can be summarised as follows: first, it will bring up to date the monetary limits relating to bankruptcy and winding-up, and give power to the Secretary of State further to increase them by regulation; secondly, it will simplify certain statutory accounting and auditing procedures, and bring them into line with modern practice; thirdly, it will simplify the procedure for a credit or submitting his claim in bankruptcy and winding-up procedures; fourthly, it will enable the court in certain circumstances to dispense with the public examination of a debtor in bankruptcy; fifthly, it will provide a special procedure for speeding up discharges from bankruptcy. This will be additional to the present discharge procedure. Sixthly, it will enable the court to disqualify a person from acting as a director or manager of a company where his conduct justifies that restraint; and, lastly, it will extend and strengthen the administration order procedure in the county court.

The increase in the monetary limits, the simplified procedure for the lodging of creditors' claims, and the additional power to disqualify a person from acting as a director or manager of a company, will apply also to Scotland. Clause 1 and Schedule 1 increase a number of monetary limits, broadly so as to restore the value which they had when fixed in 1914. They are arrived at, generally speaking, by multiplying the 1914 figure by 12. If the limits were fixed or amended after 1914, the new amount is intended to correspond with the real value they had at that later date. For example, the maximum amount for which a worker can claim preferential rights in bankruptcy and winding-up procedures for arrears of wages or salary was increased in 1947 to £200: the figure of £800 in column 3 of Schedule 1 for this limit restores the value to what it was in 1947, by multiplying by four.

There is however one important exception to this general rule. It concerns the minimum debt required to support a bankruptcy petition by a creditor. To restore the 1914 value of this limit, at present £50. would require an increase to £600. The Government feel that this is too large an increase in this particular case. There are now greater opportunities for the wage earner or self-employed person to obtain credit; and the latter is more likely to become indebted to the revenue-collecting departments of the Crown for taxes and social security contributions. An increase above £300 would, I am advised, unduly restrict bankruptcy proceedings as the best means of collecting fairly substantial debts. So the figure rests in the Bill at £300.

Clause 1 also gives the Secretary of State power to increase further the monetary limits by Regulation so as to enable them to be kept up to date in future without the need for primary legislation. Clauses 2 and 3 bring existing accounting procedures up to date and provide for a more economical and efficient service. Every trustee in bankruptcy and liquidator of a company being wound up by the court is required to send to the Department of Trade, not less than twice a year, an account of his receipts and payments. At present each separate account has to be audited in detail. All monies received by trustees in bankruptcy and company liquidators have to be paid into special accounts kept by the Secretary of State at the Bank of England, bankruptcy monies into the Bankruptcy Estates Account and liquidation monies into the Companies Liquidation Account.

Under Clause 3 these two procedures will be changed, so that the audit of accounts of trustees in bankruptcy and liquidators will be brought into line with modern auditing practice. The two special bank accounts at the Bank of England will be replaced by a single account called "The Insolvency Services Account". This will enable more efficient use to be made of the day-to-day balances not immediately required. Clause 4 will substantially reduce the formalities required to be observed by a creditor submitting his claim in bankruptcy, sequestration or companies liquidation. At present, creditors must prove their debts by completing a complicated document which then has to be verified by formal affidavit. The procedure is also relatively expensive. The clause will enable creditors to submit their claims on a simple form without the need for it to be sworn, unless the circumstances are such that the Official Receiver or trustee requires an affidavit.

Clause 5 will empower the court to dispense with the public examination of a debtor in bankruptcy on an application by the Official Receiver. At present every debtor must undergo public examination unless he is excused on grounds of unfitness, but in many cases the public examination is of little concern to the public or to the creditors and does not warrant a formal court hearing. It is in cases of that kind the Official Receiver might make an application to have the public examination dispensed with. Clause 6 provides that adjudication in bankruptcy be reviewed by the court after five years, for the purpose of considering whether or not the bankrupt should then be given a discharge. I would stress that the new review procedure is additional to the existing discharge procedure which will continue. A bankrupt will still be able to apply for his discharge, but if he fails to do so within the five years after adjudication the new review procedure will come into operation.

The main defect of the present law is that the bankrupt himself must apply to the court if he wishes to be discharged. Many never trouble to do so, and there is an increasing population of undischarged bankrupts (estimated at present at upwards of 60,000) at risk of acting, perhaps inadvertently, in breach of bankruptcy law with potentially serious consequences. Under the new review procedure bankruptcies will be considered by the court without the need for an application by the bankrupt. It is expected that, as five years will have elapsed in each case since the adjudication order, the majority of bankrupts will be granted their discharge. I must mention that the new review procedure will not apply to any bankruptcy occurring more than five years before the date when this clause comes into force. Neither the Insolvency Service nor the courts have the resources to deal with the entire population of undischarged bankrupts.

Clause 7 deals with the disqualification of directors of insolvent companies. Section 188 of the Companies Act 1948 gives the court power to restrain certain persons, who have been concerned in the management of companies, from so acting for a period of up to five years. This clause introduces a further ground upon which the court may make a disqualification order; namely, the conduct of the person concerned in his dealings as a director of two or more insolvent companies which have gone into liquidation within a period of five years. Where the court considers the person's conduct as a director of those companies to be such as to make him unfit to manage a company, it may disqualify him for a period up to five years. This seems a very prudent provision for the protection of the public.

Clauses 8 and 9 both make changes to the county court administration order procedure. The broad effect of an administration order is to prevent further proceedings by creditors to enforce outstanding debts, and to arrange for the settlement of the debtor's liabilities under the supervision of the court. The debtor is usually required to make regular payments into court, which are used to pay off his debts by instalments, either in full or to such extent as the court may direct. Under the law as it now stands a county court can make an administration order against a judgment debtor if he himself applies for such an order and his total debts do not exceed a prescribed amount, at present £1,000. The court can also make an administration order against a debtor where a creditor applies for an attachment of earnings order, and the court is of the opinion that it is more appropriate instead to make an administration order. Again the debtor's total debts must not exceed the prescribed amount.

The present system has two main weaknesses. First, since the earnings of a self-employed person cannot be attached he cannot be the subject of an administration order unless he himself applies for it. Following the abolition of imprisonment for refusing to pay ordinary civil debts, the power of the court to enforce a judgment debt against a self-employed person has been somewhat eroded. Clause 8 will strengthen the position by empowering the court of its own motion to make an administration order against any judgment debtor if his total liabilities do not exceed the prescribed amount.

I turn now to Clause 9. The only sanction which the court can apply if a debtor fails to keep up his payments under an administration order is to revoke the order, thereby leaving creditors free to pursue their normal legal remedies. Clause 9 will give a much more effective sanction by enabling the court, if the debtor defaults, to revoke the administration order and instead to make a receiving order in bankruptcy against him. He will then be subject to normal bank-rutcy proceedings.

My Lords, there are many other areas of insolvency law which I am bound to admit are in need of reform. I am afraid that Governments and Parliaments have been remiss in not doing something about it. I have already referred to the wide-ranging review of insolvency law which is being conducted by the Department of Trade. This also takes account of our EEC commitments and, in particular, the draft EEC Bankruptcy Convention which is at present under general consideration by Member-States. This Bill is restricted to those matters that need and can receive immediate legislative treatment. It is I believe a very useful and necessary measure. I beg to move.

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

3.50 p.m.

The Earl of MANSFIELD

My Lords, I have no doubt that your Lordships will give a general welcome to this Bill, which appears not over the name of the noble and learned Lord the Lord Chancellor, but over the name of the noble Lord, Lord Beswick. I confess that this change of role, so to speak, has shortened my speech to some extent in that I have prepared a few remarks which I, at least, regarded as witty in connection with the passing of the noble Lord, Lord Beswick, from the Despatch Box and in connection with this Bill.

In view of the tortuous and somewhat laboured way in which we in this country —and I include for these purposes the whole of the United Kingdom, or at least England and Scotland—deal with bankruptcy, it is right that where there has been a personal or corporate financial failure the processes should be examined and brought up to date. There is no need for me to go down all the paths which have been trodden by the noble and learned Lord, and I do not seek to do so. I hope I may be forgiven if I do not get right all the legal terms which are correct in Scotland but not in England. I have to take the legal language as I have always found it.

It is sensible that the monetary limits relating to bankruptcy and winding up in Part I of Schedule 1 should be greatly increased, as we have been told will be done. It is, however, probably worthy of comment that this is a symptom of the present appalling situation so far as inflation is concerned, that Section 155(a) of the Bankruptcy Act 1914, which regulates the amount of credit to be obtained by an undischarged bankrupt without disclosure, has been amended from £10 to £120. With certain exceptions, as the noble and learned Lord has told us, all the limits have been raised by no less than 12 times the original amount considered to be proper.

Again referring to Section 155(a), an offence is now committed only where the value of the credit obtained exceeds the sum of £120. It is perhaps worth mentioning—and I do not say this in any carping sense—that I believe the business community feel a certain anxiety over those sections mentioned in Schedule 1 relating to preferential debts. I refer of course to Section 33(1)(b) of the Bank-ruptcy Act 1914 and Section 319(2) of the Companies Act 1948. I intentionally leave out that section of the Scottish Act of 1913, relating to that country. Be that as it may, the maximum sum in respect of wages or salaries ranking as preferential debt in winding up has been raised to £800.

I do not think for one moment that your Lordships will accuse me of going into contentious realms so far as salaries and wages are concerned if I venture to make a mild criticism of this provision. As I understand it, in many cases the banks are perfectly happy to have a subjugation in respect of these wages and salaries, so that the effect of this provision will be that many firms or businesses which should really be brought to an end because they cannot succeed are going to be maintained for just that little longer by the banks, in the hope that when an upturn in the economy comes or better times arise they may see their money back. There cannot he many cases where a sum of £800 is owed in respect of wages or salaries. I should have thought that the pre-preferential debts which were embraced in the 1973 Bill—which lapsed on the change of Government, as mentioned by the noble and learned Lord—would have been a better way of dealing with this matter.

So far as the other individual clauses are concerned, Clause 4, as we have been told, eases the burden of the proof of debts in bankruptcy. I am tempted to ask—indeed I am going to ask—why the same procedure could not have been adopted in the winding up. It seems eminently sensible, so why should the one not apply to the other? Clause 6, relating to the automatic review of bankruptcy, I am sure will be generally welcomed by your Lordships' House. It is difficult to know why the Government in fact have not embraced the Blagden Report, as opposed to Clause 6 as it stands, although I think I understand the reason why. It seems to me that subsection (5) of the clause directs that the court reviews the adjudication in the absence of the bankrupt, if I may use that phrase, and the trustee and any creditor may be heard and any evidence may be put before the court. An order may be made under subsection (6) of Clause 6, presumably still in the absence of the bankrupt—indeed that must be so, because where an order for payment is made under subsection (6) there can be relief ordered under subsection (8). I raise that only because it seems to me that injustice could be caused if there is an order for payment under subsection (6) which has been made in the absence of the bankrupt. It may be that something should be written into the Bill to the effect that where the court is minded to make any such order the presence of the bankrupt should be required.

I have a slight anxiety with regard to Clause 7, because it deals with disqualification of directors of insolvent companies. I am sure that this is a measure which will be generally welcomed by your Lordships. Clause 7(1)(a) is the part which on two occasions provides for a director of insolvent companies in certain circumstances to be made, later in the subsection, the subject of an order by the court. It seems to me that as the wording stands at present there could be an element of retrospection about that part -of it. Perhaps the Government would wish to say that where a company director has failed in this way he may well not be allowed to take part in the management of the company. That is something on which the Government may care to reflect. In any event, one realises that there is a safeguard in Clause 7(1)(b), in that the court, I assume, has to be satisfied that his conduct as a director makes him unfit to be concerned.

It seems to me that if somebody is going to be put in the position where his livelihood, or his chances of gaining a livelihood, may be taken away, both the courts and Parliament must be absolutely certain that what they are doing will be fair and just, before a provision of this sort is made. In Clause 7 I cannot see any form of appeal or safeguard against the decision of what I might term an over-enthusiastic court. Certainly in my experience, if a court is in the throes of hearing a case it possibly becomes over-enthusiastic in its condemnation of somebody who has appeared in front of it; and it might be unfortunate, and indeed unfair, if someone who had been made the subject of a Clause 7 order then had no right of appeal.

As I have said, apart from those points I welcome this Bill. One ventures to hope that the Government, by their manipulation of our economic and fiscal policies, will try to ensure that the very large volume of bankruptcies and insolvencies will diminish. If I have the figures aright—and they may well be suspect—bankruptcies and insolvencies generally are running at 60percent.higher than in the last financial year, and this is something which anybody who believes in private enterprise or even in the mixed economy will deplore. One has to admit that, unfortunately, however good an economy is, there will be failures, and I commend the Government for bringing this part of the law up to date.

4.1 p.m.

Lord WADE

My Lords, on behalf of my Liberal colleagues, I should like to thank the noble and learned Lord the Lord Chancellor for outlining the contents of this Bill. At the same time, I should like to join in congratulating the noble Lord, Lord Beswick, on his appointment designate to a very important position. Until a few hours ago, I had anticipated that the noble Lord, Lord Beswick, would be outlining this Bill, but no one in your Lordships' House would for one moment doubt the complete ability of the noble and learned Lord the Lord Chancellor to deal with a Bill of this nature, or indeed with any other Bill.

Turning to the Bill there is a certain sad irony and appropriateness in the fact that we should be discussing insolvency at a time when, owing to the economic climate and the direct and indirect effects of inflation, there has been, and is, a considerable increase in the number of insolvencies. As your Lordships are aware, there are various reasons for this situation. There are the firms which relied on a bank for working capital, and then found that the securities held by the bank suddenly fell in value while the cost of raw materials doubled, thus creating difficulties. There are the firms affected by sudden changes in our tax laws. There are the firms affected by unexpected fierce competition and, for one reason or another, they have failed. Therefore, we must recognise that in solvency is not necessarily the consequence of inefficient management or rash decisions.

There has always been some stigma about becoming insolvent, whether it be a firm or an individual. But this is especially so in the case of an individual, and if one looks back into history one finds that the treatment of those who became bankrupt was very harsh indeed. Today, insolvency may not be due to action that is in itself discreditable, and therefore it is only reasonable that our law relating to insolvency should be as enlightened as possible. However, the public must be protected, so there must be a dual aim; on the one hand, to ensure that our laws are not unduly harsh and, on the other hand, to see that the public is protected. When I use the word "public", I intend to include a number of small creditors to which I shall refer in a few moments. As regards the protection of the public, Clause 7, to which the noble Earl, Lord Mansfield, has al-already referred, is very important. It is the clause which deals with the person who is, or has been, a director of two or more companies which have become insolvent. But, first, may I make a few comments on the other clauses?

The Bill contains some sensible and modest reforms. Clause 4 removes the requirement for the creditor to make a proof of debt by affidavit sworn before a commissioner for oaths. In my legal practice, from which I have now retired, I was a commissioner for oaths for about 40 years. I am not suggesting that the fees of a commissioner for oaths enable one to wax very fat and I do not think there is any indication that that has been so in my case. But I have seen a number of these affidavits in bankruptcy, from time to time being paid the appropriate fee, and I have sometimes felt rather sorry for the creditor for having to be put to this additional trouble and cost. I do not think any great harm would be done by dispensing with the affidavit. In most cases, it would suffice if the creditor made a statement showing what was his claim and that he had evidence to support it, especially when there is a proviso, as in this case, that the Official Receiver may ask for an affidavit if he deems it necessary.

Under Clause 5, the court can dispense with the public examination on the application of the Official Receiver. The question which I should like to ask is: by what criteria will this decision be made? It should not be related solely to the amount of the assets, or the number of creditors. To illustrate that, there may be a case where a considerable sum is involved, but it is well understood that there has been no discreditable action by the individual who has become bankrupt; there is no dispute about the amount of the claims. In such a case, it may be unnecessary to have a public examination. On the other hand, there may be a small bankruptcy, in the sense that the amount of the assets is negligible, and there are many creditors with only small claims. But there may be something rather shady about the business, and innocent and gullible people may have been taken in. It may even be that, following adjudication, a bankrupt is not unduly concerned because the business is to start up again in the name of his wife or that of another relative; or perhaps the debtor is a little difficult to trace. It would be very tempting and understandable, in those circumstances, for the Official Receiver not to bother with a public examination and to take the appropriate steps to suggest to the court that there be no such examination. But I suggest that in that type of case a public examination is necessary, and very searching questions should be asked for the protection of the public.

Before turning to Clause 7, I wonder whether the idea contained in that clause; namely, the ban on a director of an insolvent company from being concerned with the management of another company for a maximum period of five years, could be applied to the individual bankrupt who has been carrying on a shady business. However, that idea would require careful consideration.

If I may now turn to Clause 7, we read in the Explanatory Memorandum that: Clause 7 provides that in certain circumstances the court may order that a person who has been a director of two or more insolvent companies which have been wound up shall be disqualified from taking part in the management of a company for a specified period … ". I am wondering whether there will be any difficulty over the interpretation of the phrase in Clause 7(1): …be concerned or take part in the management of a company …". The wording is rather loose. It may be that it has been taken from an earlier Act of which I am unaware, but I am still of the opinion that controversy might arise over the interpretation of those words.

There are other proposals. Clause 6 provides for an automatic review of adjudication of bankruptcy after five years and that is a very reasonable proposal. Clause 8 gives power to the county court to make an administration order. That proposal should also he supported. There may well be detailed points which should be considered in Committee.

There is one other point which is not a matter of detail. As your Lordships are aware, it has been stated by the noble and learned Lord the Lord Chancellor that due to changes in money values, the minimum debt to support a bankruptcy petition has been increased to£300 in Schedule 1. Similarly, the minimum debt for winding up an unregistered company on the grounds of insolvency has been increased to £300 and I noted what the noble and learned Lord the Lord Chancellor had to say about this. However, it was put to me very strongly this morning by a barrister practising in bankruptcy law that this increase, although understandable, would have the effect of ruling out a considerable number of small creditors, particularly of the kind to which I have already referred. Therefore, it has some bearing on the problem of the small creditors who arc taken in by the shady business.

It is undoubtedly true that the threat of bankruptcy may often be the only effective remedy for the small creditor. Other proceedings may be open to him but they are lengthy and expensive and there arc occasions when the threat of bankruptcy is the best course. For anybody with a debt owing to him of less than £300, that threat would no longer be open, and the barrister to whom I have referred expressed the view that the position of the small creditor might be greatly weakened. Subject to those few observations, it is clear that the Bill contains a number of useful provisions and that it should be supported on Second Reading.