§ 4.38 p.m.
§ Lord Scarman rose to ask Her Majesty's Government whether they will state their views on the EEC draft convention on bankruptcy and on the conclusions of the 26th Report of the European Communities Committee (H.L. 175).
The noble and learned Lord said: My Lords, I rise to ask the Unstarred Question standing in my name on the Order Paper. The Select Committee of this House in its 26th Report, which is devoted to the draft bankruptcy convention, reached 15 conclusions concerning the convention which are to be found at the end of the report. The conclusion to which I should like at this stage to draw attention is the 15th. It is in these terms:
The Committee think that, unless the Convention is adopted, the opportunity to embark on the assimilation and improvement of the national insolvency laws will be lost. They therefore recommend that, subject to the revisions which they have suggested above, work should proceed with a view to the Convention's adoption".
I hope that Her Majesty's Government share with me the belief that the timing of this short debate following upon my Unstarred Question is excellent. The reason I suggest that is that the draft convention is now entering the last round of consultation on the text between member states and the Commission of the EEC. The Commission hopes that the text will be final and therefore ready for consideration for signature in 1982 or 1983. So, in a sense, now is the last opportunity that those who are interested will have to put forward views as to the matters or problems which require consideration at this the final stage in the consideration by the member states of the Economic Community.
§ Let me explain very shortly (because I am conscious that all I am doing is asking a question) why the Select Committee came to the conclusion that, notwithstanding certain reservations that it has about certain proposals in the convention, it is nevertheless basically sound. The reason can be stated in the two purposes which the draft convention is intended to serve. It is of course a convention which not only covers bankruptcy proceedings as we understand the expression—that is, proceedings against an individual debtor who has failed to pay his debts—but is also concerned with the winding up of companies. The word "bankruptcy" is really used in the title of the Convention as a substitute for "insolvency". It is a convention about insolvency proceedings in the European Economic Community or among the member states of that Community, and it is not exclusive of other states which might wish to become parties to the convention.
§ Therefore the first point that I wish to make—and which was very present in the minds of the House's Select Committee—is this: the object of the draft is to substitute among those states which decide to become a party to it is a single and universal bankruptcy proceeding in place of a plurality of separate proceedings in the various contracting states in which the debtor has assets.
§ The position at the moment is, as everyone who has studied the matter knows, unsatisfactory. In theory—I will not say that this would ever happen in 864 practice—there could be one debtor insolvent and yet as many sets of bankruptcy or liquidation proceedings as there are contracting states in which he has assets. Of course in practice it is unlikely that there would be more than perhaps two or three member states in which there would be assets available for distribution in bankruptcy proceedings in the event of the insolvency of the debtor. But the plurality clearly creates opportunities for confusion and difficulty one of which I will mention a little later.
§ That is the general purpose which the convention, if it comes into effect, will serve, a purpose which of course is very much in the interest of the member states of the EEC. However it is a purpose which attracts the interest of other states, and there really would be no objection to other states entering the convention and becoming contracting parties to the convention if they chose. Therefore that general purpose is a sound one and does not stand or fall by the link that of course exists between the draft convention and the European Community.
§ The second purpose which the convention is designed to serve is a strictly EEC purpose. The draft is prepared pursuant to Article 220 of the Treaty of Rome. That article imposes upon member states an obligation to negotiate for the benefit of their nationals with a view to easing the path towards the reciprocal recognition and enforcement within the EEC of judgments of the courts of the member states. There was when we entered the European Community and there is now, and we have acceded to it—or are in the course of so doing—a convention prepared under that article regulating the jurisdiction and enforcement of judgments.
§ That convention, which of course provides for the automatic recognition and enforcement in member states of the judgments in that civil proceedings of each member state, does not apply to insolvency proceedings. A gap was therefore left. There is recognition; there is provision for the enforcement of judgments throughout the Economic Community. But there is no provision for the recognition, or indeed the enforcement, if that word is appropriate, of bankruptcy or insolvency proceedings as between member states.
§ This gap in the law of the Common Market is serious, as an illustration can show: in an English bankruptcy or winding-up where there are assets abroad, the trustee in bankruptcy or liquidator finds it, in the present chaos of international arrangements, virtually impossible to collect the foreign assets unless he is fortunate enough to be able to negotiate an equalisation agreement with his opposite number, if one exists, in the foreign countries where those assets are. Such an arrangement depends entirely upon the goodwill of the creditors in that state.
§ A single and universal bankruptcy recognised by all member states would overcome that difficulty and would enable a trustee or liquidator to pursue in the territory of the other member states the collection of the assets for the purposes of distribution among all creditors. I hope I have said enough—very briefly of necessity—as to the very worthwhile purpose that this convention is intended to serve.
§ There are I suppose two general criticisms that can be made of the convention. The first is that it is an exceedingly complex document and that it is indeed difficult to understand and may therefore cause con- 865 siderable difficulties when the time comes to legislate in order to give effect to it in a member state such as the United Kingdom. On that I would say only this: the subject matter is difficult and complex. Nevertheless, the draft has been exceedingly well worked over by experts both from the Commission and from the member states, and those experts include British experts on the law of insolvency. The draft has received the general support of those experts, including British experts. I would remind the House—it is clear from the report—of the invaluable evidence the committee has had in the preparation of the report. I mention in particular Mr. Harper, inspector general of the Insolvency Service in the Department of Trade and his deputy Mr. Armstrong. Mr. Armstrong has played a major part in the preparation of the draft. Their conclusion, expressed to the committee, is that this convention is too valuable to throw away because of its difficulties.
§ Then we had the advantage of some illuminating evidence from Sir Kenneth Cork. I suppose that Sir Kenneth Cork can be described as the "troubleshooter-in-extraordinary" of the United Kingdom—south of the Anglo-Scottish border, of course. He is an expert, particularly in the restoration to health of companies which have run into financial difficulties. He is not a member of the Government; he is not an adviser to the Government save in his capacity as chairman of the Bankruptcy Review Committee. He is a man very experienced in these matters, and his view also is that this convention is too valuable to throw away. He sees it as being a good starting point for further reforms in our municipal law and a good starting point if one is going to move, as necessarily one will have to if we remain in the Common Market, towards a harmonisation of the bankruptcy or insolvency laws of the member states.
§ Finally—this is a matter which I should like to stress—we had assistance ("evidence" is strictly the wrong word) from Dr. Hauschild, who is a member of the European Commission's Directorate-General for Internal Market and Industrial Affairs. On behalf of the committee, I should like to pay a tribute to the quality of his evidence. I should like also to convey most sincere thanks to the Commission not only for allowing him to assist us in our deliberations but also for allowing that assistance to be published as an appendix to the report. He, of course, has played an important part in the preparation of the convention and he takes the same view generally about the convention as that taken by the other witnesses to whom I have referred.
§ A more penetrating criticism of the convention in general is that it would have very little immediate impact. This, I think, is true. There are very few bankruptcies of individuals which are concerned with assets in a country other than the country where the man goes bankrupt; and the convention only has to bite where there are assets in other countries as well as the country in which the debtor is bankrupt. But I suggest that it would be insular on our part to reject the convention merely because of its lack of immediate impact in the British scene. I should add that it may not have much impact even in company liquidation, since most of the large multinational companies which do business in more than one country do it by means 866 of subsidiary companies which are registered in the various countries. Then the convention would not apply, because in law they would be different entities.
§ But on the continent of Europe there is much more traffic, and therefore many more debts arising and many more insolvencies concerned, across land borders—so much so that between many continental countries the necessity has been felt for bilateral treaties dealing with the recognition and enforcement of insolvency proceedings in the two countries; and much of the text of this convention is drawn from the texts of those treaties, which have proved, on the whole, reasonably successful. Also, of course, one hopes that trade will indeed increase, not only by large multinational companies but by smaller companies and by individuals, across the national frontiers. That is certainly the purpose of the Common Market; and if it does increase the need for this convention will become apparent.
§ I have already taken rather longer than I had intended, and I apologise. Let me say finally—and I will say it without elaboration—that there are four specific matters on which I think the Select Committee would hope the Government would seek an improvement in the terms of this convention in the consultations which are now taking place and to which I have referred. I will mention them without elaboration. They are all to be found in paragraph 61 of our report. The first concerns preferential debts. The committee is extremely dissatisfied with the provisions contained in the convention for handling preferential debts and I would refer in particular to conclusions (5) and (6) in paragraph 61. I had intended to expand on that topic but I think that time is against me.
§ Secondly, the committee is concerned about the provisions in the convention dealing with the problem of transactions unsupported by consideration in favour of a spouse before the advent of the bankruptcy. It is provided in the convention that the law which will govern the extent to which such transactions can be set aside is to be the law of the member state in which the bankruptcy is opened. The committee think it would be better if it were the law of the matrimonial régime.
§ Thirdly, the convention makes no reference to floating charges. As your Lordships know, the device of the floating charge is a well-used means in the United Kingdom of raising company capital. It is doubtful whether the convention would be in any way a danger to the floating charge; there is no mention of it. Sensing the importance of the floating charge to British business, the committee were anxious that the convention should contain an express provision that its terms do not affect the validity of floating charges.
§ Finally, there is a general point which was raised very forcefully in evidence by Sir Kenneth Cork. Sir Kenneth Cork thought that if there was one substantial defect in the convention, it was that it laid too much emphasis on liquidation of companies and was not sufficiently helpful to the rehabilitation of companies. Let me just explain very shortly what was in his mind. When a company gets into financial difficulties in England, a receiver is often appointed and that receiver is expected to manage—and, if it is Sir Kenneth Cork, certainly will manage— 867 the affairs of that company with the object of getting it out of its problems. Sometimes that process goes wrong and the company has, nevertheless, to go into liquidation. One of the principles of the convention is that the law of bankruptcy will be the law of the country in which the bankruptcy is opened. If one, therefore, has persons of this country who have interested themselves in seeking, as receivers or managers, to get a foreign company with substantial assets in this country out of trouble, and that company goes into liquidation, there are dangers for those receivers and managers in some of the laws of the member states; notably, the law of France.
§ Sir Kenneth thought that that specific problem, as well as the lack of emphasis on the importance of rehabilitation as contrasted with liquidation, were matters which the United Kingdom Government might consider doing something about in the consultations that are now beginning. It is for those reasons that I am asking for Her Majesty's Government to give an indication of their views at this stage.
§ Finally, I should like to conclude on a very different note. This is, as your Lordships will appreciate, a very complex subject. I have not attempted to explain it or, indeed, to explain the convention in the remarks which I have made supporting my Question. But your Lordships may think that the style, presentation and structure of the report, let alone its conclusions, are of good quality. If they are, the credit is due to Sir Charles Sopwith, legal adviser to the Select Committee, who is about to retire after years of public service. This may be one of his last—it may the very last—of his distinguished contributions in the field of law to the public service.
§ I should like, on behalf of my colleagues and myself on the Select Committee, to seize this opportunity to pay a tribute to him not only for this work, which was signal in character, but for all his previous assistance. He is a lover of music and opera—so are some others. He will, therefore, forgive me if I say that this swan song in a very complicated aria is something of which we in the committee, at any rate, think he can be proud, and I hope that your Lordships will endorse that opinion, whatever view you have as to the substance of the recommendations made.
§ 5.3 p.m.
Lord Bruce of Donnington
My Lords, we on this side of the House should like to thank the noble and learned Lord, Lord Scarman, for having raised this Question this afternoon. We should also like to pay tribute to the conduct, under his chairmanship, of the Select Committee in dealing with this very complex subject. Of course, we entirely endorse the tribute that he has been kind enough to pay to Sir Charles Sopwith, which, in our opinion, is fully justified. We on this side of the House have said many times before that the reports that emerge from the Select Committee on the European Communities are of very high quality indeed. In fact, in my recollection over the last five or six years, I cannot remember one that has failed to receive the commendation of your Lordships and this is, indeed, no exception.
Of course, we do not yet know the reply which the noble and learned Lord, Lord Mackay, will give to the 868 Question, and we can only speculate. I gather from the evidence given in the course of the proceedings before the Select Committee—and the noble and learned Lord, Lord Scarman, has been good enough to confirm it—that even if the convention is adopted it will apply to very few instances connected with the United Kingdom. That was the evidence given by Sir Kenneth Cork. One is, therefore, tempted to ask: If in the foreseeable future—and we have all noted the regrettable increase in the number of bankruptcies and liquidations in the United Kingdom over the past two or three years—it is not going to be of any great significance, should we support the convention at this stage?
In general, the noble and learned Lord seems to think that we should, but paragraph (15) of the report, about which he himself was good enough to inform the House, states:They"—that is, the Select Committee—therefore recommend that, subject to the revisions which they have suggested above, work should proceed with a view to the Convention's adoption".I am not quite sure what he means by "subject to the revisions".
I do not know what position the noble and learned Lord would be in if, for example, the Government declined—and we do not know their decision—to support the most important revisions which the Select Committee have suggested. Speaking for myself—and, obviously, I cannot speak for the noble and learned Lord—I should be tempted to say that, if the matters recommended for revision by the Select Committee were not adopted, then, on balance, I should be in favour of our not participating in the convention's adoption.
I assure your Lordships that this is not a matter of sheer cussedness. This subject raises very important questions. I shall not repeat what the noble and learned Lord has said concerning the whole question of receiverships, concerning the whole question of fiscal debts, concerning the position of husband and wife, concerning the provision of preferential debts and so on, but these are of vital importance. I wonder whether[...] in their reply, the Government will insist, as part of their particiaption in the convention, that these matters are dealt with.
I do not want to put the Government in the position of being anti-communautaire, or of being accused of being non-European or non-EECean, whichever term may be used. But there has been a growing tendency over the past few years for the United Kingdom to be far more pliant in these matters than some of our colleagues in the Community. I want to give only one example, because it is fresh in my mind and may be fresh in your Lordships' minds.
Ever since 1975, there has been a Commission proposal for freedom to establish services throughout the EEC and, in particular, insurance other than life assurance. As I have already indicated to your Lordships, this has been filibustered in the European Parliament. I observe from the report in The Times two days ago that, in spite of the optimistic hopes prior to the Finance Ministers' meeting which was held recently in Brussels, once again there has been objection from France, Italy, Belgium and possibly one other 869 member state. So this freedom to provide an important service in the EEC has been frustrated.
We do not seem to pay very much attention to this. We do not see any accusations in our own press that some of our colleagues are being non-communautaire or anti-communautaire over certain important matters because they decline to do certain things which were recommended a long time ago by the Commission. But the moment that we apparently do not agree with what the others want done, then a degree of opprobrium is usually put upon us. I think the time has come when that ought to come to a stop. I do hope, therefore, particularly in the light of the reservations to which the noble and learned Lord, Lord Scarman, has referred, that we shall insist upon these revisions, which are of very considerable significance indeed, as was pointed out by the Institute of Chartered Accountants in the evidence which they gave to the advisory committee under the chairmanship of Sir Kenneth Cork.
My second point is: even so, should there not be many more changes in our own laws relating to bankruptcy, receivership and so on before we embark on a convention of this kind? I do not hold any strong views about this, but there are professional views, in law and in accountancy, both ways. Some, like Sir Kenneth, are in favour of adopting the convention, subject of course to the revisions which have been made by the noble and learned Lord. Others say, "Ought we not to wait until the review of our own bankruptcy law is complete?" In this respect, I would fully support a further inquiry and further action regarding our own bankruptcy laws.
In particular, I should like to know, almost as a supplementary question to that raised by the noble and learned Lord, what action the Government propose to take on the interim report of the Insolvency Law Review Committee under the chairmanship of Sir Kenneth Cork which was presented to Parliament in July 1980 and which makes certain very important suggestions for the improvement of the whole of our pre-bankruptcy and bankruptcy proceedings. This committee was composed of some of the most distinguished accountants, academics and barristers that this country has. All we have had so far has been a consultative document which has the grace to mention the inquiry of Sir Kenneth Cork and to refer to the interim report but which then quite inexplicably ignores it completely.
We are agreed of course by now that at least the professional opinion, so far as this has been able to be ascertained, is that this consultative document on bankruptcy is a dead duck, anyway, devised by people, on the instructions of Ministers, who cannot have had the remotest concept of what they were talking about. I do therefore hope that we shall have some carefully considered observations from the Government on the interim report of the Insolvency Law Review Committee and in particular upon its very closely reasoned suggestions for the introduction of debt arrangement orders—DAOs—upon which no comment appears so far to have been made.
While agreeing with the conclusions of the noble and learned Lord, Lord Scarman, and paying tribute to all the work that he and his committee have done, standing as we do in his debt for the very clear observations he has made today, I feel that on the whole it would be far better to put our own house in order first, 870 on an intelligible basis, and then to proceed to wider methods of integrating our procedures with those of other countries. May I even extend it further by asking this: why only the EEC? What is wrong with having a Council of Europe convention to deal with matters of this kind? Very excellent conventions are agreed at the Council of Europe. Wider pressures can be brought to bear on the various member states comprising the Council of Europe and also on those within the EEC itself, which might result in far wider and far more beneficial effects.
These remarks have been addressed to your Lordships in the absence of any knowledge of the noble and learned Lord's reply to the question asked by the noble and learned Lord, Lord Scarman. These observations therefore must be assessed as a preliminary reaction to what the noble and learned Lord might conceivably say. Therefore I must make the reservation that, if the noble and learned Lord decides to inform the noble and learned Lord, Lord Scarman, that the Government propose to follow precisely the recommendations of the Select Committee, we on this side might in those circumstances feel constrained to support him more wholeheartedly.
§ 5.18 p.m.
My Lords, first may I add a word of thanks to the noble and learned Lord, Lord Scarman, for asking this Unstarred Question. Secondly, may I thank the Select Committee of your Lordships' House, and Sir Charles Sopwith, for their report on this not only complex but perhaps rather arid subject.
I seek to raise briefly three topics. First, to me it appears to be plainly right that one should seek to ensure a single and universal bankruptcy, as the noble and learned Lord described it, so that one has co-ordinated administration of bankruptcy throughout the Community, thus avoiding conflict between the courts of two countries. Therefore I broadly support the fifteenth conclusion of the committee; namely, to recommend the convention to your Lordships' House.
I am somewhat surprised that everybody seems to think that there are so few cases where there will be assets in an English bankruptcy under a foreign jurisdiction. My experience, limited though it is, has always been that one gravely suspected that there were assets under a foreign jurisdiction, probably put there just for that reason, but one that did not know how to get at them. Even if today it is the case that it would not apply in many instances, none the less a single and universal bankruptcy must be desirable.
What I feel less certain about is whether the method of conferring jurisdiction upon one court and one court only is the right way to achieve that result. I seek to illustrate my doubts by two examples, the first premising to your Lordships that by no means everybody who is insolvent—or every company that is insolvent—is anxious to be made bankrupt, is willing to co-operate wholeheartedly with that process or has behaved in the past in such an upright and honest manner as gives him nothing to fear in that bankruptcy. There are many who are threatened with bankruptcy who will seek, however hopelessly, to stave off, or at least to postpone, the evil day, because what is of great importance in a bankruptcy is to remember that many 871 substantive rights are controlled by the date upon which the bankruptcy commences. The question of whether you can overturn something as a fraudulent preference, the question of whether you can overturn settlements and so on, all depend upon the date on which the bankruptcy commences.
Let us first take an example of an insolvent who has a centre of administration in a country in the Community other than England, so that the courts of that country have exclusive jurisdiction over him. Now I have been dealing with that person, who trades in England—and I say "England" with respect to the noble and learned Lord, Lord Mackay of Clashfern, because of course in this country at the moment bankruptcy is not really a matter of the United Kingdom, but is done separately in each part of the United Kingdom. I have dealt with that man, thinking that he traded over here and not knowing of his various activities in the Community; not knowing that his centre of administration was in fact (or was probably) elsewhere. He has not paid me, so I try to make him bankrupt. At some late stage in those proceedings, after he has got several adjournments and perhaps after a receiving order has been made, he turns up and says, "But England is not my centre of administration, and therefore there is no jurisdiction in the courts of this country and everything that has gone before is a nullity". The receiving order may already have been made, but he says, "Well, you have no jurisdiction". Do I then fight him on that, perhaps expensively?—and I may well lose, because of course under this convention it is by no means certain where anybody's centre of administration is located. Even the fact that it is a company and that he has a registered office there is not conclusive. Alternatively, do I throw my hand in and say, "Well, you never told me that, but none the less now I believe you", and start afresh in another country, he having gained a postponement of the start of the bankruptcy by all the time that has been spent in between?
As another example, let us take an organisation which has no centre of administration within the Community but trades in several of the Community countries. Obviously—and perhaps more important in practice—local law in each of those countries will vary as to matters such as, for example, the liability of directors if the company has fraudulently preferred the bank so as to get them out of their guarantees. As the convention stands at the moment and as I understand it, it would be open to the directors of those countries to take advice from lawyers, decide on which country they would be most likely to get away scot-free and present their own petition in bankruptcy, or a winding-up petition in the country of their choice.
Those seem to me to be serious disadvantages—one can think of others—which flow from dealing with this matter by means of exclusive jurisdiction. I venture to suggest that perhaps a better way of doing it is this. To allow, as at present, any country which has, by its own law, jurisdiction over a man or a company, to render him insolvent, to make the appropriate order, whether it be a winding-up or a receiving order, unless of course, there is in existence and known to him an existing order in another country—and then to make 872 administrative arrangements by which the bankruptcy could be transferred, either to the country of his centre of administration, or the most appropriate country, so that it was not left to the petitioning creditor to try to find the right country to bring it in and the proceedings were not rendered a nullity if one got that wrong. The man remained a bankrupt, the bankruptcy was, by an appropriate means, transferred to the central country. I do not believe that it would be beyond the wit of man to amend the convention to achieve that result.
The second topic I wish to raise is the matter that is always being adverted to; namely, that this convention only deals with procedure and not with substantive law and inevitably, of course, the two always overlap. Thus, we get the point made by Sir Kenneth Cork; that is, it does not deal with receivership. We also get this extraordinarily difficult position of dealing with the fact that in different countries, different debts are preferential and take precedence.
What surely is needed in these matters is a common substantive law. After all, the purpose, for example, of preferential debts is that it is thought that some things must come first—the wages of employees and so on—and it should not be beyond the wit of the Community to agree as to what ranks as preferential. Therefore, I would urge the Government, if they are taking steps towards ratifying this convention, hopefully—if I may use that dreadful word—amended in the way suggested by the Select Committee, that they also press upon the other members of the Community that it should be only a first step towards amendment and consolidation of the substantive law.
I then come to my third topic, which perhaps does not arise directly out of this report; but if there is to be an amendment of the substantive law, there is, I suggest, one very important point to be taken into account. At present in this country, by means of the floating charge, or the fact that banks always take securities, it is almost invariably the case that when a company or a man becomes insolvent, subject to a few preferential debts, all his assets go to the bank which has financed his operations, leaving little or nothing to the general body of creditors, because the bank has its debenture or its security. To me—and I think to many others—that has never seemed to be either fair or right. The ordinary trader deals with a company or with a man who seems totally solvent, and in practice—whatever the technical law may say—that trader will have no means of knowing whether the man is solvent or the current state of his business. The only reason that he appears solvent is because he has had the support of the bank. The bank has its way of knowing the true position, and indeed of controlling the question of whether he continues trading and, if so, in what manner. Therefore, one asks the rhetorical question: Why should the bank, which has had all those advantages and is in the controlling position and has, by providing funds, enabled him to appear to be a solvent and reputable company or person, get all the assets and the supplier who has given credit not do so?
Of course, that is a big question, and not one that I would expect the Government to answer one way or another today, but one which I urge upon the Government ought to be considered in connection with the 873 reform of the substantive law. On that issue, I venture to differ from the noble Lord, Lord Bruce of Donington. It seems to me that it would be elaborate in the extreme to seek to reform our own substantive law and then go off to the Community and say, "Now let us consolidate it", because they might want to go off in the exact opposite way to which we had gone. But I say that if we are going to have a common law of administration we also need to have a common law of substance on insolvency, and, if we are going to do that, we need to get our own ideas clear as to what the law should be and that may merit some investigation. I would ask the Government if they could consider whether or not that is something on which they should take the first step.
§ 5.30 p.m.
§ The Lord Advocate (Lord Mackay of Clashfern)
My Lords, I should like to begin by conveying most cordial thanks on behalf of Her Majesty's Government to the noble and learned Lord, Lord Scarman, who in the midst of a great variety of other burdens has come today to present this report to the House, and of course for the work which he did himself in connection with its preparation. I should also like to thank most cordially all those Members of your Lordships' House who took part in the deliberations of the committee and all those who assisted in the way that the noble and learned Lord, Lord Scarman, described. It is right that I should also especially endorse what the noble and learned Lord had to say about Sir Charles Sopwith, who in the course of a long and very distinguished career in the public service has put us all in his debt to an extent which it is really quite impossible to quantify. I should also like to thank your Lordships who have taken part in this debate today. The comments which your Lordships have made will certainly be taken into account in some of what I am going to say and, perhaps more important, in what is to follow from that.
Before the United Kingdom joined the Community in 1973 the six original members had already decided that the complexities of bankruptcy (in the broadest sense) would unduly delay the ratification of the Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial matters—commonly known as the Judgments Convention and had set up a separate working party. The working party in 1970 produced the first draft bankruptcy convention which is intended to supplement the Judgments Convention.
My Lords, even if it were the case that only a few cases in practice would in the foreseeable future be covered by the convention—and the noble Viscount, Lord Bledisloe, has suggested the contrary—this convention is important as part of the structural framework which is required for the enforcement of obligations throughout the Community, and that is a very important aspect of the Community itself.
In July 1973 the then Government appointed an advisory committee under the chairmanship of Sir Kenneth Cork, who, as we have heard, gave evidence before your Lordships' committee, to consider the terms of the draft convention and to recommend such modifications as they considered necessary. After wide consultation and long deliberation, the advisory committee reported in August 1976. In the meantime, 874 the original working party produced another draft in 1975.
I should like to take this opportunity to thank the members of the advisory committee for their hard work and for the excellence of their report. The United Kingdom members on the committee of experts sought amendments recommended in the advisory committee's report, and the present text, as the noble and learned Lord has said, owes very much to their work. One member of the advisory committee, Professor Anton of the Scottish Law Commission, produced a very helpful note of reservation which carried the analysis further and considered that the convention, as it was then drafted, contained fundamental weaknesses which would, if implemented, impose barriers to the future reforms of bankruptcy systems. Negotiations between the existing members had by that time, however, reached such an advanced stage that it was felt that the better course would be to continue with them at working party level. In the event these negotiations brought out some of the problems which Professor Anton had highlighted, particularly in respect of preferential claims and sub-estates, to which I shall return.
Although attempts were made to harmonise the insolvency laws throughout the Community, it was realised that this would be a lengthy task, and instead the working party decided to prepare a convention that would make bankruptcies within the Community more effective by providing the means whereby potential conflicts between the laws and the courts of contracting states should be resolved.
As the noble and learned Lord has said, the convention covers all bankruptcy proceedings against natural persons and company winding-up proceedings, and it also covers analogous proceedings. In the United Kingdom it would cover all insolvency proceedings pronounced by the courts, and will include creditors' voluntary winding-up of companies even though no court is involved, but not members' voluntary winding-up or receiverships. Direct insurance companies are specifically excluded at present from the scope of the convention pending agreement on a draft directive on the winding-up of direct insurance undertakings.
The convention has attempted to achieve its objectives by providing that there will generally be only one bankruptcy against a particular debtor throughout the Community at any one time and that jurisdiction in each case will be channelled to the courts of the contracting state which opened the bankruptcy. That, of course, would not prevent another bankruptcy being opened against an individual who got into difficulties a second time.
The convention gives the liquidator—or trustee—virtually exclusive authority to administer the bankruptcy wherever assets are situated in the Community. In order to assist the liquidator to administer the estate the convention has attempted to harmonise the effect of the bankruptcy on the debtor and third parties by providing that the liquidator will be governed by the bankruptcy code of the state in which the bankruptcy is opened.
So far as creditors are concerned, the convention provides an easier and less expensive way for them to present their claims in a foreign bankruptcy. So far as secured and preferential creditors are concerned, as 875 we have already heard the convention has attempted to give equal treatment to each class of creditor under a set of rules which are undoubtedly complex and are a compromise solution agreed to so far in order to allow the matter to proceed.
The Government's position on the convention is broadly in accord with the views of the Select Committee of your Lordships' House. We consider it is desirable that the gap in the recognition and enforcement of bankruptcy judgments left by the Judgments Convention should be filled, and in principle the draft bankruptcy convention forms the basis of an acceptable solution. We must ensure, however, that in attempting to make the administration of Community bankruptcies easier we do not create a minefield of complex legislation.
There are areas where we still have reservations which will have to be resolved before the final draft is available for signature. I will not attempt to deal in detail with these reservations, but it may be helpful if at this stage I deal with the committee's conclusions broadly.
One aspect which has not been fully resolved is the relationship between the convention and the remainder of private international law. Some of the problems in this field, the Government believe, can be dealt with by redrafting, but there are several areas which are very fundamental. For example, the convention sets out rules for matters of procedure and for the effects of the bankruptcy, bit it gives no guidance on matters of status or substantive law, even though in some of its provisions it assumes that guidance has been given.
Much attention has been focused in the debate on the proposals for the payment of preferential debts, not only fiscal but also ordinary civil and commercial debts. Certainly, so far as the fiscal and quasi-fiscal authorities are concerned, the convention allows them far greater rights to recover their debts than are at present applicable in the United Kingdom. It is difficult to see the justification for the extent of this partiality when the concept of allowing revenue debts out of the assets situated in a state other than its own is contrary to our private international law rules.
It must be recognised, however, that by requiring the surplus assets to be transferred from the sub-estates to the state where the bankruptcy has been opened the convention has introduced the idea of a pool of assets into a multi-state bankruptcy, which is a concept at present unknown and is the reason why competing interests race to be first to realise assets. Before we reject the convention's proposals on this matter we must be satisfied that the United Kingdom is not thereby placed at a disadvantage.
The convention's propoasls so far as civil and commercial preferential debts are concerned appear to be over-generous in that they allow certain creditors, notably employees, to claim preferentially against the assets in any contracting state, even though they have no connection either physically or contractually with that state. The alternative system suggested by the advisory committee, which restricts these preferential claims to their own state or the state where the bankruptcy is opened, was proposed by the United Kingdom representatives, but so far has not been accepted by the other delegates.
876 In the absence of harmonisation, as Professor Anton in the note to which I referred pointed out, there is unfortunately no simple system which can deal with the problems caused by the continental method of dealing with preferential debts. Each state has an order of preference for debts, whether they are what we consider normal preferential debts, such as wages, rates, taxes et cetera, or the costs and expenses of the bankruptcy which we pay in a set order of priority in advance of preferential debts. The position is made even more complicated because the order of priority, and the amount allowed preferentially is different in some contracting states. Your Lordships will see that the system proposed by the advisory committee and recommended by the Select Committee will require extensive modification—even possibly a sub-estate system—to deal with the differences and to ensure that each state pays its correct share of the preferential debts. Therefore, your Lordships will see that the Government very much share the point of view which the noble and learned Lord, Lord Scarman, drew particularly to our attention in his first point.
There is another matter, not arising directly out of the report of your Lordships' committee, which I should like to mention at this stage. The Law Commission have drawn attention to the fact that the convention does not cater adequately for variations between the currencies of the contracting states and will create problems so far as the scheme of sub-estates is concerned. It may well be that one basic monetary unit will have to be employed to ensure equality of treatment for creditors and to offset the subsequent effect of exchange fluctuations. This seems to us a very important point and we are greatly indebted to the Law Commission for their work in this area.
The second point that the noble and learned Lord, Lord Scarman, raised, was in connection with spouses. The concern which he expressed about the repercussions a bankruptcy has on the bankrupt's spouse is one shared by Her Majesty's Government, which is why the convention expressly provides that if the law of the state in which the bankruptcy has been opened presumes that the property of the spouse has been acquired with the funds of the bankrupt, that presumption shall not apply to property situated in contracting states whose law does not include such a presumption. Article I of Uniform Law goes further and provides that all modes of proof shall be admissible to refute a presumption that the property has been acquired by the funds of the bankrupt.
If, instead of the bankruptcy law, the law of the matrimonial régime is followed, this will enable spouses to know what effect a subsequent bankruptcy will have on the transaction, but it may create problems for a liquidator when the bankrupt and spouse have lived in different states during their marriage. That was also a point to which the committee drew attention. It could be argued that before deciding to move his centre of administration to another state a person will take into account the possible effect of such a move on antecedent transactions. Recent developments in family law may present further difficulties in forthcoming negotiations.
The floating charge matter is one which the Government certainly have very much in mind. The emphasis 877 that Sir Kenneth Cork would like to see on rehabilitation is, in our view, a very important matter, and it is very intimately connected with the problem of preferential debts and is, therefore, a matter which will certainly be kept much in mind.
As regards the matters raised by the noble Viscount, Lord Bledisloe, I certainly believe that the difficulties which he mentioned in connection with the date of the effective bankruptcy are very important questions. I suspect that some help might be obtained from the terms of Article 13, but certainly what he has said today will be kept very much in mind in the negotiations which follow.
I have endeavoured to summarise the principal matters on which we feel reservations about the present draft. There are less important areas of reservation: for instance, whether the duties placed on the liquidator to advertise so extensively are too onerous, or whether the rules to prevent the conflict of recognition of duplicate bankruptcies are impractical, but none of them is considered sufficiently important to make the convention unworkable.
There is one other matter that I should like to mention; it is one as regards which we agree strongly with the committee. It is that the question of the validity of clauses of reservation of title—the so-called Romalpa clauses—should not he dealt with in the bankruptcy convention, but should be dealt with in a comprehensive directive which would deal with the law relating to these matters, not only in connection with bankruptcy but generally. Some work has already been done in this connection.
I hope that your Lordships will not feel that, in attempting to summarise, the Government will not take into account all the observations that have been made on this particular draft. Adoption of a convention of this kind would, as Professor Anton has pointed out, inevitably restrict our freedom to change our substantive bankruptcy law. Your Lordships will be aware that the Scottish Law Commission has carried out a very detailed review of the Scottish bankruptcy law and their work on that, I think, is completed. The Insolvency Law Review Committee, under Sir Kenneth Cork, is doing the same for the law of England, and the Government have made clear that further work on the Government's view of this matter is deferred pending the report coming from Sir Kenneth Cork. Similar work in revision of their own bankruptcy law is, we understand, going on in Germany and some other states. In the course of negotiations on this directive we shall, of course, bear this factor—the effect of the directive on our own law and the changes required—very much in mind.
This convention as it stands is not intended to harmonise bankruptcy law but would appear to require a number of changes in the existing law of the United Kingdom. Rules equivalent to the convention will have to be applied for the three jurisdictions within the United Kingdom. The United Kingdom will no longer have jurisdiction to declare a person bankrupt if his centre of administration is in another contracting state and the laws of that state allow him to be declared bankrupt. The courts will be unable to wind up a foreign company if its centre of administration, pre- 878 sumed to be its registered office, is situated in another contracting state.
We shall need provisions to recognise bankruptcies opened in other contracting states and to enable their liquidators to operate throughout the United Kingdom under the terms of their own bankruptcy law. The concept of acts of bankruptcy will have to be altered and the Insolvency Law Review Committee have already proposed in their interim report that acts of bankruptcy should be abolished and in future the basic grounds for a creditor's petition should be the non-payment of a debt. It will be necessary to amend partnership law because a partnership in England and Wales, unlike a Scottish partnership, is not a legal entity and its partners cannot under the convention be made bankrupt automatically.
The draft convention in Article 82 contemplates that new member states would be able to sign the convention although it does not envisage that non-member states would sign it. However, as the noble and learned Lord, Lord Scarman, has pointed out, this initiative may well be of importance in a much wider field than the Community. Indeed, the Council of Europe—if I may revert to a matter raised by the noble Lord, Lord Bruce of Donington—is, I understand, considering this matter. Obviously the more co-operation that one can have internationally in this field the less chance there is of the kind of difficulty to which the noble Viscount, Lord Bledisloe, referred of assets disappearing into some distant land where creditors cannot get at them.
I should like to sum up the position. I would respectfully suggest that this has been an extremely timely debate as the Government have been asked to lodge their observations on the draft convention by 15th November. During the forthcoming negotiations in the Council working group the Government will take full account of the views expressed by your Lordships today as well as those expressed by the committee in their report, for all of which, as I say, we are extremely grateful. I hope that the result of these negotiations will be that a satisfactory convention will emerge and, therefore, it is not necessary today to face the question of what would happen if that was not possible.
Finally, the noble Lord, Lord Bruce of Donington, referred to difficulties, for example, in relation to the insurance directive. I think I can assure him that this Government are very conscious of the need to press United Kingdom interests in the Community, and have done so with great vigour since taking office. Perhaps the most outstanding example is that of my right honourable friend the Prime Minister in her successful efforts in the budget matter.