§ 4.22 p.m.
§ The Lord Advocate (Lord Cameron of Lochbroom)
My Lords, I beg to move that this Bill be now read a second time. The law of bankruptcy has consistently over the years been regarded as a cornerstone of Scots mercantile law. but it can surely not have been contemplated in 1968, when the Scottish Law Commission first set up a working party under the chairmanship of the noble and learned Lord, Lord Kilbrandon, to examine the subject, that 16 years of involved discussion and argument would be required before the position we are in today would be reached. For much of that time the Scottish Law Commisssion consulted the legal and accountancy professions in Scotland and looked at the bankruptcy laws of a number of countries across the world, and were rewarded with the views of eminent persons too numerous for me to mention individually in the short time available to me today.
However, I should like to take this opportunity to thank all those who have been involved in the exercise, and especially the Scottish Law Commission for producing a most comprehensive report to which was annexed a draft Bill. It is this draft which largely forms the basis of the Bill which we are considering today. More recently, my colleagues and I have been particularly grateful for the detailed advice of the Law Society of Scotland and the Institute of Chartered Accountants of Scotland, some of whose members have given up a considerable amount of their time to meet myself and my colleagues the Parliamentary Under-Secretary of State for Trade and Industry and the Solicitor-General for Scotland, and officials, to assist us in presenting before your Lordships a Bill which will, I believe, provide a sound basis for the administration of personal bankruptcy in Scotland for many years to come.
It is therefore with some satisfaction and, indeed, pride that I have the honour today to introduce a Bill of such notable pedigree. That a review of the law was required has not been called into question. The major legislation upon which existing practice is based is the Bankruptcy (Scotland) Act 1913, which, apart from introducing a system of summary sequestration, was largely a restatement of the Bankruptcy (Scotland) Act 1856, itself in many respects derivative of an earlier Act of 1839. Thus I do not think it is going too far to say that the Scottish Law Commission's review represents the first comprehensive examination of the law of bankruptcy in Scotland since the work of commissioners under the chairmanship of Professor 516 Bell, one of the foremost architects of Scots law, whose report led to the 1839 Act.
Major changes in business needs and social attitudes are inevitable over such a long period. A major part of the Scottish Law Commission's task was to reappraise, in the light of those needs and attitudes, the policies of bankruptcy law and the administrative structure required to give effect to these policies. What is perhaps initially a little surprising is their finding of how well a framework devised some 150 years ago has stood the test of time. While some of the proposals in the present Bill represent major changes aimed at meeting the more serious criticisms of the present law, it has nonetheless been possible to leave much of the underlying structure of bankruptcy law untouched.
The foundation of our bankruptcy law lies in the voluntary arrangement which a debtor may enter into with his creditors when he is unable to pay his debts as they fall due. These voluntary arrangements sometimes involve a private composition contract: an agreement between the debtor and his creditors by which the creditors agree to forgo further diligence and discharge their debts in return for the debtor paying an agreed proportion of them, normally by instalments. Much more usually, they take the form of a trust deed by the debtor transferring his property to a trustee for the benefit of his creditors as a whole.
The value of these voluntary trust deeds has long been recognised. Indeed, although no precise figures are available, they are understood to be the preferred method of winding up the estate of an insolvent debtor in Scotland. It is estimated that they are three or four times more numerous than sequestrations. They have the obvious virtues for both creditors and debtors alike of simplicity, informality and flexibility. I therefore heartily endorse the view taken by the Scottish Law Commission that such non-coercive schemes should be retained and should not be made subject to detailed regulation or statutory control.
However, the Scottish Law Commission identified a number of disadvantages of a voluntary trust deed. These are that it leaves the debtor vulnerable to a petition for sequestration by a non-acceding creditor, that it is capable of being challenged as an unfair preference and that, as there is no duty to advertise the granting of such a trust deed, some creditors may well remain completely unaware of its existence.
In order to encourage the use of voluntary trust deeds, the Scottish Law Commission proposed to confer upon trust deeds which comply with certain conditions designed to protect creditors, such as the requirement to advertise the granting of a trust deed, a number of advantages, in particular that of substantial protection against being superseded by sequestration. Trust deeds which fulfil these conditions will be known as protected trust deeds and are dealt with in Schedule 5 to the Bill. The trustee under a protected trust deed will also be granted many of the powers enjoyed by a trustee in sequestration, such as the right to challenge gifts or other unfair preferences made by a debtor. The intention is not that protected trust deeds should replace other trust deeds but to make available a form of trust deed which, with the advantages which they would enjoy, will I believe make them an attractive proposition for both creditors and debtors.
517 These voluntary arrangements imply the co-operation of the debtor and his creditors. Where there is no such co-operation there must be some alternative procedure for the recovery of unpaid debts because, without it, business and consumer credit, which plays such a valuable economic and social role in our society, would become more expensive and less widely available.
As the Scottish Law Commission stated in its report, it considered that it was in,the interests of all concerned, that is the creditors, the debtor and the public in general … that, in cases where a debtor cannot pay his debts where they fall due and cannot come to informal arrangements with his creditors, an orderly coercive procedure should be available to any creditor, and indeed to the debtor himself, in which his whole assets may be recovered and administered by one person for the benefit of all his creditors".As your Lordships will be aware, in Scotland we call this compulsory procedure "sequestration", which is not to be confused with the process of sequestration in England and Wales. It is the compulsory nature of the transfer which distinguishes sequestration from voluntary arrangements. It is the transfer of a debtor's whole assets for the benefit of his creditors generally which distinguishes sequestration from other ways of securing the payment of debts in Scottish law, particularly the ordinary diligences of arrestment and poinding which become unsatisfactory where there are many creditors.
The main question which concerned the Scottish Law Commission was not, therefore, whether the process of sequestration should be retained, but rather that of balancing within that process the interests of the debtor and his creditors and also the interests of creditors among themselves. I believe, and I hope to show to your Lordships, that the Bill strikes a balance between those interests which is both humane and reasonable.
I now turn to the principles on which this Bill has been prepared and it may be helpful if I summarise the objectives of the Scottish Law Commission in framing its recommendations which are embodied in the Bill. These were: to preserve the rights of creditors to come to voluntary arrangements with insolvent debtors by paying their debts in whole or in part; to preserve, where voluntary arrangements are not made, and so far as is consistent with the humane treatment of the debtor, the effectiveness of sequestration as a support for the system of commercial credit; to ensure that, except where otherwise provided, sequestration should be available in all cases of insolvency; to protect creditors by ensuring that the bankrupt makes a full disclosure of his estate wherever situated and by providing procedures whereby the extent of that estate may be verified; to ensure that that estate may be rapidly recovered and distributed among the creditors; to protect creditors, also, by retaining those rules of bankruptcy law designed to ensure that gifts made by the debtor before sequestration, and likely to have been made in contemplation of it, may be recovered for the benefit of the creditors; to promote equality among the creditors as a class by retaining provision for cutting down unfair preferences to individual creditors; by ensuring that diligences effected within a short period prior to the sequestration are cut down and by providing appropriate rules for the valuation of debts and appropriate machinery for adjudicating 518 upon them; to protect the interests of the debtor so far as fulfilment of the preceding objectives allows—in particular, the law should not discourage the bankrupt from earning his living during the sequestration or prevent him from retaining sufficient income to maintain himself and his family; to facilitate the discharge of the bankrupt and to ensure that bankrupt debtors do not remain indefinitely subject to disqualification of a bankrupt; to strengthen the law relating to bankruptcy offences, but to ensure also that the civil law of bankruptcy is not used as an instrument of penal policy; to provide an efficient and expeditious machinery for attaining the preceding objects; to ensure also that this machinery is adaptable to the circumstances of particular cases; and finally, to provide a clear and comprehensive statement of the relevant law.
Where, then, does this leave us in relation to what the Bill before your Lordships actually provides? Your Lordships will be relieved to hear that I do not intend to go through the Bill clause by clause, but it will, I think, be useful to highlight certain themes following, so far as possible, the general sequence of the sequestration process. In the system the trustee in sequestration—that is, the permanent trustee—will retain his present central role in bankruptcy administration. However, the Scottish Law Commission proposed that there should be introduced a new system of interim trustees, which is provided for in Clause 2 of the Bill. This proposal is intended to deal with the main criticisms which have been made of the present sequestration process; namely, that it fails to provide adequate protection of the debtor's estate pending the appointment of the trustee, that there is no early investigation into the debtor's business affairs, so that the causes of his insolvency and his possible commission of criminal offences are brought to light, and that there are no adequate methods for securing the administration of the estate where (as often occurs where the debtor has few assets) no trustee is appointed.
It has for some time been appreciated that a debtor's estate is at its most vulnerable in the interval between the commencement of sequestration proceedings and the election of the trustee in whom the estate is vested, because it is at this time that assets tend to disappear with great rapidity. Provisions in the Bankruptcy (Scotland) Act 1913 for the interim protection of the assets are generally recognised not to have been adequate to prevent their disappearance. It has also been apparent that the system of summary sequestration introduced by the 1913 Act to deal with small assets cases (that is, those cases where the debtor's assets are insufficient to allow any payment of his debts) has proved unsuccessful. Indeed, the figures included in the Scottish Law Commission's report show that in small assets cases a trustee is frequently not appointed, presumably because his remuneration cannot be guaranteed. This may also be the reason why fewer than one in three sequestrations are concluded by a final division of the debtor's estate.
We share the Scottish Law Commission's view that this is an unsatisfactory position. The Scottish Law Commission considered a suggestion that the English system of official receivers should be introduced into Scots law. The Scottish Law Commission rejected this 519 suggestion partly on grounds of cost and partly because it did not take account of the distinctive feature of Scottish bankruptcy administration that it is under the control of the creditors, subject to a minimum of intervention by the state. It therefore sought a solution which was consistent with the Scottish principle of creditor-control by recommending that, in every sequestration, there should be an interim trustee whose main function would be to safeguard the debtor's estate. He would be appointed on, or in certain circumstances before, the award of sequestration, and his appointment would be interim pending the election of a permanent trustee at the first meeting of creditors some four to six weeks later. If during this period the sequestration is identified by the interim trustee as being a small assets case, or if the creditors do not elect a permanent trustee, the Bill provides for the sheriff to appoint the interim trustee as the permanent trustee.
Once the interim trustee is in post he will be able to exercise various powers to preserve the debtor's estate but will also be required to ascertain the reasons for the debtor's insolvency and to draw up a statement of those affairs, including an assessment of whether the case is likely to be a small assets case. I believe that by his appointment and by the carrying out of his statutory powers and duties the interim trustee will effectively answer the valid criticisms which have been levelled at the 1913 Act procedures.
Now, since the intention is to have a trustee acting in every sequestration, there must be no room for an interim trustee being permitted to pick and choose which cases to adopt or not to adopt. The Bill therefore provides for a list of persons willing and qualified to act as interim trustees. No one on that list will be permitted to refuse to accept appointment as an interim trustee when he is selected for a particular case. Under such a system, appointees will need to be sure of receiving their remuneration should the debtor's assets prove insufficient to meet their fees and outlays. We are therefore proposing that these expenses should be underwritten from public funds to the extent that the debtor's assets are insufficient to meet them. It is only proper that this provision should extend only to those trustees who have no choice but to accept their appointment in a particular case—namely, interim trustees—and those interim trustees who are appointed as permanent trustees in small assets cases or in those cases where the creditors do not elect a permanent trustee.
Moreover, with a view to minimising the expenses in those cases and speeding their administration, we propose that the sequestration process should be subject to the modified procedure set out in Schedule 2 to the Bill. This means that no commissioners of the creditors may be elected and that the consent of the Accountant in Bankruptcy is required before the permanent trustee can take certain steps which would involve expense, such as the public examination of the debtor.
This brings me conveniently to the question of the public examination of the debtor. The 1913 Act requires the debtor in every sequestration to undergo a public examination before the sheriff, as part of the investigation into his affairs. The main purpose of the 520 public examination in Scotland has been to obtain from the debtor, when he is on oath, a full disclosure of his assets and to investigate any transactions which may be liable to be challenged. It has also been to enable the trustee and the creditors to examine the causes of bankruptcy.
The Scottish Law Commission considered that, while in certain cases the public examination can perform an important and useful function, there are a considerable number of cases where it is of little or no practical value. It considered that, having regard to its expense both from the standpoint of the creditors and that of the state, and the distress and humiliation which it causes to the debtor, the public examination of the debtor should take place only where it was necessary for the efficient conduct of the sequestration. It therefore recommended, and the Bill provides, that the public examination need not be held in every case.
The Scottish Law Commission also envisaged that the need for the public examination of the debtor would be diminished by the other provisions in the Bill, in particular the provisions regarding the preliminary investigation by the interim trustee into the debtor's estate and conduct. The Bill also introduces other ways of obtaining information from the debtor, such as by a voluntary interview of the debtor by the permanent trustee or by a private examination before the sheriff. Similar provisions also apply in the case of other persons who may have relevant information. These proposals seem to me to give the flexibility required for different cases—something that is definitely lacking under the existing procedures.
One of the humane features of our present sequestration system, in contrast with some European systems of law, is that the debtor is able to apply to the court to obtain a discharge from most if his debts, even although they may not have been paid in full. The Scottish Law Commission saw no reason to alter this principle and indeed proposed that the debtor should be discharged automatically (that is, by operation of law) five years after the date of his sequestration but with provision for the discharge to be deferred by the sheriff on cause shown. It also proposed that the debtor should be able to apply in certain circumstances for an accelerated discharge after one year.
We agree with the Scottish Law Commission's proposal with regard to the automatic discharge of the debtor, but we have proposed that the period for his automatic discharge should be reduced from five to three years. This would be in line with the proposals contained in the White Paper A Revised Framework for Insolvency Law regarding the three-year automatic disqualification of directors and the proposals for the discharge of bankrupts in England and Wales. This, of course, renders the accelerated discharge proposals less appropriate and, as a consequence, these provisions have not been included in the Bill.
So much for some of the major changes. I would, however, invite your Lordships to look at the Bill as a whole because I believe that the Bill must be regarded as a significant law reform measure. Happy as I was to speak earlier of the success with which our law has stood the test of centuries, the time has undoubtedly come for a modern and comprehensive statement of 521 bankruptcy law and procedures. This is what the Bill provides.
The Bill sets out virtually the whole law relating to sequestration—both the substantive law and the procedural requirements. The opportunity has been taken to eliminate unnecessary formalities and procedures. Some of these I have already mentioned. I will do no more than draw attention to a few of the other measures which are designed to simplify the procedures and reduce expense, such as the reduction in the number of statutory meetings of creditors to one, and the simplification of the rules for the submission and valuation of claims to vote at meetings of creditors and to rank for the payment of dividend. We have also taken the opportunity to set out in Schedule 3 a clear and comprehensive statement of the debts which receive preference in the division of the debtor's estate, including the preferences for certain Crown debts which, contrary to the Scottish Law Commission's recommendations, we are proposing to retain.
There is one matter to which I must refer with mixed pride and regret. We intend to repeal two Acts of the Scottish Parliament—a Bankruptcy Act of 1621 and a subsequent Act of 1696. These Acts are to be repealed not for the unworthy reasons that the good Scots language in which they are expressed falls strangely on modern ears. They are to be repealed partly because they do not accord in matters of detail with the proposed new bankruptcy system and partly because we wish to gather up all the major statutory law of bankruptcy in one Act. But I cannot preside, as it were, over the demise of these 17th century Acts without paying tribute to their great service to the law of Scotland. A certain Lord Chancellor, I think, once described the Scottish legal system as:those interesting relics of barbarism tempered with importations from Rome".These Acts, I think, provide convincing proof to the contrary. They set out with astonishing foresight and clarity the guiding principles of a sound insolvency law. They have endured—and rightly endured—over a span of three centuries or more, and their essential principles, unaltered except for adjustment of detail, are re-created in the Bill.
The structure of the Bill has been carefully designed so that the process of sequestration can be easily followed. The opening clauses describe the character and functions of the dramatis personae—the persons who are concerned with the administration of the sequestration procedures. The remaining clauses of the Bill then follow, so far as practicable, act by act, scene by scene, the sequence of events in the sequestration process from its commencement to its termination with the discharge of the debtor and the trustee—as it were, the final curtain. Related questions of substantive law are treated concurrently. Both the structure and the clear and simple way in which the law has been expressed in the Bill have been designed to facilitate the use of the Bill by those concerned with the sequestration procedure.
For these reasons, this Bill, in its draft form as published by the Scottish Law Commission, has already won widespread acceptance in the legal, accountancy and business worlds. I believe that it is a 522 Bill which meets the highest standards of law reform, and the Scottish Law Commission is to be congratulated for its work in producing it. As we have sought wherever possible to take into account the expert views of the Law Society of Scotland and the Institute of Chartered Accountants of Scotland in our subsequent deliberations upon its content, I am confident (without wishing in any way to pre-empt a full discussion of the Bill's provisions in either House) that an Act substantially in the same form as the Bill before your Lordships will enhance considerably the statute book by providing, in a clear and comprehensible form, provisions and procedures for settling the affairs of bankruptcy in Scotland which are both equitable and practicable and will stand the test of time. On this basis, I commend the Bill to your Lordships.
§ Moved, That the Bill be now read a second time.—(Lord Cameron of Lochbroom.)
§ 4.50 p.m.
§ Lord McCluskey
My Lords, the House will be grateful to the noble and learned Lord for introducing this generally welcome piece of law reform. As the report of the Scottish Law Commission on which the Bill is based extends to 598 pages and took 14 years from conception to birth, we can hardly criticise the noble and learned Lord for taking 27 minutes to baptise the infant; and indeed we congratulate him on his shared pride in its paternity.
However, I read recently in a Scottish newspaper—I think it was the Scotsman—of a publisher who returned an altered manuscript with the comment:This work is in parts excellent and in parts original: unfortunately, the parts which are excellent are not original, and the parts which are original are not excellent".I fear we must say the same of this Bill. Much of it achieves a welcome improvement in the law, and some of it enshrines the Government's own thinking. Alas, the improvements owe nothing to the Government's thinking, and the Government's own thinking has produced no improvements. What the Scottish Law Commission sought to do was to preserve but modernise the traditional Scottish system, which treated the debtor humanely while protecting the creditors and enabling them to preserve, recover, administer and distribute the bankrupt's estate with the minimum of bureaucracy and expense.
The one significant, dramatic and important matter of principle and policy which the Scottish Law Commission studied and proposed to alter was the present rule under which the ordinary creditors are second-class citizens—in that they get nothing until the tax collectors are paid in full. Under the existing law, the tax collectors enjoy the same privilege that nature accords to vultures. When the stricken stag or the wounded wildebeest falls dead, the vultures are first upon the scene. They gorge themselves until they are replete; and only when they are replete are less privileged creatures able to scramble for the remaining scraps.
So, I am afraid, it is in bankruptcy because the law creates a class of preferred creditors who are entitled to receive 20 shillings in the pound before the rest are entitled to a ha'penny. Who are these "preferred" creditors? Why, none other than the Commissioners of 523 Inland Revenue, the Lords of the Treasury, the Commissioners of Customs and Excise and the collectors of rates. Who are the "postponed" creditors? They are the ordinary citizen, the tradesman whose account the debtor has not paid, the friend, or even the banker, who has lent the debtor money in a vain but laudable attempt to save the business, the unfortunate customer who has paid in advance.
I believe that a system which robs the poor to pay the rich is a system which sorely needs a good advocate and a sound justification. The system has found its advocate in the person of the noble and learned Lord the Lord Advocate—and there is none more persuasive than he. But for justification we look in vain. The Scottish Law Commission, who have no axe to grind—on the contrary, they are even paid by the same Lords of the Treasury—studied the question with immense care. After full consultation, reflection and, for all I know, even prayer, they concluded that the retention of Crown preference could not be justified. They asked, but could find no answer to, the judge's question, which was:Why should individuals be made to suffer for the general good, especially … where the general benefit is infinitesimal but the individual loss substantial?Why indeed, they asked, should the unfortunate creditor discharge the debtor's obligations to the community? Why did they find no answer?—because there is no answer. So they recommended a change. Yet this is the one recommendation that the Government have rejected.
The noble and learned Lord the Lord Advocate is the urbane and amiable advocate for a meretricious cause and a callous client in this regard. He and his colleagues are much given to airy rhetoric about the Rule of Law. The underlying principle of the Rule of Law is that we are all equal before the law. But alas, when it comes down to hard cash, the noble and learned Lord the Lord Advocate, wholly insensitive to the irony that this is 1984, has added the Orwellian footnote that some are more equal than others. In the trough of bankruptcy the Chancellor the Exchequer has the longest snout.
Ministers have often—and I think arrogantly—announced that there is no alternative. But in this instance the alternative is clear. It is spelled out by the Scottish Law Commission. It is the alternative of justice, of equality, and of humanity. So I think the noble and learned Lord the Lord Advocate should go back to the Scrooges in the Treasury, show them the Scottish Law Commission's modest and just proposal, and ask them Tevje's plaintive question:Would it spoil some vast, eternal plan?".If he does not receive the right answer from the Lords of the Treasury, then we shall, at the Committee stage, have to ask your Lordships in this House to tell him where his duty lies.
On one small matter of detail, arising out of that particular point—the retention of Crown preference—I should like the noble and learned Lord the Lord Advocate to be able to tell me, if not now, then at some stage before we go into Committee, whether the combined effect of the rules about preference contained in Clause 48 and the rules in Clause 34 for the recall of a court order made for 524 payment of a capital sum on divorce, would be to transfer to the Commissioners of Inland Revenue and other Lords of the Treasury the assets and the moneys which the divorced spouse, usually the wife, has been awarded when a decree of divorce has been pronounced. Will she then be able to come back to the court and in some way seek to obtain a periodical allowance in relation to her financial dependence?
There are other questions which I shall raise at a later stage. At the moment, looking at questions of principle, there is another rather important matter that I want to draw to the attention of the House. It is this. The Bill creates, and re-enacts throughout its length, a series of offences. For example, in Clause 15 the debtor who fails to inform the trustee in bankruptcy of some expected benefit from another estate can be fined for that failure. In Clause 18 if he disobeys the interim trustee's directions, or the court's directions, or if he obstructs the trustee, he can be fined or sent to prison for no fewer than five years. That is therefore an indictment in the High Court for an offence under this Bill. If he fails to deliver a proper list of his assets, he can be fined. If the creditor makes a false statement of claim, and that is known to the debtor and he does not reveal it to the trustee within a period of time, he can be sent to prison for a maximum of five years.
With respect, I can see some difficulties in imposing sentences by way of a fine upon persons who have been sequestrated, because they have no money. On the other hand, it seems monstrous that for statutory offences of this kind the maximum period of imprisonment should be five years. If the creditor and the debtor engage together in a plot, as it were, to defeat the other creditors and they are therefore guilty of fraud at common law, let them be prosecuted for fraud at common law. If they are guilty of what are essentially technical offences, or even slightly more than technical offences, why impose a statutory maximum of five years' imprisonment? In my submission that reflects a somewhat Victorian view, and this Bill owes its origins to Victorian legislation in some respects. It reflects a Victorian view that bankruptcy is somewhat close to criminality.
On the matter which the noble and learned Lord the Lord Advocate mentioned regarding the discharge of the bankrupt, the Scottish Law Commission, as he reminded the House, proposed that there could be an accelerated discharge of the bankrupt, to take place 12 months after the sequestration, and the discharge would be automatic after five years. I think that the noble and learned Lord the Lord Advocate will be asked at a later stage to justify that more fully because, at the moment, the reason why the Government have departed from the recommendation made by the Scottish Law Commission is certainly not to me entirely clear or convincing.
One other matter that relates to penalty to which I should draw your Lordships' attention is this. In several places, and notably in Clause 22 and in Clause 18, it is very difficult for the person accused of the criminal offences created by the appropriate clause to escape a conviction. In Clause 22 (5) (a) the onus is inverted. I should like to know why it is that in that situation the person accused has to satisfy the court of his innocence, rather than follow the usual procedure 525 whereby the onus rests upon the accuser. Secondly, why is the defence of reasonable excuse not accorded to the person accused under Clause 18?
I do not think the Lord Advocate did explain, unless I missed it, where Clause 58 came from. It appears to have been added to the Bill and not taken from the Scottish Law Commission's draft Bill. Perhaps he can assist us as to the origins of the clause. A number of other points arise for consideration. Many of them were drawn to my attention by an interesting and full memorandum prepared by the Law Society of Scotland. But these matters of detail can, I think, wait until the Committee stage.
One other matter should be mentioned. The law relating to receivers in Scotland has got into rather a mess in the last 10 years or so. It may be that this Bill is not the right vehicle to put these matters right, but I hope that the Lord Advocate will be able to tell the House that the law on receivers is to have due consideration with a view to straightening it all out.
Subject, therefore, to our distaste for the line taken by the Government against the recommendation of the Scottish Law Commission on retaining Crown preference, and subject to the various questions that have been asked, I think that we can extend a general welcome to the Bill. We congratulate, in particular, the Scottish Law Commission, which has engaged in considerable industry and shown a lot of compassion and good sense. I should also like to congratulate the Lord Advocate especially for persuading the Government's legislation committee to allow this particular piece of law reform to go ahead of the general reform of the law on insolvency in England and Wales. I want to congratulate him for capturing the Bill, as it were, for himself. Subject to the matters that I have raised, we extend a general welcome to the Bill. We will not, therefore, oppose the Second Reading.
§ 5.1 p.m.
§ Lord Wilson of Langside
My Lords, it just goes to show, does it not, that one is never too old to learn. I had not appreciated that there was a process known to the law of either Scotland or England as se(pronounced see)questration. I had assumed that it was simply the BBC news readers' mispronunciation of the word "sequestration". I am glad to have my ignorance corrected by the noble and learned Lord the Lord Advocate. We on these Benches accord to the Bill a similarly qualified welcome to that expressed by the noble and learned Lord, Lord McCluskey. There is, of course, no doubt that the administration of the law in the context of bankruptcy and sequestration will be improved if and when, as I am sure it will, the Bill becomes law. For that reason alone, it is to be welcomed. I received yesterday morning three lengthy papers from the Scottish Law Commission. Unfortunately, I had other preoccupations yesterday and this morning which prevented me digesting them. However, I doubt, when I have done so, that they will greatly modify the qualified welcome that I accord to the Bill.
Frankly, I find that on this kind of Bill it is very difficult to compose a Second Reading speech. Here, of course, the Government have accepted the Scottish 526 Law Commission's view that the reform should proceed upon the existing principles of bankruptcy and sequestration. Indeed, it suggests, in chapter 3, paragraph 3.7, I think, that these principles should be strengthened. As I reflected last night, and indeed early this morning, on what I might say in a Second Reading speech, I experienced some difficulty and found my mind inclining to wander. I wondered at one stage if, without offending against the rules of relevancy, I might present—because of the title of the Bill—an attack on what I regard as the Government's appalling mishandling of the miners' strike. This is not because I agree with the views that have been expressed by some right reverend Prelates, but because I take the view that an imaginative, bold, political initiative might have brought the Scargill-McGahey axis down some time ago and spared us all, particularly those in the mining areas, a lot of blood and tears. My mind wandered along these lines but I found myself bereft, perhaps bankrupt, of ideas which would enable me to stretch the law of relevancy thus far.
Indeed, the only consequence, frankly, was that I fell asleep to dream that the Lord Advocte was to be seen attaching a bugging device to the tail of Mr. Arthur Scargill, that hero of the Labour Party, as he entered the Russian Embassy to beg for alms for the miners whom he had so grossly betrayed. But, as I say, I could see no justification for embarking on that field which intrigues me even more that the field of bankruptcy. I was, however, intrigued by the circumstances that the exercise from which this Bill has emerged began, as the noble and learned Lord, Lord McCluskey, said, in 1968 when the Law Commission was only three years old and when I—it must have been for my sins—was Lord Advocate.
This induced some reflection on the role and operation of the Scottish Law Commission which I think is excusable and understandable. I have vacillated over the years as to whether the Scottish Law Commission was the most appropriate body that could have been devised to help restore our national pride in our law. Scots lawyers are inclined to complain at the intrusion of the English law into our law. It is therefore something of a paradox that the Scottish Law Commission is an English invention. As your Lordships will remember, it was the noble and learned, and greatly respected, Lord Chancellor, Lord Gardiner, who presented the proposals for an English Law Commission. And the Scots, as they are often prone to do—one or perhaps two Scotsmen—came forward and said, "Me too".
I have often wondered whether this was the best answer to the problems of Scotland where the dimensions of the problems are very different. I vacillated from one view to another. Looking at the report on which this Bill is based and also on the next Bill that we are to consider, I must make up my mind firmly one way or the other. There is no doubt that as things are, we could not, in Scotland, do without our Law Commission. We are much in its debt for these kinds of proposals after exhaustive and careful examination of the problems.
Sixteen years have passed since this exercise was started. Four Lord Advocates have come and gone, like snow from the desert's dusty face, perhaps here and there, according to your view, lighting a little hour 527 or two on the way. I am very glad that the present Lord Advocate has now embarked on the presentation of this Bill, for the clarity of which we are much in his debt. I wish it well. I express from these Benches our appreciation of the preparatory work which has gone into it and I look forward to the Committee stage when no doubt a great many questions will arise. I look forward with particular interest to the noble and learned Lord the Lord Advocate's answer to the two principal criticisms which the noble and learned Lord, Lord McCluskey, directed to the Bill.
§ 5.11 p.m.
§ Lord Cameron of Lochbroom
My Lords, I should express from this side my thanks for the welcome to this Bill, if at times somewhat equivocal, from the noble and learned Lords opposite. It seemed to me that the noble and learned Lord immediately opposite, Lord McCluskey, fixed really upon only one particular clause in the Bill as indicting the whole of it. With respect to him, I accept the train of his remarks generally as being a welcome to the remaining portions, with the exception of that relating to criminal offences.
I should like to attempt to answer certain of the points that were made by the noble and learned Lord opposite. In regard to Crown preferences, certainly the Government accept the general principle to which the noble and learned Lord referred—equality of treatment between unsecured creditors. But it is, to be fair to the Scottish Law Commission, a matter upon which they accepted that there were two sides of the question. In the Government's view, a sufficient case has not been made out for altering the existing arrangements. I should amplify that in part because the case for retaining the existing—I underline the word "existing"—Crown preferences is, in my submission, a strong one. In the first place, there is a significant difference between taxed and non-taxed debts in that the former are imposed by law—a law passed by Parliament—whereas the latter are incurred by agreement.
Secondly, certain debts such as PAYE, which is an annual system of tax payment, national insurance contributions and VAT arrears represent monies which a debtor has deducted or collected, acting as an agent for the Government, but which have been diverted for his own purposes instead of being made over to the Exchequer. Loss of preference for these taxes would confer considerable benefit to the private creditor and a corresponding loss to the public at large, and it surely cannot be right that the statutory provisions enacted for the more convenient collection of revenue should inure to the benefit of private creditors.
Thirdly, it is not open to the revenue departments to protect themselves in the same way as, for example, a commercial creditor can—for instance, by demanding security for his debt. Thus there may be a significant interval that elapses between the time when a profit is earned and the date when the tax is due. These reasons in principle, apart from others which might be adduced in later discussion, cause the Government to take the view that the existing arrangements should be maintained. However, the opportunity has been taken 528 in the Bill to set out all the Crown preferences in a comprehensive and readily accessible form in Schedule 3.
The second point which the noble and learned Lord opposite raised was in relation to the question of a divorced wife. Since this is a somewhat detailed point, perhaps I may write to the noble and learned Lord on the matter.
The third point related to the question of the criminal offences. Perhaps I should say at this stage that, as the noble and learned Lord opposite is well aware, this proposal stems in part from the proposals in the draft Bill of the Scottish Law Commission themselves, so that if there is a Victorianism at all it is a charge which can be levelled against the Law Commission, who were otherwise praised by the noble and learned Lord, Lord McCluskey.
The Bill attempts to provide a balance between those offences which could only be summary offences and those offences which may, in certain circumstances, be serious enough to merit indictment; that is to say, a more formal procedure either before the sheriff court or before the High Court. The Bill as now before your Lordships does not include a provision which was in the draft Bill to the effect that in sheriff courts the period of imprisonment might be as high as three years. The Government take the view that there is no good reason for departing from the ordinary convention that the limit of imprisonment in the sheriff court should be two years. Of course, it will be for the prosecution to determine which form of procedure will be adopted, and at the end of the day it will be for the court to determine what is the appropriate sentence to follow upon conviction.
Obviously there may be different views upon this matter. The Government have attempted to strike a proper balance. It is considered that, whereas the Law Commission properly said it is proper to set out, in a Bill such as this, where you are dealing with persons who may become insolvent or verge on insolvency, the limits of permissible conduct, the limits of that conduct may at times amount in essence to fraud; but it may still be appropriate to proceed by way of a statutory offence. In these circumstances, I suggest that a period of five years is a suitable limit for certain of the offences if they are of a sufficiently grave nature to warrant indictment, and indictment which may take them to the High Court. Accordingly, I would suggest to your Lordships that there is a good reason for the distinction made in the clauses in the Bill on this matter; but I would certainly be open to persuasion on these matters as we proceed through the Bill at the Committee stage.
The next point that was raised concerned accelerated discharge. While I think I dealt with it, perhaps in passing, in my opening remarks to your Lordships, I will say that the change is one which has been discussed with the professional bodies—the Law Society of Scotland, the Institute of Chartered Accountants of Scotland—and is considered acceptable since it provides a consistent approach with what is heralded as being a possible approach in England for the automatic discharge of bankrupts. I think that your Lordships would consider that, in a 529 realm such as this, there is good reason to try to bring the two systems of law at least into harmony.
The question then raised by the noble and learned Lord opposite was as to the origins of Clause 58. I would simply say that again this is introduced for the same reasons of harmony. It derives from the same White Paper to which I made reference at the outset—namely, A Revised Framework for Insolvency Law—and again it seems appropriate in this matter that the trustee should be in no worse state North of the Border than he is South in trying to reduce what otherwise technically could be regarded as a fraud upon the creditors induced by another creditor.
Finally, I think that mention was made of the receivers. I should make it quite clear that, of course, this Bill deals only with personal bankruptcy, and the law relating to receivers may well be amended in a measure which I hope will shortly be coming before your Lordships' House. I trust that the points which I have made are sufficient at least to deal with the matters raised by the noble and learned Lord opposite.
§ Lord McCluskey
My Lords, before the noble and learned Lord sits down, I should like to draw his attention to one particular matter which he has dealt with in part—and again, I am just taking advantage of his kind offer to consider matters again in relation to penalties. However, what worries me particularly in relation to the statutory five-year imprisonment is that it is available in Clause 22(5)(a) where the onus is transferred to the creditor. If the creditor produces a statement which is false, then the burden upon him is to prove:that he neither knew nor had reason to believe that the statement of claim …was false".It seems to me, as a matter of quite important principle, that one should not impose a potential sentence of five years' imprisonment in a situation where the accused has the burden of proof upon him. I hope that the noble and learned Lord the Lord Advocate will take that on board in his reconsideration.
§ Lord Cameron of Lochbroom
My Lords, obviously I took note of what the noble and learned Lord said on this matter and I certainly will undertake to have a further look at it in the light of the remarks that he has made. I hope that I have dealt with the various points that have been raised, and in conclusion I would simply once again make clear my thanks and, I think, quite clearly the thanks of your Lordships' House, to the Scotish Law Commission for this very fine exercise in attempting to bring up to date the law of bankruptcy administration in Scotland.
§ On Question, Bill read a second time and committed to a Committee of the Whole House.