§ Consideration of amendments on Report resumed.
§ Clause 52 [Public examination of officers]:
§
Lord Bruce of Donington moved Amendment No. 81:
Page 37, line 9, leave out ("shall") and insert ("may").
§
The noble Lord said: My Lords, with your Lordships' permission, I should like to speak at the same time to Amendments Nos. 197, 198 and 199, all of which accomplish the same principle.
Amendment No. 197: Clause 116, page 93, line 12, leave out ("shall") and insert ("may").
Amendment No. 198: Page 93, line 27, after ("bankrupt") insert ("(a)").
Amendment No. 199: Page 93, line 28, after ("section") insert—("or
(b) refuses (except on the ground that the answer would tend to incriminate him) to answer any question properly put to him in that examination").
§ I can be very short about this. These amendments make the court's duty to order a public examination discretionary rather than mandatory, so that it can refuse a public examination if it appears that it would serve no useful purpose. The amendments also make it clear that the examinee must answer any questions properly put to him except that he can abstain if it means self-incrimination. I believe that this latter point has already been considered favourably—and the answer was in the affirmative—by the Scottish Law Commission. I am content to accept the noble Lord's correction if I happen to be wrong on that.
§ I do not think I need speak at length. The amendments would merely give the court the discretion rather than make a public examination mandatory. That would help to save time if the court came to the conclusion that it need not have a public examination. The requirement to make the examinee answer questions properly and truthfully is also a good point, as is the fact that he should be exempt from revealing matters that would be self-incriminating. I beg to move.
§ Lord DenningMy Lords, I would support these amendments. They are quite sensible. The court ought not to be compelled to have a public examination. It ought to have a discretion with the insertion of the word, "may". In addition, a person ought to have to reply unless he has a proper ground for refusing to answer. I support the amendments.
§ Lord Lucas of ChilworthMy Lords, I am sorry to say that I am not able to accept the amendment to Clause 52 or indeed the identical amendment to Clause 116. I should perhaps say that the noble Lord has rather caught me on the wrong foot because I was not prepared at this moment to speak to the other group of amendments, Amendments Nos. 82 and 83, with the consequential amendments, Amendments Nos. 198 and 199. However, I shall do the best I can. In fact the basic argument is the same overall.
Amendment No. 82: Clause 52, page 37, line 25, after ("person") insert ("(a)").Amendment No. 83: Page 37, line 26, after ("section") insert ("or(b) refuses (except on the ground that the answer would tend to incriminate him) to answer any question properly put to him in that examination").Clauses 52 and 116 require the court to direct the holding of a public examination if the official receiver applies for one. I ought to emphasis from the outset that there is no question of the official receiver asking for a public examination in all cases, or even a majority of them. The public examination will be reserved for the case where the official receiver cannot obtain relevant information or co-operation from the potential examinee in any other way. Furthermore, where creditors requisition an examination under Clause 52(2) or Clause 116(2) the official receiver will, if he thinks that the requisition is purely vindictive or that there is otherwise no good reason for holding a public examination, be able to go to the court for an order under Clause 52(2) or Clause 116(2) that he should not apply for an examination to be fixed.Our concern is that, if these amendments were accepted, the application for a public examination would inevitably turn into a full-blown pre-trial of the issues. We envisage that, if it had to consider whether a public examination should be held, the court would need to see a detailed report from the official receiver (or in Scotland the liquidator) setting out the reasons why the examination should be held and would allow representations from the potential examinee. This could drastically reduce the value of the public examination when ultimately fixed, since the potential examinee would effectively be put on notice of all the matters the official receiver wished to raise at the subseqeunt examination.
Such problems have already been encountered in relation to the winding up of companies under Section 563 of the Companies Act 1985, where allegations have to be laid against a person before the court can consider whether to fix a public examination. As pointed out by the review committee, those provisions have fallen into disuse because of the difficulties they create.
I turn now to the latter points which come under, I think it is, Amendments Nos. 82 and 83, which connect with Amendments Nos. 198 and 199, and I have again to refuse these. The refusal is twofold. First, it is not necessary for the Bill to provide expressly that refusal to answer questions put in the course of a public examination is a contempt of court. Such a refusal is punishable by the courts as a contempt in exercise of their inherent jurisdiction.
The other limb of the amendments proposed is that a person may refuse to answer questions put to him in the course of a public examination on the grounds that 76 the answer would tend to incriminate him. This is not acceptable since it could well defeat the purpose of the public examination. The leading authority on this is the 1927 case of In re Paget, a case heard by the Court of Appeal. I am sure that the noble Lord, Lord Bruce, will appreciate that I am advised in this matter. In that case, the Master of the Rolls gave a very clear analysis of the purpose of the public examination. He pointed out that its object was not merely to obtain a full and complete disclosure of the assets and facts relating to a bankruptcy but was also the protection of the public. The protection of creditors and of the public might be frustrated if a debtor was entitled to refuse to answer questions put to him at his public examination on the ground of self-incrimination.
The noble Lord specifically raised the matters contained in the Bankruptcy (Scotland) Bill at Clause 44(3). That provides that on a public examination a person is not excused from answering a question on the grounds that it may incriminate him.
Under the Scottish Bill, where an examination is applied for, the court must arrange this. That is in Clause 42(2). However, perhaps I can reassure the noble Lord, Lord Bruce of Donington. This might be helpful: the protection that I think he is seeking in his amendments—protection given at present to persons in a public examination that they need only answer such questions as the courts may put or allow to be put to them—will be restated in the rules.
Since Section 564 of the 1985 Companies Act is repealed by virtue of Schedule 9 to this Bill, it would be necessary for that protection to be restated. Again, notwithstanding what my noble friend Lord Selkirk had to say, I have to advise the House that it is intended that those provisions will be restated in the rules. This continuing discretion of the court will go some way to meeting the underlying points which the noble Lord, Lord Bruce of Donington, has made. I realise that his amendments may seek to go rather further but I have to tell him that we can go no further than I have suggested.
Lord Bruce of DoningtonMy Lords, the noble Lord astonishes me. In the earlier amendments that we have been discussing, for example, when I was emphasising the necessity for alleged delinquent directors being informed of the nature of the reports made against them, the noble Lord seemed to be all in favour of that. But one of his complaints is that if the application came before the court for argument, under subsection (3) of the clause we have in mind, then it would put the person on notice. Well, the noble Lord has been busy giving us assurances that the person would be placed on notice anyway, so what is the noble Lord complaining about? What is the point of having an application to the court under subsection (1) if the court has to grant the application anyway? It seems quite absurd.
All the first amendment does is to say "may" instead of "shall". What on earth is wrong with that? Does the noble Lord not trust the courts, or something? Surely, on a matter of this kind, no matter what the detail of the report submitted by the liquidator—and without casting any aspersions on his bona fides or on his desire to reach the truth—the reason for an application being made is to apply. If you 77 apply for something, surely the assumption follows from that that the application can be denied or it can be granted. As I say, the noble Lord objects to it on the grounds, inter alia, that of course it would give the debtor a notice of the matters. Well, he ought to have notice anyway. The noble Lord has been kind enough to underline that at an earlier stage in the Bill.
On this question of self-incrimination, the noble Lord first of all started to reply by saying that selfincrimination—or rather the absence of evidence that might lead to self-incrimination—would be undesirable in the public interest. But five minutes later he assures me that the measures against self-incrimination are in any case covered by the rules. Which does he want? Does he want a person to say things that are going to incriminate him, or does he not? He cannot have it both ways. I must insist that this as rather a frivolous way of dealing with quite serious amendments of this kind, which profoundly affect the liberty of the subject, and which indeed from the way the noble Lord is putting it seem to call into question the competence of the courts.
Once again the noble Lord refers to the rules. Your Lordships will be glad to hear that I do not want to expatiate on the rules any further tonight. Certainly, the way the Government are going, they will hear much more about government by rule. It seems to me that the longer this wretched Government continue in existence, the more reliance they have upon rules and the less they try to legislate through the ordinary democratic machinery of Parliament. That is another example but I shall not enlarge on that.
I ask the noble Lord seriously to think again about these amendments before he gives his final veto to them.
§ 8.15 p.m.
§ Lord DenningMy Lords, perhaps I may say one word. If an application is made to the court, the result is that the court can either grant it or refuse it. In my experience it is quite unusual to have an application which the court "must" grant or "shall" grant. That is the first point. The second point is this. When there is a public examination, the question of what questions should be allowed or what answers accepted is a matter for the person who is holding the public examination. There is really no need for any special rules about it. I would entirely agree with the Court of Appeal in 1927—I expect the Master of the Rolls then was Viscount Hanworth—in saying that there would not be an answer that tended to incriminate because one of the very things which the court wants to find out is whether there is anything incriminating being done. In a way, I would support the amendment in regard to the word "shall" being made, but I would not go so far as to support the other one.
§ Lord Lucas of ChilworthMy Lords, with the leave of the House, may I say that since the noble and learned Lord, Lord Denning, is the only other noble Lord who has added a voice to this series of amendments, and in view of what the noble Lord, Lord Bruce of Donington, has said, I should like to assure him that I have no reason to be, nor was my purpose to be, frivolous about this matter.
After all, as the noble Lord, Lord Denning, has said, 78 a public examination, or the purpose of a public examination, is to bring out one matter before one court to see whether evidence can be adduced on oath which has been withheld from the official receiver if he has not been able to obtain it otherwise. The purpose here is really to put the facts before the court for its consideration as to fitness or otherwise of a director while considering the question of disqualification. Surely that is right and proper. Certainly it is no wish of Government to prejudge or indeed to thwart the court's thinking in this matter.
I felt fairly confident that the Government had this right. I still think that we have. I do not think that the noble Lord, Lord Bruce of Donington, has added very much to it. However, without committing myself further, I am prepared to give this matter additional consideration in the light of what he has said. I have to emphasise that I should not wish to commit myself any further than considering most carefully the points which he has added.
Lord Bruce of DoningtonMy Lords, I am grateful to the noble Lord for having repeated the 11 th Commandment, "Thou shalt not commit thyself', and for saying that he will have another look at this matter. We shall return to the question; but in the meantime I ask the leave of the House to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ [Amendments Nos. 82 and 83 not moved.]
§
Lord Bruce of Donington moved Amendment No. 84:
Page 37, line 43, at end insert—
("( ) A person who is to be examined under this section shall be entitled to legal representation at his public examination.").
§
The noble Lord said: My Lords, if I may, I shall speak to this amendment and to Amendment No. 200 together.
Amendment No. 200: Clause 116, page 93, line 31, at end insert—
("( ) A bankrupt who is to be examined under this section shall be entitled to legal representation at his public examination.").
§ Both amendments cover substantially the same point. They would give the officers of a company and bankrupts the right to be legally represented at their public examination. One of the objects of public examination will be to obtain information from the examinee for the purposes of an action for wrongful trading. The examinee may need advice as to which questions amount to self-incrimination. A similar system of public examination to that proposed in the Bill exists in Australian bankruptcy law. This has now been held not to allow the right to legal representation. These amendments would put the issue beyond doubt and would enable the impecunious examinee to obtain legal aid.
§ That is the purpose of the amendment. I am bound to tell the noble Lord that it is not an amendment that I propose to ask the House to divide upon. However, I should like some public pronouncement by the noble Lord in response to the representations that I have made, so that it can be indicated which way the Government's mind is moving. There is reason to suppose that further amendments to the Bill may be made in another place, time in your Lordships' House 79 being close to running out, and that the Government may amend the Bill at some stage to ensure that anything said at the public examination will be admissible against the officer or bankrupt in other proceedings. We suspect that this may be in the mind of the Government. If it is not in the mind of the Government, we all know that the noble Lord is privy to everything that goes on in the Government's mind, particularly at the Department of Trade and Industry, and we would be glad if he would share his confidences with us. Otherwise, we would appreciate a formal statement of the Government's reaction to the proposals comprised in both amendments. I beg to move.
§ Lord DenningMy Lords, I should have thought that this was unnecessary. I believe that a person under public examination would be entitled to have his lawyer there, without any provision in the statute about it, and able to take such part as the person holding the examination allows. It seems to me that this would apply apart from any provision in the statute.
§ Lord Lucas of ChilworthMy Lords, let me say straight away that I am able to accept the principle of these amendments. I am grateful to the noble Lord, Lord Bruce of Donington, for bringing them forward although, as I will explain, I do not think, as indeed the noble and learned Lord, Lord Denning, does not, that they are necessary.
The procedure at public examinations in both winding-up and bankruptcy will in future be set out in the rules under the powers contained respectively in paragraph 17 of Schedule 3 and paragraph 25 of Schedule 6 to the Bill. The present provision of Section 564(3) of the Companies Act 1985, which allows a person being publicly examined in a winding-up to be legally represented at his examination, is therefore being repealed but the substance of that provision will be re-stated in the rules. I have taken on board as, indeed, my noble and learned friend has taken on board, the comments of noble Lords throughout the House with regard to the rules. But that is how we see the position at this moment.
Although there is no equivalent statutory provision in bankruptcy, it is the practice of the court to allow a bankrupt to be legally represented when he is publicly examined. Consequently, the rules will provide expressly that a bankrupt may be legally represented at his public examination for the purpose of enabling him to explain or qualify any answers given by him. His legal representative will also be able to make representations on behalf of the bankrupt.
It will be apparent, I believe, from what I have said that the purpose of the noble Lord's amendments will be achieved by the provisions which will appear in the rules. On that basis, I would ask him to withdraw his amendment although I recognise that, at this moment, anyway, he has some underlying reluctance to rely upon rules. We have talked about this previously. I think that we shall talk about it again. Of course, I have no objection to that. But, as the Bill stands before your Lordships, I reiterate that I do not think that the purpose for which these amendments have been set down, and as the noble Lord has explained it, they are 80 necessary. I would therefore invite him to withdraw the amendment.
Lord Bruce of DoningtonMy Lords, this is a most remarkable position. The noble Lord concedes the validity of the amendments. They are quite desirable. The only thing that divides us is whether they should be in the Bill or whether they should be in the rules. What harm is there at all in those circumstances in having them here in the Bill? I have taken all the trouble to put them there. There is no need to trouble the Lord Chancellor's Department and to incur all the public expenditure that would undoubtedly arise from the Lord Chancellor's participation in drawing up the rules. I am trying to economise. I have already done it for the noble Lord. He does not need to spend any more money.
This is merely another example of where this Bill, which could have been a comprehensive Bill on the lines of the Cork Report, bringing the whole of the law up to date publicly and openly, is being converted into an enabling Bill which, once passed, allows the Government to do exactly what they want in the rules or rather allows the Lord Chancellor to do so, thus breaching his own famous dictum about the elective dictatorship of the present Government. What is the purpose of having public and democratic discussion of Bills that affect quite a wide area when the main substance of the Bill is not in the Bill itself but in regulations that are not available at the time the Bill is being discussed? So we have no idea what will be the final form of the entire legislation. We cannot see the context, we cannot see the setting, within which the Bill itself is to be set.
Really, I must protest in the strongest possible terms about this tendency to pass enabling legislation, some of the principles of which are not discussed in this House at all and are not subject to the ordinary checks and balances. This business of legislating sub rosa in some obscure background or some obscure office in Whitehall is not one that this House should encourage. I must therefore protest, but having protested and observing that I have not a built-in majority in your Lordships' House, I beg leave to withdraw the amendment.
§ Lord Lucas of ChilworthMy Lords, just before the noble Lord seeks the leave of the House, I think that I have to protest also because he has made some very powerful statements. I want to remind him of one thing. Under the present law, rules relating to insolvency are made by the Lord Chancellor and they are laid before Parliament after they have been made. This Bill introduces in Clause 86 and Clause 193 an element of parliamentary control which is not available at present.
§ 8.30 p.m.
§ It does this by making the rule subject to annulment by resolution of either House of Parliament; so really it is quite wrong of the noble Lord opposite to go on about taking matters of this nature out of the realm of Parliament, because it is just not true.
§ For a number of years there has been a source of frustration to the Insolvency Rules Advisory Committee—and that itself was established under the Insolvency Act of 1976—that in its consideration of 81 the present rules there has been the inability to harmonise and modernise various procedures in the bankruptcy and winding-up codes because of this mismatch in primary and secondary legislative provisions. The inclusion of various matters in secondary legislation will enable the Government to introduce a number of provisions based on the recommendations of the Insolvency Law Review Committee without a significant increase in the size of Bills.
§ The Government and your Lordships will have a keen and high regard for those members of the rules advisory committee, as I do, and I think the noble Lord opposite would acknowledge that. I say that only because I want to get into perspective the impression that your Lordships may have following Lord Bruce of Donington's reply to my response to his amendment. I believe by repeating that to your Lordships I have brought that into perspective. The law and Parliament have a role.
Lord Bruce of DoningtonMy Lords, with the leave of the House, perhaps I may briefly reply to the response that the noble Lord has made. He has said there is an element of democratic participation by making the rules and the orders or the instruments subject to the approval of either House of Parliament. That illustrates the point beautifully: it is either House, not both, whichever one suits the Government. If the Government think they can get the provision through the Lords, they will send it to the Lords for approval; if they do not, they will send it to the Commons. This is the way in which it will work. It is no answer at all to ordinary democratic participation.
§ Amendment, by leave, withdrawn.
§ Clause 54 [Functions of official receiver in relation to office of liquidator]:
§ Lord Lucas of Chilworth moved Amendment No. 85:
§ [Printed earlier: col 52.]
§ The noble Lord said: My Lords, I spoke to this amendment earlier this afternoon, in speaking to Amendment No. 21. I beg to move.
§ On Question, amendment agreed to.
§ Clause 55 [Appointment of liquidator in Scotland]:
§
Lord Cameron of Lochbroom moved Amendment No. 86:
Page 39, line 31, after ("made") insert ("by the court").
§ The noble and learned Lord said: This is a purely drafting amendment. It makes it clear that where Clause 55(1) is referring to a winding-up order in Scotland, it has to be a winding up order made by a court. That brings the wording of this clause into line with the wording used elsewhere in this part of the Bill. I beg to move.
§ On Question, amendment agreed to.
§
Lord Cameron of Lochbroom moved Amendment No. 87:
Page 39, line 34, after ("shall") insert ("continue in office until another person becomes liquidator in his place under this section or section 56 below.
(1A) The interim liquidators shall").
§
The noble and learned Lord said: My Lords, it might be convenient to your Lordships if, in addition to speaking to this amendment, I speak to Amendments No. 90, 91 and 92.
Amendment No. 90: Page 39, line 43, leave out ("(1)") and insert ("(1A)").
Amendment No. 91: Page 40, line 2, leave out from ("is") to ("meetings") in line 3 and insert ("appointed or nominated by the meeting or").
Amendment No. 92: Page 40, line 5, at end insert—
("(4) A person who becomes liquidator of the company in place of the interim liquidator shall, unless he is appointed by the court, forthwith notify the court of that fact.").
The purpose of these amendments is twofold. First, they make it clear that any person who becomes liquidator of the company under Clauses 55 or 56 does so in place of the interim liquidator. Secondly, they require any person who becomes liquidator in place of the interim liquidator forthwith to notify the court of that fact, except in the case where he is appointed by the court itself. I beg to move.
§ On Question, amendment agreed to.
§
Lord Cameron of Lochbroom moved Amendment No. 88:
Page 39, line 35, leave out ("twelve weeks") and insert ("twenty-eight days").
§
The noble and learned Lord said: My Lords, in the case of this amendment it would also, I think, be to your Lordships' convenience if I spoke to the next amendment, No. 89.
Amendment No. 89: Page 39, line 36, after ("made") insert ("or such longer period as the court may allow").
§ The first of these two amendments is similar to that which the noble Lord, Lord Taylor of Gryfe, moved at Committee. It reduces from 12 weeks to 28 days the period within which the interim liquidator appointed by the court is required to summon meetings of the company's creditors and members for the purpose of choosing a person to replace him as liquidator. The Government agree that it is desirable that these meetings should be summoned as soon as practicable after the appointment of this interim liquidator. However, as was mentioned at Committee stage, the Government consider that it would be desirable to retain a degree of flexibility in case it might not be possible in any particular case for an interim liquidator to summon these meetings within the reduced period of 28 days. Accordingly, the second amendment allows the court to extend the period within which these meetings may be summoned. Since these two amendments run together, with the leave of the House, I would move the two en bloc. I beg to move.
§ On Question, amendments agreed to en bloc.
§ Lord Cameron of Lochbroom moved Amendments Nos. 90 to 92:
§ [Printed above].
§ The noble and learned Lord said: My Lords, I beg to move Amendments Nos. 90, 91 and 92 en bloc. They were spoken to when I spoke to Amendment No 87.
§ On Question, amendments agreed to.
83§ Clause 56 [Choice of liquidator at meetings of creditors and contributories]:
§
Lord Lucas of Chilworth moved Amendment No. 93:
Page 40, line 13, leave out subsection (3) and insert—
("(3) The liquidator shall be the person nominated by the creditors or, where no person has been so nominated, the person (if any) nominated by the contributories.").
§ The noble Lord said: My Lords, in moving Amendment No. 93 I should also like to speak to Amendment No. 166.
§ [Printed earlier: col. 53.]
§ Clause 56 of the Bill and Section 589 of the Companies Act 1985 provide for the appointment of a liquidator in a compulsory and creditors' voluntary winding-up respectively. Under both provisions, the liquidator is to be the person nominated by the creditors. If no nomination is made by the creditors, then any person nominated by the members will be liquidator. It has been represented to us that what Clause 56 and Section 589 do not make clear is who is to be liquidator where no person is nominated by the creditors. This is a valid criticism and Amendment No. 93 makes it clear that in a compulsory winding up it is always the person nominated by the creditors who will act as liquidator. Only in cases where the creditors fail to nominate a person will the nomination of the contributories be appointed as liquidator.
§ A similar amendment is made to the appointment of a liquidator in a creditors' voluntary liquidation by virtue of Amendment No. 166, so far as it relates to Schedule 4, paragraph 23. I beg to move.
Lord Bruce of DoningtonMy Lords, we on this side of the House have no objection to this amendment at all. However, for the record, my note shows that, when speaking to Amendment No. 21, the noble Lord also spoke to Amendments Nos. 155 to 166 inclusive. He now claims to be speaking to Amendment No. 93 and 166. Perhaps in due course the record might be corrected. The amendments seem eminently sensible and we have no objection to them on this side of the House.
§ On Question, amendment agreed to.
§ Clause 58 [Control of liquidator by a supervisory committee in England and Wales]:
§ Lord Lucas of Chilworth moved Amendments Nos. 94 to 108:
§ [Printed earlier: col. 52.]
§ The noble Lord said: My Lords, when I was speaking earlier today on Amendment No. 21, I addressed myself also to Amendments Nos. 94 to 108 inclusive. I beg to move these amendments en bloc.
§ On Question, amendments agreed to.
§ Clause 63 [Removal of liquidator and vacation of office]:
§
Lord Cameron of Lochbroom moved Amendment No. 109:
Page 45, line 37, at end insert—
(" (7A) Where an order is made under section 61 above for the dissolution of the company, the liquidator shall forthwith vacate office.").
§
The noble and learned Lord said: My Lords, it may be convenient to the House if, in speaking to this amendment, I also speak to Amendment No. 112.
Amendment No. 112: Clause 64, page 46, line 29, after ("63 (6)") insert ("or (7A").
§ The purpose of these amendments is to remedy an omission in the Bill by making provision for the removal from office of the liquidator, and his release, in the case where the court in Scotland makes an order for the early dissolution of the company.
§ The first amendment provides for the liquidator to vacate his office forthwith where the court has made such an order under Clause 61. The second amendment—Amendment No. 112—has the effect of providing that such a liquidator should have his release with effect from such time as the Secretary of State may, on an application made by him, determine. I beg to move.
Lord Bruce of DoningtonMy Lords, this is one of the detailed matters raised in the amendments which, due to the vast number that has been inflicted upon us over the last few days, I have not yet had an opportunity to examine in detail. I have no reason to doubt at all anything that the noble and learned Lord has said about these amendments, and, while reserving my position for a later stage, we have no objection to them going through at this time.
§ On Question, amendment agreed to.
§ Clause 64 [Release of liquidator]:
§ 8.45 p.m.
§
Lord Lucas of Chilworth moved Amendment No. 110:
Page 46, line 24, leave out ("or contributories or") and insert ("that has not resolved against his release or by a general meeting of the company's contributories or who").
§
The noble Lord said: My Lords, in moving Amendment No. 110 I should like to speak also to Amendments Nos. 111, 113, 114, 210, 211, 212 and 213.
Amendment No. 111: Page 46, line 28, after ("office") insert ("by a general meeting of the company's creditors that has resolved against his release or")
Amendment No. 113: Page 46, line 37, leave out ("resolves that he should not have his") and insert ("has resolved against that person's")
Amendment No. 114: Page 46, line 40, leave out ("in any other case") and insert ("if that meeting has not resolved against that person's release")
Amendment No. 210: Clause 125, page 98, line 42, leave out ("or") and insert ("that has not resolved against his release or who")
Amendment No. 211: Page 99, line 2, after ("office") insert ("by a general meeting of the bankrupt's creditors that has resolved against his release or")
Amendment No. 212: Page 99, line 11, leave out ("resolves that the trustee should not have his") and insert ("has resolved against that person's")
Amendment No. 213: Page 99, line 14, leave out ("in any other case") and insert ("if that meeting has not resolved against that person's release").
§ The amendments are identical save that one group applies to winding up and the others to bankruptcy. The amendments provide that where a liquidator or trustee (other than the official receiver) is removed from office by a meeting of creditors held under Clauses 63 or 124, he will be released upon vacating 85 office, unless the creditors resolve against his release. Where the creditors pass such a resolution, the liquidator or trustee will have to apply for his release to the Secretary of State.
§ These amendments would harmonise the release procedure which results from the removal of a liquidator or trustee by a creditors' meeting during the course of the liquidation or bankruptcy with the release procedure which flows from the final meeting of creditors convened by a liquidator or trustee under Clauses 62 and 147.
§ In our view, it is right that, in the, hopefully, rare cases where a liquidator or trustee is removed from office by the creditors, it should be possible for creditors to indicate any dissatisfaction with the liquidator's or trustee's handling of the case by withholding his release, so that he (the liquidator or the trustee) has to apply to the Secretary of State to obtain it. The Secretary of State will then have an opportunity to look into the circumstances which have resulted in the refusal of release.
§ Under the present legislation, a liquidator or trustee must notify the creditors who have proved their debts (and in winding up proceedings, the contributories) of his intention to apply for his release. Any creditor (or contributory) who objects to the granting of the release must notify his objection to the Department of Trade and Industry within 21 days of the date of the notice.
§ Upon receipt of any objection, the department withholds the release until the objection has been fully investigated. The nature of the objection dictates the level of investigation carried out: in most cases, objections concern minor matters and are quickly and easily resolved. More serious complaints obviously result in more detailed investigation. An aggrieved creditor can also bring his objection to the court. Once a complaint has been fully investigated and resolved, the department will grant the release. The objector may apply to the court, if he still feels aggrieved.
§ The investigative role of the Secretary of State in this respect will continue, although the professional standards required to enable a person to act as liquidator or trustee will, it is expected anyway, reduce the number of cases in which the Secretary of State is involved. Should creditors withhold release upon grounds that are well founded, it is intended that the Secretary of State will be able to report the liquidator or trustee concerned to the relevant professional body under the new arrangements for licensing insolvency practitioners which we discussed a little earlier today.
§ The bonding requirements will ensure that creditors do not incur permanent loss if the liquidator's or trustee's release is withheld due to negligence on their part, and aggrieved creditors (or contributories) can apply to the court under Clauses 12 and 130 (for corporate and personal insolvency proceedings respectively) if a liquidator or trustee has acted in breach of duty. Application under Clauses 12 and 130 can be made either before or after the liquidator's or trustee's release, although in the latter circumstance only with the leave of the court.
§ We believe that these amendments provide an important safeguard for creditors, and accordingly I beg to move.
86Lord Bruce of DoningtonMy Lords, we on this side of the House have no objection to these amendments, which seem to us to provide for elementary safeguards. However, in the course of his introductory remarks the noble Lord made mention of certain bonding requirements so far as insolvency practitioners were concerned. Will the noble Lord kindly enlarge upon what he said? What are the bonding requirements to which he referred?
§ Lord Lucas of ChilworthMy Lords, I am not able to enlarge very much further than my memory serves me and that means calling into sharp relief discussions which I believe we had at the end of January or in early February when we were discussing the early part of the Bill and the new arrangements with which it would be necessary for insolvency practitioners to comply. Clause 2 of the Bill deals with the qualification of practitioners. The noble Lord will see that Clause 2(2)(b) says that an individual will have to provide,
such security or, in Scotland, caution for the proper performance of his functions as may be prescribed.
§ Lord Lucas of ChilworthNo, my Lords, they are not rules. The situation is put quite clearly in Clause 2. That gives, in effect, the bonding requirements. My answer to the noble Lord's question has been put together a little from memory and with a little help from my noble and learned friend, and I hope that that satisfies the noble Lord opposite.
Lord Bruce of DoningtonMy Lords, the point is a comparatively small one. The noble Lord was asked a question as to bonding arrangements. The noble Lord replied that that is dealt with at Clause 2. Yes, it is. It says:
such security … as may be prescribed".That is no answer at all. The noble Lord is saying once again that the rules are going to lay it down. We do not know the rules, and therefore we cannot judge.
§ Lord Lucas of ChilworthMy Lords, with the leave of the House, perhaps I may say that the noble Lord is not doing himself justice when he argues this way. Practitioners have always had bonding arrangements. Those arrangements have not been set down in statute. They have been practice, and practice evolved through the application of rules. There is nothing very new here. I have a little suspicion that the noble Lord, Lord Bruce of Donington, is being perhaps a little frivolous on this amendment.
§ On Question, amendment agreed to.
§ Lord Lucas of Chilworth moved Amendment No. 111:
§ [Printed earlier: col. 84.]
§ The noble Lord said: My Lords, I have just spoken at some length to Amendment No. 111. I beg to move.
§ On Question, amendment agreed to.
§ Lord Cameron of Lochbroom moved Amendment No. 112:
§ [Printed earlier: col. 84.]
87§ The noble and learned Lord said: My Lords, I spoke to this with Amendment No. 109. I beg to move.
§ On Question, amendment agreed to.
§ Lord Lucas of Chilworth moved Amendments Nos. 113 and 114:
§ [Printed earlier: col. 84.]
§ The noble Lord said: My Lords, I spoke to Amendments Nos. 113 and 114 with No. 110 just a few moments ago. I beg to move both these amendments.
§ On Question, amendments agreed to.
§ Clause 66 [Effect of insolvency on members' voluntary winding up]:
§
Lord Lucas of Chilworth moved Amendment No. 115:
Page 48, line 10, after first ("the") insert ("relevant locality, that is to say the").
§
The noble Lord said: My Lords, in speaking to Amendment No. 115, it might also be convenient to your Lordships if I spoke to Amendments Nos. 116 to 119, and also 124 to 127.
Amendment No. 116: Page 48, line 11, leave out ("is situated.") and insert ("was situated during the relevant period.").
Amendment No. 117: Page 48, line 23, leave out from first ("the") to ("for") in line 24 and insert ("relevant locality").
Amendment No. 118: Page 48, line 29, leave out subsection (4) and insert—
("(4) Where the company's principal place
of business in Great Britain was situated in different localities at different times during the relevant period, the duties imposed by subsections (2)(c) and (3)(c) above shall apply separately in relation to each of those localities.
(4A) Where the company had no place of business in Great Britain during the relevant period, references in subsections (2)(c) and (4) above to the company's principal place of business in Great Britain shall be construed as references to the company's registered office.").
Amendment No. 119: Page 48, line 41, at end insert—
("(5A) In this section "the relevant period" means the period of six months immediately preceding the day on which were sent the notices summoning the company meeting at which it was resolved that the company be wound up voluntarily.").
Amendment No. 124: Clause 68, page 50, line 3, after first ("the") insert ("relevant locality, that is to say the").
Amendment No. 125: Page 50, line 4, leave out ("is situated") and insert ("was situated during the relevant period.").
Amendment No. 126: Page 50, line 26, leave out from beginning to ("for") in line 27 and insert ("relevant locality").
Amendment No. 127: Page 50, line 34, leave out subsection (5) and insert—
("(5) Where the company's principal place of business in Great Britain was situated in different localities at different times during the relevant period, the duties imposed by subsection (2)(c) and (4)(c) above shall apply separately in relation to each of those localities.
(5A) Where the company had no place of business in Great Britain during the relevant period, references in subsections (2)(c) and (5) above to the company's principal place of business in Great Britain shall be construed as references to the company's registered office.
(5B) In this section "the relevant period" means the period of six months immediately preceding the day on which were sent the notices summoning the company meeting at which it was resolved that the company be wound up voluntarily.").
§ My Lords, Clauses 66 and 68 are both designed to ensure that where a meeting of creditors is to be held in a members' or creditors' voluntary winding up, that meeting is given adequate publicity. Notices of the 88 meeting must be sent to the creditors, where their names and addresses are known. Furthermore, the meeting must be advertised in the Gazette and local newspapers circulating in the area of the company's principal place of business in Great Britain. If the company has no place of business in Great Britain, then the advertisements must be placed in newspapers circulating in the locality of the company's registered office. These provisions ensure that the meeting is advertised in the area in which the company traded and where many of its creditors are likely to be.
§ On re-examining these clauses it has occurred to us that the purpose of local advertisement may be defeated where directors change the company's principal place of business, or registered office, immediately prior to passing a resolution to wind up the company. The question arises: what of the creditors in the old locality? These proposed amendments would ensure that advertisements are placed in the local newspapers for all the localities where the company had its principal place of business, or, if it had no place of business, its registered office in the six months before the company meeting to wind up the company is summoned. We consider that these amendments afford a small but necessary protection to local creditors, and I hope that your Lordships will be able to accept them. I beg to move.
§ On Question, amendment agreed to.
§ Lord Lucas of Chilworth moved Amendments Nos. 116 to 119:
§ [Printed above.]
§ The noble Lord said: My Lords, in speaking to No. 115 I spoke to Nos. 116 to 119. I beg to move these amendments en bloc.
§ On Question, amendments agreed to.
§ Clause 67 [Liquidator nominated by company in creditors' voluntary winding up]:
§
Lord Lucas of Chilworth moved Amendment No. 120:
Page 49, line 2, leave out ("is") and insert ("has been").
§
The noble Lord said: My Lords, I beg to move Amendment No. 120, and with the leave of the House I should like to speak also to Nos. 121, 122 and 123.
Amendment No. 121: Page 49, line 22, leave out subsection (5).
Amendment No. 122: Page 49, line 30, after ("shall') insert ("within seven days of the relevant day").
Amendment No. 123: Page 49, line 31, at end insert—
("(7) In subsection (6) above "the relevant day" means the day on which the liquidator was nominated by the company or the day on which he first became aware of the default, whichever is the later.
(8) If the liquidator without reasonable excuse fails to comply with subsection (2), (4) or (6) above, he shall be liable on summary conviction to a fine not exceeding the statutory maximum.").
§ These amendments are contained in Clause 67, which deals with the abuse of a company appointing a liquidator in a creditors' voluntary winding up and then delaying the holding of the creditors' meeting while the assets are sold before the creditors are apprised of the position. This practice provides scope for abuse by directors in collusion with liquidators to dispose of assets in a manner advantageous to themselves. Although the new provisions on qualified insolvency practitioners will go a long way towards 89 eliminating such abuse in this context, Clause 67 restricts the liquidator's powers pending the creditors' meeting and imposes certain duties on him.
§ A liquidator appointed by the company in a creditors' voluntary winding up is under a duty under Clause 67(6) to apply to the court for directions where the company and the directors are in default of their obligations to call a meeting of creditors and supply it with the requisite information. However, under Clause 67(6) as drafted no sanction is imposed on a liquidator who fails to make such an application.
§ A liquidator appointed by the company and acting in collusion with the members or directors could therefore take no action under subsection (6) deliberately so that a creditors' meeting was not called (and hence the liquidator could not be replaced) or proper information was not provided, for the benefit of creditors, by the directors. This is clearly undesirable and the amendments therefore secure that the liquidator will be guilty of an offence if he fails to comply with the duty set out in subsection (6) of the clause within seven days from being nominated or from becoming aware of the default in addition to those set out in subsections (2) and (4). I beg to move.
§ 9 p.m.
Lord Bruce of DoningtonYes, my Lords, we on this side entirely agree with the noble Lord in regard to these amendments. We note that the Secretary of State for Industry and thereby the creditors have the same safeguards in the matter in that if a liquidator acts in collusion either with the directors or with selected creditors he runs the risk of losing his licence. That, in the ordinary way, should be quite sufficient.
This may go some way to eliminating the menace of the phoenix companies. It may go only a little way, but even a little way is very helpful. The whole trouble about phoenix companies is that what often appears to be a corrupt transaction need not necessarily be so. In a liquidation one finds that in taking over the assets of a company the difference between the going concern and the balance sheet values of assets is very different from their ordinary valuation on a break-up valuation as passed by a certified valuer. Therefore, when a liquidator offers assets for sale at their breakdown value and scouts around to try to get offers for them, sometimes a former managing director of the company is the only person who comes up with any offer that matches the independent valuation of the assets concerned.
If he takes the company over and starts again, that gives the impression that this is a phoenix company. But it is not necessarily so. One should therefore have a good deal of caution before one stigmatises every event of that kind as being another example of some kind of improper liaison between a liquidator and the former directors. Often there is no feasible alternative to the asset take-over in the absence of other offers and in the interests of the creditors generally. Nevertheless, having said that, I entirely agree with this as an extra safeguard to be written into the Bill. On this side of the House it has our entire support.
§ Lord Lucas of ChilworthMy Lords, I am much obliged to the noble Lord, Lord Bruce of Donington.
§ On Question, amendment agreed to.
90§ Lord Lucas of Chilworth moved Amendment No. 121.
§ [Printed earlier: col. 88.]
§ The noble Lord said: My Lords, when I was moving Amendment No. 120, I spoke also to Amendments Nos. 121, 122 and 123, and since I addressed Amendments Nos. 124 to 127 when I moved Amendment No. 115, it may be for the convenience of the House if I were to take en bloc Amendments Nos. 121 to 127.
§ The Deputy Speaker (Earl Cathcart)My Lords, with the leave of the House I shall put Amendments Nos. 121 to 127 en bloc. Also with the permission of the House, I shall not read them out.
§ On Question, amendments agreed to.
§
Lord Lucas of Chilworth moved Amendment No. 128:
After Clause 68, insert the following new clause:
§ ("Removal etc. of liquidator in voluntary winding up.
§
.—(1) This section applies with respect to the removal from office and vacation of office of the liquidator of a company which is being wound up voluntarily.
(2) Subject to subsection (3) below, a liquidator may be removed from office only by an order of the court or—
(3) Where a liquidator was appointed by the court under section 599 of the 1985 Act, a meeting such as is mentioned in subsection (2) above shall be summoned for the purpose of replacing him only if the liquidator thinks fit or the court so directs or the meeting is requested, in accordance with the rules—
(4) A liquidator shall vacate office if he ceases to be a person who is qualified to act as an insolvency practitioner in relation to the company.
(5) A liquidator may, in the prescribed circumstances, resign his office by giving notice of his resignation to the registrar of companies.
(6) Where—
the liquidator whose report was considered at the meeting or meetings shall vacate office as soon as he has complied with subsection (3) of that section and has given notice to the registrar of companies that the meeting or meetings have been held and of the decisions (if any) of the meeting or meetings.").
§
The noble Lord said: My Lords, in moving Amendment No. 128 I should like to speak also to Amendment No. 129.
Amendment No. 129: insert the following new clause:
§ ("Release of liquidator in voluntary winding up.
§
.—(1) This section applies with respect to the release of the liquidator of a company which is being wound up voluntarily.
(2) A person who has ceased to be a liquidator shall have his release with effect from the following time, that is to say—
(3) Where a liquidator has his release under subsection (2) above, he shall, with effect from the time specified in that subsection, be discharged from all liability both in respect of acts or omissions of his in the winding up and otherwise in relation to his conduct as liquidator; but nothing in this section shall prevent the exercise, in relation to a person who has had his release under subsection (2) above, of the court's powers under section 12 above.").
§ I have no doubt that the House is aware that to provide greater protection for creditors the Bill imposes stricter controls on voluntary liquidators, in that they must be licensed insolvency practitioners under Part I of the Bill. They must also take out insurance in respect of every company of which they are appointed liquidator, as is the present position with liquidators appointed for companies being wound up by the court, although not for voluntary liquidators. Where bonding exists, it is also necessary to have a release procedure so that the liquidator can be discharged from liablity for his acts or omissions during the winding-up. This means that the practitioner's insurance cover can then be terminated as from the date of his release. The necessity for a release procedure, in turn, gives rise to a need to codify the method by which a voluntary liquidator may vacate office, since this is linked with the release procedure.
§ These new clauses provide similar provisions for a voluntary liquidator's removal, vacation of office and release, to those for compulsory liquidators contained in Clauses 63 and 64 of the Bill. They provide that the voluntary liquidator may be removed from office by the court or by meetings of the company's members or creditors, depending on whether the winding-up is a members' voluntary or a creditors' voluntary. He will also be required to vacate office if he ceases to be qualified to act as an insolvency practitioner in relation to the company, and in any event he must vacate office once the final meetings of members and of creditors are held.
§ The second new clause to be inserted specifies the time at which the release of the voluntary liquidator takes effect. I would draw attention in particular to new subsection (2)(e)(i), which provides that if the final meeting of creditors resolves against the liquidator's release because it is dissatisfied with him he will only 92 obtain release on application to the Secretary of State, who will investigate the circumstances surrounding the refusal of release. As I am sure your Lordships will recognise, this provision is on all fours with the amendments we have made to Clause 64, which we have just discussed. It is important for the reasons which I explained in connection with those amendments also. These two new clauses are necessary to ensure the proper working of the Bill and I commend them to your Lordships.
Lord Bruce of DoningtonMy Lords, during the passage of these proceedings so far I have become so accustomed to being benevolent towards the noble Lord in regard to his amendments that it is with some sense of personal shock that I find myself getting a little worried about Amendments Nos. 128 and 129, which apply to the removal of liquidators in a voluntary winding up and the release of a liquidator in the case of a voluntary winding up. When the noble Lord's right honourable friend was giving a press interview on the occasion of his announcement of the abdication from the position of compulsory disqualification, his right honourable friend made it clear that, even though he was relinquishing the position that he then took up, nevertheless he was going to make quite sure that insolvency practitioners took some of the burden that he himself was about to assume.
I can only therefore suggest that Amendments No. 128 and 129 are the result of his right honourable friend's determination that solvency practitioners are going to be made to toe the line and, if necessary, occasionally to feel the lash of the whip. I do not object to that particularly in principle, but in view of the time that these amendments became available and the time that has been available to me to consider them and to consult professional colleagues about them, while, for the moment, I am prepared to assent to their going through, I must reserve my position in case, on further examination, something undesirable from the professional standpoint, at any rate, might emerge and might therefore be a suitable candidate to be raised on Third Reading. Subject to that, I have no objection to the new clauses as they now stand.
§ On Question, amendment agreed to.
§ Lord Lucas of Chilworth moved Amendment No. 129:
§ [Printed earlier: col. 90.]
§ On Question, amendment agreed to.
§ Lord Cameron of Lochbroom moved Amendment No. 130:
§ [Printed earlier: col. 64.]
§ The noble and learned Lord said: My Lords, this is the new clause that will take the place of Section 614 of the Companies Act and will also incorporate material which is presently to be found in paragraph 24 of Schedule 4 to this Bill—and that for the reasons which I explained when speaking to Amendment No. 45. I beg to move.
§ Lord DenningMy Lords, I wish only for a word of explanation. I heard my noble and learned friend Lord Cameron say at Committee stage, "We are not going to have all these Crown preferences, and all that sort of thing". But now, when I look at this, I do not understand it. It says: 93
In a winding up the preferential debts listed in Part I of Schedule 5 … shall be paid in priority to all other debts".When I look at Part I, I see all those old things there, including the rates and everything. I am sure that I must have misunderstood it. I should like to know what the explanation is. I thought that the Crown were giving up their preference.
§ Lord MottistoneMy Lords, before my noble and learned friend comments, I apologise for not being in the House when Amendment No. 45 was taken. I had not realised that it was the first of this lot, which I imagine includes Amendments Nos. 152, 153 and 170, 235 and 264. All that I should like to say is that I am grateful in principle for what the Government have done in these amendments, but, rather like the noble Lord. Lord Bruce, on the previous amendment, there has not been time to consider the detail of it and it is just possible that we might come back at Third Reading on some part of it. In principle, I thank the Government for what they have done in response to what, at an earlier stage of the Bill, they said that they would do.
§ Lord Cameron of LochbroomMy Lords, with the leave of the House, perhaps I might deal with the two points that have been raised. First, in response to the noble and learned Lord, Lord Denning, I think that I spoke to this in that, when explaining Amendment No. 45, I said that the intention is to deal with preferential debts both in the context of bankruptcy and of company insolvency within this Bill and not to have it spread over the Companies Act and this Bill. For that reason, I simply limited the amendments to which I spoke when introducing Amendment No. 45 to the three of which this is the third.
The consequences of the undertaking which I gave in the course of Committee arise in amendments to Schedule 5 itself. The result of those amendments, if this House accepts them, will be that what is stated in Schedule 5 will then incorporate the Government amendments which will give account to the undertaking which I gave. But I did not embark upon an explanation of those amendments when speaking to Amendment No. 45, for the simple reason that it did not seem to me to be appropriate to do so at that stage. I hope that with that explanation I have satisfied both the noble and learned Lord and also my noble friend.
§ On Question, amendment agreed to.
§ Clause 73 [Interest on debts]:
§ 9.15 p.m.
§
Lord Lucas of Chilworth moved Amendment No. 131:
Page 55, line 17, leave out from ("payable") to end of line 18 and insert ("in accordance with this section on any debt proved in the winding up, including so much of any such debt as represents interest on the remainder.").
§ The noble Lord said: My Lords, in moving Amendment No. 131, I should also like to speak to Amendments Nos. 276, 277 and 278.
§ Amendment No. 276: Clause 186, page 143, line 33, at end insert ("(a)").
§ Amendment No. 277: Page 143, line 35, after ("or") insert ("(b)").
§ Amendment No. 278: Page 143, line 39, at end insert ("and any interest provable as mentioned in section 142(2) above.").
94§ These amendments do not make any change at all of substance to the Bill. They are technical, drafting amendments which result from representations we have received that the Bill could be made clearer in one respect in particular. Under Clause 142 of the Bill, creditors will be able to prove in a bankruptcy for interest accrued on the debts owed to them up to the date of the bankruptcy order. A similar provision will be applied to company liquidations in rules to be made under the power in paragraph 11 of Schedule 3 to the Bill.
§ Furthermore, under Clauses 73 and 145, where there is a surplus after creditors have been paid in full the surplus will be applied first in paying the interest on those debts which have accrued since the date of the winding-up or the bankruptcy order. The purpose of the amendments is to make it clear that the debts which can be proved in a winding-up or bankruptcy may include interest, and that any post-liquidation or post-bankruptcy interest will be calculated on the whole of the provable debt, including any part of it which represents interest.
§ I would only add that there are provisions elsewhere in the Bill, in Clauses 83 and 152, to deal with agreements that seek to charge an extortionate rate of interest. I beg to move.
§ On Question, amendment agreed to.
§ The Deputy Speaker (Earl Cathcart)My Lords, in calling Amendment No. 131A, I should point out that there is a misprint in the amendment as it appears on the Marshalled List. It should read "Page 55, line 24" and not "line 25".
§
Lord Bruce of Donington moved Amendment No. 131A:
Page 55, line 24, at beginning insert ("Subject to section (Deferment of debts due to connected persons) below").
§ The noble Lord said: My Lords, if I may, at the same time as moving this amendment I should like to speak to Amendment No. 132, which deals with the same point.
§ Amendment No. 132: After Clause 73, insert the following new clause—
§ ("Deferment of debts due to connected persons.
§ .—(1) Subject to subsection (2) below debts and liabilities owed to persons who at the date of the commencement of the liquidation or at any time when the company was insolvent within twelve months before that date were connected with the company shall—
- (a) rank in priority after all other debts of the company; and
- (b) be repayable with interest at the rate specified in section 73(4) above in respect of the period during which they have been outstanding since the commencement of the liquidation,
§ (2) Subsection (1) above shall not apply—
- (a) to any debt or liability (other than a debt or liability in respect of a loan) arising within twelve months before the commencement of the liquidation;
- (b) to any liability under any enactment, for breach of trust, or in tort;
- (c) to other debts and liabilities so far as the aggregate of such debts and liabilities does not exceed the amount of the issued share capital of the company.
§ (3) The amount which by virtue of subsection (2)(c) above is excluded from deferment under subsection (1) above shall be apportioned among the creditors whose debts and liabilities are subject to deferment under subsection (1) above in proportion to the respective amount of such debts and liabilities.
95§ (4) Any security given by the company shall be void in so far as it secures a debt or liability to which subsection (1) above applies.").
§ These amendments are intended to give modified effect to the recommendation of the Cork Committee, notably paragraph 1963, that the debts which are owed to connected persons and are, in effect, part of the long-term capital structure of the company should be deferred in liquidation, and we on this side of the House concur in that principle. The reasoning behind the proposal is similar to that in connection with the amendment to invalidate floating charges in favour of connected persons; namely, that if a person is given the benefit of limited liability for his business he and his associates should not be entitled to finance their business by means of loan capital secured or unsecured, which is repayable either in priority to or equality with outside creditors.
§ The amendment defers all debts due to persons connected with the insolvent company, with the following exceptions. The first exception is debts other than loans incurred within the 12 months preceding liquidation. This would include, for example, undrawn salaries or arrears of rent for premises occupied by the company. If these debts are unpaid for more than a year it is reasonable to treat them as part of the loan capital. The second exception is debts not exceeding in total the company's issued share capital. We think it is not unreasonable to allow some of the company's capital to be financed by loans, but it is necessary to keep a reasonable proportion between share capital and loan capital. I trust, following the quite explicit findings of paragraph 1963 of the Cork Committee's report, with which I shall not weary the House unless your Lordships specifically desire me to read the particular paragraph, that the Government will feel constrained to agree wholeheartedly with the amendment and pass it without further ado. I beg to move.
§ Lord Lucas of ChilworthMy Lords, these two amendments are, of course, identical to those tabled by the noble Lord, Lord Meston, at the Committee stage of the Bill and are, as the noble Lord, Lord Bruce of Donington, said, taken virtually out of the Cork Report. I said in Committee that our objection to the proposed new clause is that it treats connected persons unduly harshly, particularly when considered with other provisions of the Bill. I shall say a little more about that in a moment.
96 If this amendment is accepted, it will in our view be a positive disincentive to those who run their own businesses and invest in them—and I am thinking here particularly of small and medium sized businesses. Where companies or businesses are in financial difficulties but could nevertheless be pulled round with additional finance—particularly low cost finance—why should proprietors of the business and their connected persons be penalised if they invest in their companies, whereas there would be no such penalty if they invested in totally unconnected companies?
Where connected persons seek to obtain an unfair advantage over other creditors, there are various provisions of the Bill which may then come into play. But Clauses 81 and 82 enable the court on the application of the liquidator to make orders restoring the position of the company and its creditors to what it would have been if the company had not entered into a transaction at an undervalue; or indeed had given a preference to a person. The clauses are more strict in dealing with connected persons than with non-connected persons, in that a preference given to a connected person is open to challenge if made in the two years before a liquidation, rather than six months as in the case of a non-connected person.
Clause 83 entitles the court to vary or set aside extortionate credit transactions between the company and the creditor so that if a connected person abuses his relationship with a company by, for example, charging an extortionate rate of interest, that transaction may be set aside. Furthermore, Clause 84 provides for certain floating charges be invalidated in the event of a subsequent winding up, and again charges in favour of connected persons are treated more stringently than those in favour of non-connected persons.
We consider that the amendments, if accepted, would disrupt business practices, particularly those of small companies. The implications of this go far beyond the law of insolvency, which is after all what the Bill is about. Therefore, I would ask the noble Lord to withdraw his amendment.
Lord Bruce of DoningtonMy Lords, I am not satisfied with the noble Lord's reply but I should like to have further time to study it. In the meantime, I have no objection to it going through, and I beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ [Amendment No. 132 not moved.]
97
§
Lord Bruce of Donington moved Amendment No. 133:
After Clause 74, insert the following new clause:
§ ("Consumer advance payments
§
.—(1) So much of any unsatisfied consumer advance payment made to a company as does not exceed the prescribed amount shall be a preferential debt in the liquidation of the company ranking equally with the debts listed in Schedule 19 to the 1985 Act.
(2) For the purposes of subsection (1) above a consumer advance payment is made if—
(3) For the purposes of subsection (1) above, a consumer advance payment is unsatisfied if—
§
The noble Lord said: My Lords, I should like at the same time to speak to Amendments Nos. 252 and 263.
Amendment No. 252: Schedule 5, page 168, line 6, at end insert—
(" . So much of any unsatisfied consumer advance payment made to the bankrupt as does not exceed the prescribed amount.").
Amendment No. 263: Page 169, line 37, at end insert—
(" .—(1) For the purposes of Part I of this Schedule, a consumer advance payment is made if—
(2) For the purposes of paragraph 7 of Part I of this Schedule, a consumer advance payment is unsatisfied if—
§ All of these amendments have a bearing on the whole question of consumer credit. They represent an attempt to deal with the problem of ordinary members of the public who have made advance payments to an individual or company for goods and services—for example, to a mail order firm or to a travel agent—which individual or company has then become insolvent, so that they lose their money without getting what they have paid for.
§ As the noble Lord, Lord Taylor of Gryfe, pointed out in Committee, a number of consumer organisations have proposed that all businesses which obtain consumer advance payments should be required to pay them into a separate trust fund and 98 retain them in the fund until the goods or services are provided, so that on liquidation or bankruptcy the money in the trust fund will not form part of the assets of the insolvent and will be repayable to the customers. The view has been taken, however, that an obligation to set up a trust fund would cause considerable difficulties to businesses in terms of both extra administrative costs and loss of potential cash flow, and therefore should not be supported.
§ The amendments I venture to put forward are an alternative which would give customers considerably better rights than they now have without causing problems to insolvent businesses. As preferred creditors up to the "prescribed amount"—and the noble Lord will observe that I have used the words which have become hallowed by him in the course of various clauses in this Bill, and therefore I am resting upon the rules—customers would rank ahead of holders of floating charges, as well as other unsecured creditors, although not getting full trust fund protection.
§ It will be clear that by increasing the number of preferred creditors who rank ahead of the holders of floating charges the provision by banks and other lending institutions of finance on the security of floating charge will become more risky and therefore more expensive and less freely available. It is also quite clear that it is unfair to trade and other creditors, whose position would be made worse.
§ Those are valid arguments. There are, of course, countervailing arguments to those, and we should seek as far as we can to balance the other considerations. The other considerations are that the present system—that is to say, without these amendments—is unduly favourable to floating charges and makes it too easy for banks and other strong creditors to protect themselves at the expense of weaker creditors.
§ I do not believe that these particular proposals would lead to any significant increase in interest rates. In other words, I do not believe that the existence of such provisions would bother the banks overmuch. It is normally the banks who make loans available on the basis of a floating charge. If it did, it could only happen in relation to a relatively small number of businesses where consumer advance payments are required. Trade creditors have other means of protecting themselves, although not in every case, such as reservation of title claims under ROMALPA-type agreements, and know that they are providing credit, while ordinary consumers are, in effect, defenceless. So those are the two opposing considerations.
§ Your Lordships will recall that at Committee stage I produced an amendment which reproduced the Cork proposal that 10 per cent. of the proceeds of enforcement of a floating charge should be set aside for the benefit of unsecured creditors. This would give some benefit to consumer creditors, but the benefit would be much smaller than that which might result from the amendment. In many cases, a fund of 10 per cent. would be too small to be worth bothering about.
§ This is a matter where the arguments for and against are most evenly balanced, and one has to take a view upon them. It is quite clear that the ordinary and unsuspecting person who replies to an advertisement, who puts down £25 and then receives nothing at all 99 because four or five days later the company to which he has sent the money goes bankrupt or the concern goes into liquidation, is in a position in which he is defenceless. He is in the position of possessing far less knowledge about the firm than the ordinary trade creditor.
§ I am well aware that the ordinary trade creditor under normal circumstances—particularly where there is a very high scale of preferential debt—also does not stand very much chance of getting his money. Indeed, one's reaction can be that if the ordinary trade creditor who may supply £3,000 or £4,000 worth of goods two days before the company goes into liquidation cannot be treated in any way as a preferential creditor, then why should the small depositor of money be treated on any other different basis?
§ It is a very difficult argument to resolve. Clearly, consumers are worried; but clearly, also, are small businesses which advance money, on credit, to firms which go into liquidation a comparatively few days after the goods have been supplied. That is the reason why I put into the amendment the magic formula, to which the noble Lord is much addicted, of "the prescribed amount". That leaves it to the all-wise Lord Chancellor's department as to how much the amount should be. It might be small, it might be only a token, but it would be in the Lord Chancellor's hands and a chance for him to exercise his judgment as to how far consumer interest should be at any rate partially reimbursed, should there be any bankruptcy or liquidation which leaves unsatisfied deposits.
§ 9.30 p.m.
§ I am well aware that the amendments are not satisfactory. I am well aware that the arguments are evenly balanced; but I think they ought to be ventilated, and that it is in the interests of consumers generally that the Government's explicit views on this should be known. If the Government come down against even this very moderate amendment, which leaves the entire abatement of indebtedness in the lap of the Lord Chancellor, they should say so. It will be a good thing if the country at large knows exactly where the Government stand, and this amendment, which I hope I have moved in reasonably temperate terms, gives them the opportunity of stating precisely where they stand in the matter. I beg to move.
§ Lord DenningMay I say a word on this? The Cork Committee, when it advocated the abolition of a lot of Crown preferences, saw that that would be a very valuable increase to banks and other people who held floating charges, so that they would get a good deal more money in hand. Therefore, it recommended, as a package deal, that 10 per cent. should be reserved and made available for the unsecured creditors. The report referred to, and advocated a 10 per cent. fund. I think that many commercial concerns are in favour of a 10 per cent. fund.
On our previous discussions that was not found acceptable; nor is there any amendment or anything here to provide for a 10 per cent. fund as recommended by the Cork Committee. As an alternative we have this clause, to which one would be sympathetic; 100 namely, that those who advance money and do not receive their goods, and so on—consumer advance payments—should be treated preferentially if they arise within 12 months, or whatever it may be, before the liquidation. The Cork Committee rejected that because it is almost impossible to decide between the rights and wrongs of unsecured creditors. One must take the unsecured creditors as they are, whether or not they were shortly before the liquidation. You cannot draw any distinction between them, so you cannot give any particular group a preference. The Cork Committee was against such a clause as this. I would be, too; and I am disappointed that we have no trace of a 10 per cent. fund in the Bill.
§ Lord Lucas of ChilworthYes, indeed, my Lords, the noble Lord, Lord Bruce of Donington, has put forward the amendments in a temperate and very sympathetic way, but the House will probably recall that the noble Lord, Lord Meston, and the noble Lord, Lord Taylor of Gryfe, introduced similar amendments in Committee which I resisted at that time. I resisted them successfully.
One of the arguments that I used at that time was that the Government were in favour of the view taken by the review committee chaired by Sir Kenneth Cork. That committee looked at the question of deposits and prepayments and considered that the provision of credit in that way was not appreciably any different from other forms of trade credit. The Government have recently made the decision to reduce the scope of their preferential claims for assessed income taxes. A change in that decision would be quite inconsistent with a creation of a new class of preferential claim.
I say now, as I said then, that we are sympathetic to consumers who find themselves as unsecured creditors in a liquidation or bankruptcy when they have advanced moneys to traders for either goods or services not yet supplied. The problem was looked at specifically by the review committee. Quite specifically it said that it would be wrong to give consumer creditors preferential status. It took the view that there was no essential difference between the customer who extends credit by paying in advance for goods or services, and the trader who supplies goods or services in advance to be paid for later. Both give credit and both thereby take a risk.
Let us look at a different side of the coin: the position of a small trader. For example, a small furniture retailer with insufficient storage space and not enough capital to stock every item of furniture in every colour and pattern. Nevertheless, he is prepared to accept an order and to place that order for a special item, however bizarre it may be. The prepayment by the consumer is very often regarded purely and simply as a demonstration of good faith—good faith to ensure at least to some extent the customer is likely to complete the contract. What would happen if we abandoned that or made specific and particular requirements? I suggest that it would put that man in some jeopardy. I do not think that in the end result there would be any great advantage to the consumer.
The noble Lord, Lord Bruce, asked that on this occasion the Government's view should be made quite clear. I can only repeat the view which we have had 101 since we started discussing the Bill some four months ago. I reiterate that we believe that the answer to the problem lies in our policy of encouraging the development of voluntary schemes through trade and other associations designed to cover particular problem areas, rather than the invidious task of singling out particular groups for enhanced protection. That development can be assisted if the Government concentrate on encouraging those directors who have in the past neglected their businesses and responsibilities to take a much greater interest in the running of the companies and so obviate that position.
To turn to the Government's proposed reduction in preferential claims for assessed taxes and general rates, we go a long way towards the principle advocated by the review committee that pari passu distribution should be the cornerstone of insolvency law. However sympathetic one is to the plight of the unsecured, consumer creditor, it would be quite wrong, we believe, to qualify that principle so as to deal with particular problems of certain classes of creditor. If we did that, undoubtedly there would be other classes which considered that they had a claim to preferential treatment and we should end up in exactly the same situation as hitherto.
No, the answer is in the general principles lying behind this Bill rather than in particularising. I do not want to make an issue of one or two small points that I might draw attention to, but there are a number of drafting errors in the amendment. I have a feeling that the noble Lord, Lord Bruce of Donington, will not press his amendment. I shall certainly invite him to withdraw it. I do not think it would be helpful—certainly on this occasion—were I to point out those minor drafting errors.
Lord Bruce of DoningtonMy Lords, I am most grateful to the noble Lord for his reply, even if I am a little disappointed with it. I am grateful to him for having pointed out a series of unspecified drafting errors. In view of the fact that the Government themselves put down 300 amendments within the last few days, I think I may be excused for any minor inaccuracies that I have made in putting down the 47 which I ventured to lay in the time at my disposal.
The noble Lord says that the policy of the Government in regard to these victims of consumer credit difficulties is to rely on voluntary codes of conduct in the trades themselves. This will not do. A large number of instances of cases where consumer disappointment takes place, and very often fraud takes place, are a result of the non-application of the law by the Government, the non-enforcement of it due to their economy cuts. This is part of the reason. The absence of effective enforcement over a whole mass of law at the present time is one of the reasons why these frauds take place.
We are not discussing fraud today. We are only discussing the results of unfortunate situations in which consumers find themselves. The noble Lord can say that this distorts the pattern and that the Cork Committee in any case did not endorse the proposals. No, the Cork proposals were, as the noble and learned Lord, Lord Denning, pointed out, to be taken as a package and as a balanced whole. It does not lie in the 102 mouths of the Government to complain of an endeavour at any rate partially to remedy their remissions by referring to inconsistencies i n the particular approach.
It is quite true that it has been necessary to recommend something outside the Cork Report itself. But that has been entirely due to the fact that the Government's own Bill has distorted the Cork Report as a whole. As the noble and learned Lord, Lord Denning, has mentioned, they have not brought in anything at all concerning the 10 per cent. deposit or withholding, as it is, from the floating charge for the benefit of creditors.
I am well aware that the amendment itself is unsatisfactory. I am equally well aware that the arguments are very evenly balanced. I am very glad to have received at any rate a partial ventilation of the case and I am very grateful indeed for the intervention of the noble and learned Lord, Lord Denning. I ask the leave of the House to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ Clause 78 [Delivery and seizure of property]:
§ Lord Lucas of Chilworth moved Amendment No. 134:
§ Page 58, line 26, after ("Where") insert ("(a)")
§
The noble Lord said: My Lords, perhaps I may speak also to Amendments Nos. 135, 195, 196, 221 and 222. They are identical in effect.
Amendment No. 135: Page 58, line 27, leave out from ("and") to end of line 33 and insert—
("(b) at the time of the seizure or disposal the office holder believes, and has reasonable grounds for believing, that he is entitled (whether in pursuance of an order of the court or otherwise) to seize or dispose of that property,")
Amendment No. 195: Clause 113, page 91, line 19, after ("Where") insert ("(a)")
Amendment No. 196: page 91, line 22, leave out from ("and") to end of line 27 and insert—
("(b) at the time of the seizure or disposal the official receiver believes, and has reasonable grounds for believing, that he is entitled (whether in pursuance of an order of the court or otherwise) to seize or dispose of that property,")
Amendment No. 221: Clause 130 page 102, line 17, after ("Where") insert ("(a)")
Amendment No. 222: page 102, line 19, leave out from ("and") to end of line 24 and insert—
("(b) at the time of the seizure or disposal the trustee believes, and has reasonable grounds for believing, that he is entitled (whether in pursuance of an order of the court or otherwise) to seize or dispose of that property,")
§ It is important that liquidators, administrators, the official receiver and trustees in bankruptcy are adequately protected if they should seize and dispose of property which they reasonably believe they are entitled to seize or dispose of and it turns out subsequently to belong to a third party. Such protection is increasingly important given the proliferation of hire purchase and retention of title agreements. We have received representations from the legal and accountancy professions that the defences afforded by Clauses 78, 113 and 130 could be improved in certain respects. We are grateful to those bodies for their suggestions. The amendments before 103 your Lordships harmonise the defences available under all three clauses. They afford a defence to an office holder, official receiver or trustee in bankruptcy who has reasonable grounds for believing that he is entitled to seize or dispose of property,
§ 9.45 p.m.
§ Clearly, if a third party has notified the office holder of an interest in the property concerned, he will not be able to seize or dispose of it until the claim has been investigated and the true ownership of the property ascertained. The office holder will also remain liable for any loss or damage resulting from his seizure or disposal of a third party's property that is caused by his negligence. Finally, the amendments make clear that the power to seize and to dispose of an insolvent's property is available to the office holder either with or without a court order having been obtained. I beg to move.
Lord Bruce of DoningtonMy Lords, I should like to take the opportunity of examining these amendments more closely than we have had the opportunity to do so far. In the meantime, they appear to be a step in the right direction.
§ On Question, amendment agreed to.
§ Lord Lucas of Chilworth moved Amendment No. 135:
§ [Printed earlier: col. 57.]
§ On Question, amendment agreed to.
§ Clause 79 [Duty to co-operate with office holder]:
§ Lord Cameron of Lochbroom moved Amendment No. 136:
§ [Printed earlier: col. 57.]
§ The noble and learned Lord said: My Lords, this amendment and Amendment No. 137 are amendments to which I spoke when speaking to Amendment No. 26.
§ On Question, amendment agreed to.
§ Lord Cameron of Lochbroom moved Amendment No. 137:
§ [Printed earlier: col. 57.]
§ On Question, amendment agreed to.
§ Clause 80 [Inquiry into company's dealings]:
§
Lord Lucas of Chilworth moved Amendment No. 138:
Page 61, line 11, leave out ("that goes into liquidation") and insert ("in respect of which a winding-up order has been made by the court").
§ The noble Lord said: My Lords, Clause 80 deals with the office holder's powers to apply to the court for the private examination, in court, of any person 104 specified in subsection (1). Such examinations are normally required to assist the office holder in his duties to recover and realise assets of the company, for the benefit of creditors, and in his general inquiries into the company's affairs, particularly in cases where the person so summoned has failed to co-operate fully with the office holder.
§ Subsection (6) specifies that these powers of the office holder extend to the official receiver, whether or not he is liquidator of the company. As presently worded, the clause gives the official receiver these powers in the case of any company that goes into liquidation in England and Wales, whether that liquidation is compulsory or voluntary. In a case where a company goes into voluntary liquidation, however, the official receiver will not become involved in the administration unless a winding-up order is subsequently made by the court, and therefore it is neither necessary nor desirable that such powers should be conferred upon him.
§ The proposed amendment provides that the official receiver's powers to apply for a private examination shall only extend to cases of companies against which the court makes a winding-up order in England and Wales; that is, only in respect of companies where the official receiver is directly involved in the administration. I beg to move.
§ On Question, amendment agreed to.
§ Clause 83 [Extortionate credit transactions]:
§
Lord Lucas of Chilworth moved Amendment No. 139:
Page 64, line 39, leave out from beginning to ("was") in line 1 on page 65 and insert ("the transaction is or was extortionate and").
§
The noble Lord said: My Lords, in speaking to this amendment, I should also like to refer to Amendments Nos. 140, 141, 267 and 268.
Amendment No. 140: Page 65, line 2, leave out ("it") and insert ("the company").
Amendment No. 141: Page 65, line 13, at end insert—
("and it shall be presumed, unless the contrary is proved, that a transaction with respect to which an application is made under this section is or, as the case may be, was extortionate.").
Amendment No. 267: Clause 152, page 122, line 20, leave out from beginning to ("was") in line 22 and insert ("the transaction is or was extortionate and").
Amendment No. 268: Clause 152, page 122, line 32, at end insert—
("and it shall be presumed, unless the contrary is proved, that a transaction with respect to which an application is made under this section is or, as the case may be, was extortionate.").
§ I said during the Committee stage that I was grateful to the noble Lords, Lord Meston and Lord Taylor of Gryfe, for bringing forward at that stage proposed amendments to Clause 85 and Clause 152. The purpose was to provide that, as in the Consumer Credit Act, the onus of proof should be on the creditor to establish that his transaction was not extortionate. I undertook that the Government would in due course bring forward their own amendment for the same purpose. These are the amendments now before your Lordships. They remove the burden of establishing that the transaction was extortionate from the office 105 holder or trustee in bankruptcy. The burden of proof is now placed on the creditor. I hope that your Lordships will agree that the amendments achieve the purpose sought by the amendments tabled by noble Lords. I beg to move.
§ On Question, amendment agreed to.
§ Lord Lucas of Chilworth moved Amendments Nos. 140 and 141:
§ [Printed above.]
§ On Question, amendments agreed to.
§ Clause 84 [Avoidance of certain floating charges]:
§
Lord Bruce of Donington moved Amendment No. 142:
Page 66, line 3, leave out ("relevant period") and insert ("period of twelve months ending with the day of the commencement of the winding up")
§
The noble Lord said: My Lords, I beg leave to move Amendment No. 142. Perhaps I may at the same time speak to Amendments Nos. 143, 144 and 145.
Amendment No. 143: page 66, line 13, leave out subsection (2).
Amendment No. 144: page 66, line 25, leave out from ("charge") to end of line 28.
Amendment No. 145: after Clause 84, insert the following new clause:
§ Charges in favour of connected persons.
§ (" .—(1) Subject to subsection (2) below, a floating charge on the company's undertaking or property is invalid if the person in whose favour the charge was created was connected with the company at the time the charge was created.
§ (2) Subsection (1) above shall not apply if—
- (a) the floating charge secures debentures which are listed on any stock exchange; or
- (b) the benefit of the floating charge has at any time been acquired for full consideration in money or money's worth by a person who was not at the time of such acquisition connected with the company and did not have notice at that time that the floating charge was invalid under subsection (1) above.")
§ It is plainly inevitable that those who operate limited companies should not only have the benefit of limited liability but should have the opportunity to give themselves priority over unsecured creditors of the company by financing the company's activities by means of a loan secured by a floating charge. This seems to us to be quite unacceptable. For example, for someone to set up a £100 company financed by advancing £100,000 on the security of floating charge and thereby claim priority over unsecured creditors if the company fails. The same principle applies equally strongly, if not more so, to inter-company indebtedness within the group. In this respect, perhaps we are permitted to disagree with the Cork Committee's views, and I should be interested if on this one occasion we have Government support for something that the Cork Committee have recommended.
§ We believe that it should be the principle that those who obtain the protection of limited liability and their associates should not be allowed to obtain any priority over other creditors. However, in order to preserve the marketability of debt, exceptions need to be made for debentures quoted on the Stock Exchange or acquired by purchasers for value without notice.
§ That is clearly desirable; but equally clearly you do not get companies floated on the Stock Exchange, at 106 any rate not within Stock Exchange rules and subject to the normal prospectus rules, where you have an issued share capital of £100 and loans of £100,000 secured by a floating charge on the part of the owners. So the exception is not altogether as incongruous as it sounds. I do not propose to press these amendments to a Division; but once again I should like the Government's thought about the situation created by floating charges in favour of owners to be made fully public, full ventilated and logically established. I beg to move.
§ Lord DenningMy Lords, I am very much in sympathy with these proposals. I gave illustrations earlier in Committee of what often happens. A man forms a £100 company so the capital of the company is only £100, but with that company he buys a business; he buys a business which may have its stock and its vans and everything like that. He does not pay for it with £100. He gets £100,000 of his own and lends it to the company to enable it to make purchases. He then takes a floating charge over all the assets of the company for his £100,000 or he may take it in his wife's name. He trades for years and years, and eventually the assets are milked. When the company eventually goes into liquidation, what happens? The floating charge takes all those assets and he has priority over everyone.
At paragraph 1550 of the Cork Report, the committee said:
Some of those who have given evidence to us have urged that directors or controlling shareholders of the debtor company and their associates should be prohibited from taking the benefit of a floating charge over any of its assets".They go on:While understanding the reasons which have led them to make this suggestion, we consider that it goes too far.Then in paragraph 1566 they say:There remains the question of floating charges created in favour of persons closely connected with the company, whether directors, controlling shareholders, or other companies in the same group. We are sympathetic to the widely held view that the freedom of such persons to rely upon the security of a floating charge over the assets of their company should be more narrowly circumscribed than that of other persons".That is the view of the Cork Committee. Surely it is the common sense view that the right of these relatives, whoever they may be, or the right of the man himself in the case of the one-man company who takes this floating charge, should be circumscribed. He should not be able to take off all the assets in this way. The proposal of my noble friend Lord Bruce of Donington is very short and simple: let it be invalid if he is connected with the company, but it does not apply if it is listed on the Stock Exchange or if the benefit of the floating charge would bring full value for money. It goes much further than the Cork Committee recommended.It is difficult to follow it through, but it seems to me that probably Clause 84, as it stands, is quite a good effort to endorse what the Cork Committee recommended. I have not studied it in detail, but it seems to me that in a way Clause 84 as it stands is in line with what the Cork Committee recommended. However, I would certainly agree with my noble friend Lord Bruce of Donington that this is a matter which should be cleared up and the Government's view upon it should be made known.
§ 10 p.m.
§ Lord Lucas of ChilworthMy Lords, by way of introduction I have to say that the Government are not able to accept this series of amendments, and before I finish my remarks I shall ask the noble Lord, Lord Bruce of Donington, to withdraw them. The noble and learned Lord, Lord Denning, has spoken at some length and has quoted from the Cork Report and I should like at some time to return to that matter. However, perhaps I may respond specifically to the noble Lord, Lord Bruce, because he asked—as did the noble and learned Lord, Lord Denning—if I would set out the Government's view.
These amendments seek to remove from Clause 84 all references to persons connected with the company and the applicability of the clause in relation to the appointment of an administrator. The effect of this would be to leave the clause very much in the terms of the present Section 617 of the Companies Act 1985, which was formerly Section 322 of the Companies Act 1948. The noble Lord, Lord Bruce of Donington, seeks in Amendment No. 145 to insert in the Bill a new clause relating to floating charges created in favour of connected persons. I want to speak about that particular amendment in a moment.
Let me respond to the invitation of the noble Lord, Lord Bruce of Donington, and the noble and learned Lord, Lord Denning, to explain Clause 84 as it relates to administrators and connected persons. Those provisions are based on specific recommendations made by the review committee in Chapter 36 of its report. Subsection (2) (a) gives effect to recommendations contained in paragraphs 1554 and 1566 respectively of the review committee's report. It enables the provisions as regard the avoidance of floating charges to apply where an administrator is appointed and extends the period during which the creation of such a charge is liable to be set aside in the case of a charge in favour of a person connected with the company; the period in those circumstances will be two years instead of the usual 12 months.
Subsection (3) gives effect to a further recommendation contained in paragraph 1566 of the report. It provides that where a floating charge is created in favour of a connected person it is no defence that the company was solvent immediately after the creation of the charge.
The combined effect of Amendments 142, 143, 144 and 145 would be to replace the provisions which I have just mentioned by a clause invalidating in all but exceptional circumstances any floating charge created in favour of a connected person. This was an option considered by the review committee at paragraph 1550 of its report, to which the noble and learned Lord, Lord Denning, referred. The committee felt, however, that such a provision would go too far and preferred provisions along the lines of those now contained in Clause 84 of the Bill. The Committee argued that, if I may quote:
there is no reason why even persons concerned in the management of a company should not take a floating charge to secure new money genuinely advanced by them to the company, and which might not otherwise be forthcoming".We agree with the views of the review committee on this subject. I suggest to your Lordships that the new clause which Amendment No. 145 seeks to 108 introduce goes too far. It would discourage owners of businesses, especially small and medium-sized companies, from investing in those businesses, perhaps on terms advantageous to the company in comparison with those that might be offered by other sources of finance. We believe that this is clearly undesirable. I have set out clearly how the Government view the clause, and my response to the noble Lord's amendment. I believe that Clause 84 as it is now in the Bill is a better way of achieving that which we want to achieve, and I would invite the noble Lord to withdraw his amendment.
Lord Bruce of DoningtonMy Lords, I am most grateful to the noble Lord for his long and detailed reply. He will appreciate that much of what he said was highly technical and will have to be examined when the Official Report appears tomorrow, in conjunction with the relevant clauses and with the amendments that I venture to propose to your Lordships. I still remain dissatisfied with the situation, which demands much further examination. In the circumstances, I ask leave of the House to withdraw the amendment and I do not intend to move Amendments Nos. 143, 144 and 145.
§ Amendment, by leave, withdrawn.
§ [Amendments Nos. 143, 144 and 145 not moved.]
§ Clause 85 [Unenforceability of liens on books etc.]:
The Earl of Selkirkmoved Amendment No. 146:
Page 66, line 44, at end insert ("but any person delivering such books, papers or other records to the office holder shall be entitled to receive from him out of his receipts such outstanding fees and costs as were before such delivery secured by such lien.")
§ The noble Earl said: My Lords, at an earlier stage I moved that Clause 85 should be removed. It embraces quite a new concept. I believe that this matter has never caused trouble in the past and putting it in has itself caused difficulty. The clause provides that those who hold the books and papers and other records have no lien on them when the receiver, or whoever it may be, demands them back. That does not apply to the company which has gone bankrupt or become insolvent. It applies only to a third party. The most likely third party is the auditors, who may, for one reason or another, have the papers in their offices. They will by this rule be prevented from exercising what I believe is common law in Scotland and may be in England too. If anybody is asked to do work on any object such as a shoe, a motor car or a wireless set, the party doing the work has a lien on that object until the work is paid for.
§ In the ordinary course of events, I understand that that applies to an auditor who, for one reason or another holds the books of some company that has gone bankrupt. As it stands, the clause would mean that the receiver would be able to take those books without paying the auditor's fee. This is quite wrong and I have tried to produce an amendment which would cover this item; that is to say that when they deliver the goods they are entitled to be paid. That would seem to be common sense; it is in accordance with my understanding of the common law and I think it is a provision which should be included. I should prefer the clause to be taken out altogether, but if it is 109 not taken out I ask that these words should be added so that those who, for any reason, hold the papers are entitled to demand their fees. They have been paid up to quite recently when doing the annual audit and they should have a lien now. I beg to move.
§ Lord PolwarthMy Lords, while I can never claim in my accountancy career to have had to delve into the mysteries of insolvency law, it seems to me in all equity that the amendment proposed by my noble friend Lord Selkirk should be accepted.
§ Lord Cameron of LochbroomMy Lords, I am obviously grateful to my noble friends who have spoken on this, which is undoubtedly a highly technical matter. The clause applies both in Scotland and also in England and Wales. The purpose of it is to make in corporate insolvency an equivalent provision for that which presently obtains regarding liens in an English bankruptcy. Noble Lords will understand what I said earlier this evening. The idea is to harmonise the law on bankruptcy and corporate insolvency.
In English bankruptcy, Bankruptcy Rule 386, which is re-enacted in Clause 158 of the Bill, provides that any lien is completely unenforceable against an office holder unless the lien is on documents which give a title to property and which are held as such. The principles behind this provision are, first, that the office holder and the official receiver in a winding-up by the court or in bankruptcy in England and Wales should have full access to all records of the insolvent company or the insolvent individual; and, secondly, that an otherwise unsecured creditor should not be in a position to elevate his claim to a secured or pre-preferential position to the detriment of other creditors. The effect of this amendment would be to eliminate the second principle of which I have just spoken. The holder of the records would, in return for handing them over to the office holder, be entitled to be paid on the basis of a first charge out of the otherwise uncharged assets in the insolvent company's estate, thus securing payment of what otherwise would be an unsecured non-preferential claim.
Insolvency practitioners in England and Wales have welcomed Clause 85 of the Bill and its harmonising effect with the law of bankruptcy in England and Wales. They see it as a positive benefit and an aid in maximising realisations for creditors. Nevertheless, I appreciate that the bankruptcy law in Scotland is different from that in England and Wales, and Clause 37 (4) of the Bankruptcy (Scotland) Bill has the effect which this amendment seeks to introduce into the corporate insolvency provisions in this Bill. It may be that this is a case where such a fundamental variation in the laws obtaining in the two jurisdictions is such that one standard provision ought to apply in both corporate and personal insolvency in Scotland and another should apply in England and Wales.
This is something that we should like to consider. The present amendment would obtain both in Scotland and England and Wales, and, for the reasons I have set out already, practitioners in England and Wales have welcomed this clause. But, obviously, the matter of corporate insolvency in Scotland does raise a different question, and if my noble friend Lord 110 Selkirk is prepared to understand that we shall look at this I would ask him to withdraw his amendment to give us an opportunity to do so.
The Earl of SelkirkMy Lords, I am grateful to my noble and learned friend. I do not see why we should corrupt the law of Scotland because it suits practitioners in England. I can see no reason whatever why that should be carried out. This is what is wanted in Scotland. There is nobody who wants this clause, which they consider totally unnecessary. May I also say that I do not understand how the English practitioners welcome it. If accountants are not paid their fee, they will not do their job. If they do not do the job, the receiver will not know what is in the accounts. It seems to me that to think that you can get away without the accountant being paid for preparing the accounts means that you are crying for something you will not get. I do not know how the English Act works. I will engage myself in trying to find out about the Acts quoted by my noble and learned friend. In the meantime, I am grateful for what he has said and beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ Schedule 3 [Provisions capable of inclusion in company insolvency rules]:
§ Lord Lucas of Chilworth moved Amendments Nos. 147 and 148:
§ [Printed earlier: col. 52.]
§ The noble Lord said: In speaking to Amendment No. 21 earlier this afternoon, I spoke also to Amendments Nos. 147 and 148. With the leave of the House, I should like to move both amendments together.
§ On Question, amendments agreed to.
§ Lord Cameron of Lochbroom moved Amendment No. 149:
§ [Printed earlier: col. 57.]
§ The noble and learned Lord said: My Lords, I spoke to this amendment earlier when speaking to Amendment No. 26. I beg to move.
§ On Question, amendment agreed to.
§ Lord DenhamMy Lords, I think it is the general consensus of the House that we have probably got as far as we can usefully go tonight. I beg to move that further consideration on Report be now adjourned.
§ Moved accordingly, and, on Question, Motion agreed to.
§ House adjourned at sixteen minutes past ten o'clock.