HL Deb 07 February 1985 vol 459 cc1212-30

3.28 p.m.

The Parliamentary Under-Secretary of State, Department of Trade and Industry (Lord Lucas of Chilworth)

My Lords, I beg to move that the House do now again resolve itself into Committee on this Bill.

Moved, That the House do now again resolve itself into Committee.—(Lord Lucas of Chilworth.)

On Question, Motion agreed to.

House in Committee accordingly.

[The LORD ABERDARE in the Chair.]

Clause 77 agreed to.

Clause 78 [General provisions as to office holders]:

Lord Bruce of Donington moved Amendment No. 81:

Page 58, line 16, at end insert— (" (4) Any provision of a tenancy or lease of property providing for forfeiture upon the appointment of an office holder or any form of receiver shall be void.").

The noble Lord said: I beg to move the amendment which stands in my name. This particular amendment seeks to insert a new subsection into Clause 78 and I am hopeful that the noble Lord will find it completely non-controversial. The amendment itself would provide a useful breathing space in the event of insolvency and allow the sale of leasehold premises or other valuable leases so long as the other obligations of the lease were met. The landlord's or owner's rights to terminate on other grounds, such as non-payment of rent, are unaffected. It would seem to fit in with the scheme of the legislation, in stopping mortgages from premature sales destroying going concerns and is likely to assist in the protection of going concerns and therefore of jobs.

There is a limited provision of this kind in the Law of Property Act 1925, but the principle should be extended to receivers and administrators. Your Lordships will be aware that in many long leases in particular, some of which you may be personally acquainted with, there is a provision in the lease that stipulates that if the lessee goes bankrupt, or something of that kind, the lease is automatically terminated. I know perfectly well that a case can be brought for relief under the Law of Property Act, but it needs the case to be brought. In point of fact, owing to the intervention of the court, it is very rarely that this particular type of stipulation in a lease is in force, but it still needs a lot of trouble to get rid if it, and I should have thought it might be convenient to insert this into the Bill. I beg to move.

Lord Denning

I am not at all sure that it would be a good thing to do. When a liquidator or other person is appointed, of course he looks at the leases of the property and he has to decide whether it is worth having them at all. If the terms are too onerous, then he can disclaim. On the other hand, if he wants to keep on a lease and it is a valuable property, there is a clause in the lease which says it can be forfeited, but, on the other hand, he can apply for relief under Section 146 of the Law of Property Act or he can pay the rent and the landlord will waive any forfeiture by accepting the rent. But in any event a very short application to the court for relief can put the matter on a legally correct basis, without, I should have thought, the necessity of having a clause like this to cover very exceptional circumstances, saying that a provision is to be void. I would say that existing procedures can deal with the difficulty without the insertion of this new clause.

Lord Mishcon

The Committee will have heard the observations of the noble and learned Lord, Lord Denning. If I may say so, I think he may agree with me that what he has said strongly underlines the point that was made at the last sitting of this Committee on the Bill—namely, that where you are dealing with disclaimers you must give the person against whom the disclaimer operates, provided he does so within a speedy time, the right to dispute the right to disclaim.

Lord Lucas of Chilworth

I am most grateful to the noble Lord, Lord Bruce of Donington, for the way he has explained the purpose of his amendment. It does, of course, seek to make void the forfeiture provision in a tenancy or lease. I do appreciate that a provision such as is proposed in the amendment has the virtue of making it clear by statute that a liquidator, administrator or receiver would be able to deal without hindrance with a tenancy or lease relating to an insolvent company. But at the same time it is necessary to weigh up very carefully whether such interference is justified in the interests of the main body of creditors, as against the interests of the individual who would be the lessor or the beneficial owner.

The noble Lord referred to the Law of Property Act 1925 and there is already provision in that legislation with respect to the forfeiture of a lease or a tenancy on a bankruptcy or a winding up. Broadly speaking, within certain specified exceptions, in the year following the bankruptcy or liquidation the landlord must serve a statutory notice if he wishes to re-enter. The trustee or the liquidator can then apply to the court for relief, and after that year notice need not be served and relief cannot be given. I would suggest to the Committee that the protection afforded by the Law of Property Act does in fact strike the right balance between the rights of those who have entered into contracts and the interests of creditors.

The amendment, in our view, goes too far in tipping the balance of which I have spoken rather too much in favour of the creditor as against the interests of the individual. I followed what the noble and learned Lord, Lord Denning, said and, although he approached the problem from a different viewpoint, this view does support our own view that it would be better to leave such protection under the Law of Property Act and not seek to make the alteration in this Bill that the amendment proposes. I would therefore invite the noble Lord to withdraw the amendment.

Lord Bruce of Donington

It would be a very bold non-lawyer who would dare to dissent from the noble and learned Lord, Lord Denning, on a point of this kind but, with respect, I cannot help feeling that the noble and learned Lord misunderstood the purport of what I said. I am not seeking in any way to take away from the right of the lessor to exert to the full his rights under the lease, save in one particular specified instance, where the lease provides that the lease itself is void by virtue of the person going bankrupt—and in this case the appointment of an office-holder in his place puts him in an equivalent position—then, as against the office-holder or any form of receiver, this should be void.

I am quite sure in my own mind that the matter would be resolved satisfactorily on application being made to the court in the circumstances I have described and that ultimately the general body of creditors would not be deprived of the value of the lease formerly in possession of either the company or the debtor. Of this much I am quite sure, but it does need that application.

I should have thought that it was plain common sense, though I shudder to apprehend the reply of the noble and learned Lord, Lord Denning, to what I am saying. I should have thought it would be very much simpler and would not violate any principle of law if the amendment were put straight here, because the effect of it ultimately is going to be the same. All that is going to happen is that lawyers do not earn a lot of fees in the application being made and the time of the judges is not wasted in hearing a case in which they know perfectly well they are going to grant relief anyway.

Lord Lucas of Chilworth

I understand what the noble Lord says. Nevertheless I am not convinced by that argument. Perhaps this would be the right time to suggest to the Committee a number of other reasons why we cannot accept the amendment. I admit that they are technical and I was not proposing to advance them, but it may be helpful if I do and then the noble Lord, Lord Bruce, can, if he wishes, give further consideration to them on another occasion.

The amendment, as set down, would in fact create a great number of difficulties. For example, it relates only to Part II of the Bill and therefore covers only corporate insolvency. That is a disadvantage. In addition, as drafted, the amendment would create a retrospective effect. That is a disadvantage. It would override the rights of landlords in respect of agreements into which the company concerned had freely entered. Also, the circumstances in the amendment—namely, the appointment of an office-holder—may not, we feel, be sufficiently comprehensive to cover all the circumstances in which a forfeiture clause might operate. For instance, such a clause might refer to the presentation of a petition for winding up or for bankruptcy. Perhaps underlying it is the principle: if this were accepted, why should not forfeiture provisions in such types of agreement—for example, loan agreements or wills—also be rendered void? I said at the outset that I think the amendment goes too far. We could not accept it for the reasons I gave in my first response, and my latter remarks merely add argument to our reasons for asking the noble Lord to withdraw it.

Lord Bruce of Donington

I note with some wry amusement the arguments that are brought forward against the amendment, which suggest that it is not a good amendment because it does not amend other parts. That seems to indicate that if the amendment had been wider in its concept and had applied to bodies other than corporate bodies then it would have been acceptable. I do not propose to make heavy weather of this. I was trying to be helpful to Her Majesty's Government, though there is no reason why I should continue my endeavours on their behalf if they are so ungrateful for them. In those circumstances, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 78 agreed to.

Clause 79 agreed to.

Clause 80 [Duty to co-operate with office holder]:

Lord Monson moved Amendment No.:

Page 59, line 37, at end insert— ("( ) Every office holder shall give to creditors within one month of the relevant day a statement of affairs giving particulars of the company's assets, its debts and liabilities, the names, residences and occupations of creditors, the securities held by them respectively, the dates when securities were respectively given and any other information which may be relevant and by means of a statement to be sent to creditors at intervals of not more than three months shall keep creditors informed of progress.").

The noble Lord said: This is a totally non-partisan amendment, in which respect it resembles the Bill as a whole, and I therefore hope that it will receive support in all quarters of the Committee. Having said that, there is no question of our pressing it to a Division this afternoon. For one thing, the drafting can almost certainly be improved. For example, I think one would need to insert the words "if known" in brackets after the word "occupations" in line 4 of the amendment.

Furthermore, I am not entirely certain that the Consumers' Association, at whose request I tabled this amendment, are right in suggesting that the amendment should be inserted into Clause 80. On reflection, I feel that it should probably form a new clause on its own between Clauses 80 and 81. Apart from anything else, the effective penalty for non-compliance would then be withdrawal of the insolvency practitioner's certificate, which is surely a more appropriate sanction than a fine. But having anticipated the detailed criticisms which the noble Lord, Lord Lucas, is sure to make, reasonably enough, the important thing is to get widespread agreement on the general principles of the amendment. Its main purpose is to protect small creditors who, so far, have not done terribly well from our Committee stage deliberations, particularly after the defeat of the Alliance amendment on Monday.

Time and time again one hears of cases in which companies have gone bust and where their creditors, be they suppliers or consumer creditors, are kept in total ignorance of the fact for months on end. Meanwhile, those creditors may, for example, have borrowed heavily from their banks in anticipation of the money that they believed to be coming through. With a statement of affairs in their hands, as this amendment provides, they are at least in a position to know where they stand and to make realistic plans for the future.

Furthermore, once they are armed with the names and addresses of fellow creditors they will be in a much better position to take collective action, even if this collective action consists only of pressing for criminal proceedings to be instituted against the delinquent directors of an insolvent company. This amendment is to a considerable extent in line with the recommendation in the Cork Report, or so I understand. I hope, therefore, that the Government will welcome it in principle, even if not in every detail, and will perhaps undertake to bring in their own amendment on similar lines at Report stage. I beg to move.

Lord Mottistone

I should very much like to support this amendment in principle though I agree that its wording could obviously be improved. While supporting the explanation which the noble Lord, Lord Monson, has given, I should like to underline the real need for looking after the interests of small creditors, which, as I see it, is the purpose behind this amendment. I should like to support it.

3.45 p.m.

Lord Bruce of Donington

I am very glad that the noble Lord, Lord Monson, was qualified in the support he offered to his own amendment, because as one who has held the position of office holder in the widest sense in this clause I know that what he is asking for is quite impossible. You cannot, within the time stipulated, always find the particulars for which the noble Lord is asking. It is manifestly impossible. I have known of cases going on for a period of three months and where it would be quite impracticable to produce the particulars that are set out here. For example, there are the occupations of creditors. Dear, oh, dear!—how does one possibly know the occupations of creditors in all cases? When one takes up a position of this kind, it is most difficult to find out. What is the occupation of the Inland Revenue? Some people may have rather awkward names for them and may consign them, in the very nature of the description of their occupations, to almost unmentionable places.

We on this side think that it is the responsibility of every office holder to keep creditors, particularly small creditors, well informed as to exactly what the position is. This is very important indeed, and there have been errors of omission in this regard on a very wide scale over the past few years. What one hopes is that with the new qualifications that are required of people who occupy these various positions creditors will be dealt with more professionally and more properly. But to endeavour to put it in precise words, however much they might be changed on Report, would be impracticable; and in those circumstances, although we support the wishes of the noble Lord, Lord Monson, and the sentiments of the noble Lord, Lord Mottistone, we could not possibly offer our support to this amendment.

Lord Meston

I, too, should like to support the principle of this amendment. In practice it is very important for creditors to know what is going on, and to know that as soon as possible. The crucial point is that they have the information. Perhaps the timing is less important, although it is equally important that they should have as much information as possible within a stipulated time limit. In particular, one thinks of employee creditors who have lost their jobs as a result of a liquidation and who need to know where they go from there. They need to know whether anything is coming to them, and, if so, how much and when.

Lord Lucas of Chilworth

I should like to thank the noble Lord, Lord Monson, for his explanation of this amendment, but I am afraid I have to tell him now that, while having sympathy with what he hopes to achieve, I am not able to accept it. I think it will be helpful if I explain in some detail exactly why not. That would be only fair, especially since my noble friend Lord Mottistone has given support and the noble Lord, Lord Meston, has given support in principle. So I should like to set out exactly why we do not wish to pursue the line of argument of the noble Lord, Lord Monson.

One has to be mindful of the cost of providing any kind of information that might be called for. It will of course be an expense of the insolvent estate, and hence ultimately it will fall on the creditors. That is not something that should be lightly discarded. Directors in all types of insolvency proceedings will under this Bill be required to submit a statement of affairs, and it will be a criminal offence if they fail so to do.

The relevant provisions are contained in Clauses 25 and 26 and in Clauses 40 and 41, 49, 52, 67 and 69. In all types of winding-up, provision will be made in the rules for creditors to be able to obtain a copy of the company's statement of affairs if they so wish. An appropriate rule-making power is contained in paragraph 16 of Schedule 3 to the Bill, and such power does extend to the rules which will be made in relation to administrators and administrative receivers.

As regards the winding-up by the court, the official receiver, whether or not he is also the liquidator—if he is the liquidator, as the noble Lord, Lord Bruce of Donington, has reminded the Committee, this will be a slightly different kind of person to what we have become accustomed to in recent years—would be obliged by the rules as at present constituted to send to the creditors following the submission of a statement of affairs by the directors a summary of that statement. In addition, in a creditor's voluntary winding-up, provision is made in Clause 67(3)(b) and (c) and in Clause 69(4)(b) and (c) for a copy of the statement as to the company's affairs prepared by the liquidator or the directors, as the case may be, to be filed with the Registrar of Companies and kept available for inspection of the creditors.

The creditors will of course also be represented through any committee they may establish to monitor the progress of the proceedings. The committee will represent creditors and perhaps shareholders as well, but in the main their representation will be for creditors. They will be in close touch with the office holder as regards progress in the proceedings. Provision will also be made in winding-up for annual accounts as recommended in paragraph 813 of the review committee's report to be prepared by liquidators, and these also will be sent to creditors.

I suggest to the Committee and to the noble Lord, Lord Monson, in particular that the proposals I have outlined do give ample scope for the receipt by creditors of all relevant information. They strike, I believe, the right kind of balance between keeping creditors informed and keeping to a minimum the cost to the company's estate. I hope that what I have said has reassured your Lordships of the Bill's intentions as regards information. I hope therefore that the noble Lord, Lord Monson, will not feel it necessary to pursue his amendment.

Lord Monson

I am grateful to the noble Lords, Lord Mottistone and Lord Meston, for their qualified support. The noble Lord, Lord Bruce of Donington, claims that within the time stipulated it is impossible to secure all the information needed. I accept that. I am not, and nor is the Consumers' Association, wedded to a period of one month. Six weeks, two months or whatever is generally thought to be right would be quite acceptable. The noble Lord also poured scorn on the inclusion of the word "occupations". I quite accept that it may be difficult in many cases to find out the occupations. There is a good reason for including the word "occupations"—in theory, at any rate, if not in practice—because if one or more of the creditors is a barrister or solicitor or accountant, it is to him that the other creditors would turn in order to form an ad hoc committee.

The noble Lord, Lord Lucas of Chilworth, talked about the cost to the creditors. One accepts his concern. It is a question, as he says, of striking a balance, but I am not sure that the Bill as it stands strikes the balance in the right place. The noble Lord also went on to say that all creditors will be able to obtain or inspect a copy of the statement of affairs if they wish. The trouble is that many creditors will not even know that the company has gone into liquidation and therefore it would not occur to them to go to try to obtain this statement of affairs.

I never expected this amendment to be acceptable as it stands but I must say that I am rather disappointed that the noble Lord, Lord Lucas, has not felt able to go even part of the way towards meeting the problems I have posed. I wonder whether he can indicate if there is any possibility of the Government putting forward even an extremely watered down version of this. Can he say whether there is any possibility of the Government doing so?

Lord Lucas of Chilworth

I really am sorry to tell the noble Lord, Lord Monson, that there is no possibility.

Lord Monson

I thank the noble Lord for putting us straight on this. We shall have to try to do the best we can ourselves at the next stage. With that, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 80 agreed to.

Clauses 81 to 83 agreed to.

Clause 84 [Extortionate credit transactions]:

Lord Meston moved Amendment No. 81A:

Page 65, line 35, at end insert— (" (6) If, on any application under this section, it is alleged that a transaction is extortionate, it is for the creditor to prove the contrary.")

The noble Lord said: Perhaps I may speak also to the identical amendment, Amendment No. 111A.

Amendment No. 111A: Clause 153, page 123, line 17, at end insert— (" (7) If, on any application under this section, it is alleged that a transaction is extortionate, it is for the creditor to prove the contrary.")

Clauses 84 and 153 of the Bill provide for the court to deal with extortionate credit bargains or transactions involving the company which has gone into liquidation or the bankrupt. Usually the most the court will do is to modify the terms of the bargain. This has been introduced into this Bill by the draftsman adopting almost verbatim much of Sections 137 to 139 of the Consumer Credit Act 1974. It is a very welcome innovation but by accident or design an omission has occurred, in that one feature of the Consumer Credit Act—namely Section 171(7)—does not appear: that is to say, the burden is not expressly placed upon the creditor to prove that his transaction is not extortionate.

This imposition of a burden of proof upon the creditor works well enough in practice under the Consumer Credit Act. The purpose of this amendment is really to introduce some consistency into this legislation. In practice it works well enough and it will arise only if the issue is raised by the liquidator and will not in fact place a heavy burden of proof upon the creditor. I beg to move.

Lord Mishcon

I wonder whether the noble Lord the Minister will be good enough in replying to the amendment so well moved by the noble Lord, Lord Meston, to say whether or not third parties who act in good faith and therefore have rights in respect of this transaction are going to be protected.

Lord Lucas of Chilworth

I am grateful to the noble Lord, Lord Meston, for bringing forward this amendment on a point to which he referred during the Second Reading of the Bill. I am grateful to him also for attaching with this amendment that which he wishes to say to Amendment No. 111A, in Clause 153. The amendment to Clause 153 is the bankruptcy counterpart of this amendment. The noble Lord is right. The provisions are indeed derived from provisions contained in the Consumer Credit Act 1974, and we agree with the principle behind the proposed amendment; namely, that the onus of proof should be on the creditor to show that the transaction was not extortionate.

4 p.m.

I can tell the Committee now that I am able to accept the amendment in principle. However, the technical effect of the amendment is to import the provisions of Section 171(7) of the Consumer Credit Act into Clause 84. That clause is written in terms that are different from the provisions of the consumer Act on which it is based. We therefore need to consider what further amendments to Clause 84 will be necessary to ensure that the result intended by the noble Lord is achieved. Similarly, we would have to ensure that the same provisions follow in Clause 153.

To turn to the question of the noble Lord, Lord Mishcon, my understanding is that the third party is equally protected, but I should like to come back to the noble Lord on that point—perhaps in some little detail. With the assurance I have given, I shall be grateful if the noble Lord, Lord Meston, would be prepared to withdraw his amendment.

Lord Meston

I am most grateful to the noble Lord for his indications. I am always open to criticism as to my drafting, and in view of his comments I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 84 agreed to.

Clause 85 [Avoidance of certain floating charges]:

[Amendments Nos. 81B, 81C, 81D, 81E and 81F not moved.]

Lord Meston moved Amendment No. 81G:

Page 66, line 35, at end insert— ("(4A) For the purposes of subsection (1) above, consideration shall be treated as having been given for the creation of the charge only if and to the extent that the amount which (but for this subsection) would be treated as being validly secured by the charge on the day of the commencement of the winding up exceeds the relevant indebtedness. (4B) For the purposes of subsection (4A) above, "the relevant indebtedness" means the greatest amount of net unsecured indebtedness owed by the company at any time within the relevant period before the creation of the charge to the person in whose favour the charge was created and to any other person connected with that person at that time, less the amount of any net unsecured indebtedness so owed by the company on the day of the commencement of the winding up.").

The noble Lord said: This is a rather complicated amendment. Its purpose is to cure what is perceived to be a defect in Clause 85. The intention of Clause 85 is to limit the validity of certain floating charges. Clearly, that is a desirable purpose—to limit floating charges given within 12 months of winding up to charges given to secure new credit. The purpose of this amendment is to prevent creditors effectively dressing up old credit as new credit.

In other words, it would be very easy to convert old credit to new credit. For example, a liability for existing supplies could be paid off, and credit for further supplies secured without increasing the amount of credit made available. The Cork Committee dealt with this question in paragraphs 1560 to 1562.

To ensure that exemption from invalidity is restricted to genuinely new credit, it is proposed by this amendment that the floating charge should be invalidated if and insofar as there has been a reduction in the unsecured indebtedness owed by the company giving the charge to the creditor or its associates between the time of the creation of the charge and the time of liquidation. I beg to move.

The Chairman of Committees (Lord Aberdare)

I understand that there is a misprint in the amendment as it appears on the Marshalled List, and that it should read: Page 66, line 35, at end insert—

Lord Meston

That is correct.

Lord Lucas of Chilworth

The purpose of the noble Lord's amendment is to implement the recommendation of the review committee to which he referred in relation to floating charges; that providers of credit should not be able to convert unsecured debt into debt secured by a floating charge where liquidation takes place within 12 months of the taking out of that charge. The point at issue here is whether providers of credit should be able to obtain effective floating charge security for advances originally made on unsecured terms where liquidation takes place within 12 months of the creation of the charge.

While I recognise that there are arguments—which were very ably deployed by the noble Lord, Lord Meston—in favour of such a proposal, the Government's view is that the contrary arguments are such as to suggest that it would be better to take no action. The recommendation of the review committee to which the noble Lord referred is somewhat at odds with another of its recommendations—the effect of which would be to negate the first.

The review committee recommended also that no action with equivalent effect to the noble Lord's amendment to Clause 85 should be taken in relation to fixed charges. Hence, any action we take in relation to floating charges could be negated by a provider of credit converting his unsecured debt into secured debt by resorting to fixed charge rather than floating charge security. Since the Government accept the review committee's point regarding fixed charges, it is inappropriate to pursue reform in the area of floating charges.

We must also take account of the views of the banking community on this matter. Their judgment is that the effect of reducing the flexibility they currently enjoy would he harmful. It would damage their ability to assist ailing businesses because they would be unwilling to risk additional funds if unable to obtain floating charge security for existing unsecured debt. This could only lead to earlier precipitation of business failures—and this is entirely contrary to one of the major themes of the Bill; that is, the preservation and rescue of businesses as going concerns. Those are the reasons why we do not wish the noble Lord to pursue this amendment.

Lord Meston

I am grateful for the Government's view. I question whether the terms of this amendment would make it more difficult for creditors in practice; I doubt that it would. The purpose of the amendment is to tighten the already expressed purposes of the clause. However, this is a complex area, and as the noble Lord has surmised I would not want to press the amendment now, although I may wish to reconsider the matter at a later stage. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Bruce of Donington moved Amendment No. 82:

Page 66, line 39, at end insert— (" (6) In the event of the company going into insolvent liquidation one tenth part of the sums received or receivable by the holder of a floating charge, whether or not subsequently crystallized, shall if not also preferential claims, and if received or receivable pursuant to, and as a consequence or substantially as a consequence of, the creation of that charge by the company and not substantially for any other reason, be payable to, and pending payment held in trust for, or, as the case may be, retained by, the liquidator of the company for the general purposes of the liquidation.").

The noble Lord said: I am pleased to move Amendment No. 82, which arises directly from the Cork report where the suggestion was made that where there was a floating charge, an amount equal to one-tenth ought to be retained on trust for the benefit of the liquidator of an insolvent company. One of the difficulties this amendment would remove is where a liquidator in insolvency is appointed and there is no money whatsoever due to the existence of the floating charge itself which the liquidator can use in defraying the normal expenses of the liquidation.

It is a finely-balanced and very delicate question to be able to decide. The Cork report reached the conclusion that, in general, taken with the other preferential packages proposed in the report—which, as your Lordships will know, meant a certain downgrading of the liabilities due to, among others, the Inland Revenue—more funds would become available in that way for the ordinary creditors, and consequently the position of creditors generally would not be prejudiced by the creation of the 10 per cent. element suggested in the report.

The insolvency review committee came to the conclusion that taken as a package, of which this 10 per cent. proposal forms only a part, it was very doubtful whether anybody would lose very significantly by it at all, but that it certainly would have the effect of providing funds for the liquidator to be able to carry out his normal functions at a time when every asset of the company was covered by a floating charge and no free assets were available. I beg to move.

Lord Denning

The Cork Committee recommended this one-tenth as a most important part of its proceedings and, indeed, several pages of the report are given to illustrations of how it would operate. Furthermore, it was regarded as a package deal to be considered in relation to the troublesome question we shall soon have about preferential debts. The committee pointed out that of all the grievances it had before it and had been brought before it by letter, and otherwise, it is the injustices which are inflicted very often by the existence of floating charges on the whole of the company's assets, then or in the future, that are of most concern. Judges have from the very earliest times pointed out the injustices of a floating charge. The Cork Committee has done so. They have nothing similar on the Continent and the committee said that urgent and radical reform was necesary.

Let me give an illustration; but I shall first read an important paragraph in the report in which is set out the injustices which are inflicted by the floating charge. The report states that, there is scope for the dishonest director, who is often the principal shareholder in the case of a small trading company, and who is in the best position to judge the true financial position of the company, to avoid the loss of the capital invested by him in the venture, by obtaining a floating charge in his own favour and thus gaining priority over the unsecured and often unsuspecting trade creditors with whom he has been dealing". One can always understand these things better by little illustrations. Let me suggest that there is a trader who is going to buy a shop, its stock and perhaps the van to go round with the goods. He forms a small company with £100 capital and that perhaps enables him to buy the typewriter. Let us say that he also has to hand some £50,000. He might lend that money to the company he has formed and that company can buy the shop, the stock and the van. He then takes a floating charge by which he gets security over the shop, the stock and the van and carries on the business as before, but with his floating charge over him.

Year after year he continues to trade. He sells the stock and replaces it with other stock from his suppliers. They give him credit on the basis that he is running an existing and apparently good business. After a year or two, perhaps three or four years, the business goes down. He cannot pay his debts. His unsecured creditors amount to £100,000 and then, let us say, he says, "I want my own money, please. I have a floating charge. I appoint a receiver for me, for the debenture holders, and I will take all that new stock, the shop and the van under my debenture. As for those unsecured creditors, they can whistle, I have got the lot because of my floating charge".

4.15 p.m.

The floating charge operates most unjustly. A man can raise money like that. He can have it on a debenture, use it himself, trade with his unsecured creditors, let them whistle when it comes to the point, and get away with it altogether. That is why judges time after time have proclaimed the injustice of this floating charge. But when it is raised before the commercial community the banking community says, "Oh, we lend our money". It probably is essential that when the banks lend their money they always take it on a floating charge—a receiver for the debenture—and they operate it very well. Although those injustices have been caused to no end of people, nevertheless the banking community and the commercial community—and often the House—have said, "We cannot interfere with the general principle of these floating charges, however grievous may be the injustices that are inflicted by it".

What is to be done? Recommendations have been made that we shall be able to consider later in an amendment by the noble Lord, Lord Meston, saying, in effect: "Don't let these chaps, the directors or the man who is running it himself, or these closely connected people lend the money". We have to take care of those. The committee also says that we ought to do something for the unsecured creditors and that there should be another package. At all events, if a debenture holder comes in like this do not let him take the lot for himself; let the unsecured creditors have a little. Let them take 10 per cent.

The Cork Committee gives page after page of its report to how sensibly and justly the 10 per cent. would operate. Your Lordships will find it all set out on pages 347 to 357, with examples of how it will work and how just and fair it is. The reasons convince me entirely, but they do not seem to have convinced the Government. They do not seem to have convinced the civil servants who drew up the other report. The reasons have convinced me and, I hope, will have convinced all the readers of the report. Whether they will convince the Government is for this Committee to say. I hope that if it comes to a vote, this Committee will say, "Ten per cent., please, off what the debenture holders are to have, and let that 10 per cent. go to the unsecured creditors".

Lord Mishcon

I very much hope that the words of the noble and learned Lord, Lord Denning, will be heeded by the Committee and, indeed, will be listened to with great care by the noble Lord the Minister because we are dealing with a very important matter. It is not only the content of what the noble and learned Lord says when he addresses this Committee that must be considered; there is also the manner in which his voice is intoned when he utters his wise advice. That intonation seems to turn the holder of a floating charge into a villain—

Lord Denning

Only some of them.

Lord Mishcon

The noble and learned Lord is eclectic. Some of the people who hold floating charges are turned into villains and some of those who are unsecured creditors are turned into angels. As I said, it is not just the content of what the noble and learned Lord says; it is also the way in which he addresses the Committee that we so much admire.

I do not want to repeat points that have already been made. The noble and learned Lord talked in terms of the feeling of injustice held by those who have looked at the matter, whether in Parliament or outside, in regard to many cases involving the holder of a floating charge. The Cork Committee was of course very careful about what it did in regard to its recommendations here because it had in mind, of course, the international community and, indeed, the EC.

At paragraph 1529 the committee says—so that all aspects are seen to be looked at— The Advisory Committee emphasised the importance of floating charges to the commercial community in the United Kingdom, and considered it undesirable that the EEC Bankruptcy Convention, if adopted, should in any way prejudice their validity. The Committee recognised that, to achieve acceptance of the floating charge within the Community, some concessions would need to be made for the benefit of non-United Kingdom creditors within the Community". It is very important to emphasise that point.

At paragraph 1531 it says: We are satisfied that the floating charge has become so fundamental a part of the financial structure of the United Kingdom that its abolition cannot be contemplated. But we are equally convinced that reform is needed". I hope that the first point that the Government will take on board is the point which I have tried most respectfully to emphasise—that this reform is a very small reform, but it does indeed keep the floating charge alive.

The point that I want to make, which has not so far been made, is this. Mention has been made of the justice that ought to be done to the unsecured creditor. That is a very good point. But what are we trying to do in this Bill? One of the main aims of this Bill is to see to it that somebody investigates what happens in an insolvency in order to make sure that all the rights which are to be given by this Bill—rights in regard to calling for disqualification of directors and the personal liability of directors, investigation in order to see whether offences have been committed under the Companies Act, and so on—keep our commercial life clean; and it is a very essential point.

We had a name without blemish, I might almost say, in the commercial world so far as the City was concerned and so far as the way in which our commerce and industry were conducted. I wish that I could say that now; I cannot. There have been too many scandals, whether at Lloyd's, where the name was second to none in the world, or right in the centre of the City. We are all, in all parts of the Chamber, behind the Bill because we are trying to stop people hiding behind limited liablity and carrying on nefarious activities that no decent businessman would countenance.

What happens when there is a floating charge? All too often the unsecured creditors realise, and the liquidator, if appointed, realises, that there is nothing that is going to come to them at all. It will all be eaten up by the floating charge. Where will the liquidator get his expenses, let alone his fees, for looking into the affairs of the company and seeing whether all the things that we are going to try to cover are properly covered by a proper investigation? He can do it only if there is a fund of this kind. As the noble and learned Lord said, and as my noble friend in moving this amendment clearly pointed out, the situation is not that a huge amount is taken from the floating chargee. There are deductions which, as the noble and learned Lord, says, are fairly made before the 10 per cent. fund is calculated.

I hope that when he comes to reply to this very important amendment—without it, in my view, we can tear up many clauses in this Bill to which we abscribe so much value because they are not practicable without this fund—the noble Lord the Minister will not talk about the wording. I have no doubt that it could be in simpler form. I have no doubt that it could provide for all the contingencies that ought to be provided for. We are bringing this amendment forward at Committee stage on a matter of principle, and it is the principle which I believe that the Committee will want the noble Lord to deal with. If it is to be a useful debate, he has to tell us why the principle is wrong and why the unsecured creditors should not be protected to some extent. But, more than anything, he has to tell us how else he thinks the provisions of this Bill to which I ventured to refer will be carried out when the floating chargee takes everything and is therefore quite uninterested in investigating the affairs of the company and how the directors have conducted themselves. Who else is going to do it, and who else will pay for it?

Lord Meston

I, too, support the amendment, for all the reasons which have been fully expressed by noble Lords who have spoken. In anticipation of a possible response from the Government, I suggest that the proposal would not prevent or limit investment in companies, large or small, by proprietors of those companies who will continue to enjoy limited liability.

Lord Lucas of Chilworth

This is a very important debate. I wonder whether the Committee will agree with me on this. My noble friend the Leader of the House is to make a Statement, and he has other pressing matters to deal with. Rather than crowd the debate on this amendment, does the Committee agree that we should take the Statement now and then return to my response to the amendment?

Lord Bruce of Donington

I do not think that it is the custom that we should break into the middle of a debate in order to hear a Statement. I speak subject to correction, but that is the position as I have always understood it.

The Lord President of the Council (Viscount Whitelaw)

I understand that that is indeed the position. I apologise to the Committee. If that position is to be held, it must be held. It is very inconvenient for me, but the House comes before my convenience and that of the Government. I have to understand that.

Lord Lucas of Chilworth

I have listened carefully to what has been said, but I regret that neither the Cork Report nor your Lordships have convinced me of the wisdom of accepting the amendment. As noble Lords will recall, the proposals of the Cork Committee were not totally unanimous. Indeed, since the matter came to the notice of followers of this measure, there has been quite a response. I would suggest to the Committee that most of it has been emotive in nature and largely engendered by the fact that unsecured creditors are always at the greatest risk of losing money as a result of receivership or, indeed, as a result of insolvency.

The real practical problems associated with the proposal contained in the Report of the Review Committee have tended to be ignored. We cannot ignore those problems. The major problem stems from the routine practice of lenders taking floating and fixed charges over the assets of a company to secure its debts. I am sure that the Committee will appreciate that nowadays very much greater emphasis is placed on fixed charge security, with the result that the floating charge assets are often minimal. There will in most cases therefore be a very small pot from which 10 per cent. or any other figure can be set aside. I can easily foresee lenders ensuring that, with the inception of such a fund, nothing at all was left in the floating charge, and I think that that would defeat the purpose of the noble Lord's amendment.

Alternatively, I can see that lenders will either lend a good deal less or seek very much higher rates of interest if there is to be an amount siphoned off. In practical terms, it really is difficult, if not impossible, to get something for nothing, particularly, I suggest, in the financial world. That is what one is seeking to do here. It is essentially for practical reasons that the Government judged that the proposal in that part of the review committee's report was unworkable.

4.30 p.m.

There is no malign opposition to the aim that the amendment seeks to achieve. The fact that there are technical defects in the amendment is perhaps beside the point because I am really saying that what is suggested is just not a practical, sensible proposition. That is how we are advised by those who feel that they would have to implement it. I cannot recommend to the Committee that the amendment is acceptable.

Lord Bruce of Donington

The noble Lord does not have to convince the Committee that 10 per cent. of nothing amounts to nothing. But it seems to me, and it may seem to other members of the Committee, particularly some noble and learned Lords, that the Minister has not apprehended what a floating charge is all about. A floating charge is a charge upon the assets of a company for the time being, which includes book debts, stock, working assets, and the nature of which varies from day to day. It differs vastly from any fixed charge on any fixed property of the company. In many cases, in its ever changing form—sometimes increasing, sometimes decreasing, changing its nature from debtors to cash, or stocks, or whatever it may be—it comprises the bulk of the assets of the concern.

The Cork Report made it quite clear that this was part of a package. Of course, even the proceeds of a floating charge are subject to the claims of the preferential creditors, the structure of which, if the Cork Report recommendations are adopted, would mean that more money is available for those holding the floating charge, let alone the unsecured creditors.

This is a question of principle. I accept the noble Lord's reproach that perhaps the amendment may not have been couched in the correct technical terms and the correct legal phraseology, although I have taken the opinion of eminent lawyers upon its structure. (However, this may be wrong). This involves a fundamental question of principle to which I hope all members of the Committee, in whichever part of the Chamber they may sit, will pay very serious attention indeed. The rejection of this amendment would result in the rejection of main thrust of the Bill which, as my noble friend Lord Mishcon has pointed out, depends upon the ability of those who are put in the position of receiver and liquidator, behaving thoroughly, being able to carry out all their investigatory functions, and being able to inform all the creditors in the way that the creditors ought to be informed. If this amendment is not accepted, the Bill will be worthless insofar as its main thrust is concerned. In all seriousness, I invite all Members of the Committee in all parts of the Chamber, if they value the whole thrust of the Bill (inadequate though it may be) to vote for this amendment.

Lord Denning

May I just say one word? The Cork Committee considered all the points. I am afraid the Government must have been much-influenced by those big bankers because they said this at paragraph 1533 of the report of the review committee: We discussed our approach in general terms with representatives of the banking community and some other witnesses … Not surprisingly, it was less than enthusiastically received. The banking community want every penny. They want the last 10 per cent. As the Committee know, they always want their interest, right to the very top rate. The banking community do not need this 10 per cent.

But then the Cork Committee go on to explain. As my noble friend says, there is all the difference in the world between a fixed charge and a floating charge. A fixed charge is on the land which is there. The floating charge is on all the stock which comes in and out. It is on the vans that come in and out, all the carriage, and things like that. Those are the items on which the floating charge operates. The debenture holder comes in and takes all that, as against the unsecured creditors.

I do not want to go into details but so far as any hardship and fairness is concerned, all the examples which the Cork Committee give in all those pages, show how fairly and justly it will work without any real harm at all to those people who want the last penny. They ought to allow the unsecured creditors a little bit, just 10 per cent., that is all. I hope this amendment will be accepted.

Lord Lucas of Chilworth

I have only two things to say. The first is that I know the difference between a fixed and a floating charge. The second thing I have to say is that the noble Lord, Lord Bruce of Donington, has over-exaggerated the effect that this amendment would have upon the Bill. It is not the core of the Bill at all and he very well knows it. This Bill is about saving businesses and looking after the interests of creditors. In no way at all does 10 per cent. of nothing secure any greater help for unsecured creditors. There are indeed almost unsurmountable problems associated with an amendment of this nature. I invite the Committee to reject the amendment.

4.37 p.m.

On Question, Whether the said amendment (No. 82) shall be agreed to?

Their Lordships divided: Contents, 89; Not-Contents, 106.

Airedale, L. Listowel, E.
Amherst, E. Llewelyn-Davies of Hastoe, B.
Attlee, E. Lloyd of Kilgerran, L.
Aylestone, L. Longford, E.
Beaumont of Whitley, L. McIntosh of Haringey, L.
Beswick, L. McNair, L.
Birk, B. Meston, L.
Boothby, L. Mishcon, L.
Bottomley, L. Monson, L.
Brockway, L. Mulley, L.
Bruce of Donington, L. Munster, E.
Carmichael of Kelvingrove, L. Nicol, B. [Teller.]
Collison, L. Oram, L.
Crowther-Hunt, L. Peart, L.
David, B. Phillips, B.
Denington, B. Ponsonby of Shulbrede, L. [Teller.]
Denning, L.
Diamond, L. Prys-Davies, L.
Elwyn-Jones, L. Rea, L.
Ennals, L. Reilly, L.
Falkland, V. Ritchie of Dundee, L.
Foot, L. Roberthall, L.
Gaitskell, B. Rochester, L.
Gallacher, L. Rugby, L.
Galpern, L. Seear, B.
Graham of Edmonton, L. Serota, B.
Greenway, L. Shaughnessy, L.
Hall, V. Shepherd, L.
Hampton, L. Shinwell, L.
Harris of Greenwich, L. Stallard, L.
Hatch of Lusby, L. Stamp, L.
Hayter, L. Stedman, B.
Henderson of Brompton, L. Stewart of Fulham, L.
Hooson, L. Stoddart of Swindon, L.
Hunt, L. Strabolgi, L.
Hutchinson of Lullington, L. Todd, L.
Jacobson, L. Tordoff, L.
Jacques, L. Underhill, L.
Jeger, B. Wallace of Coslany, L.
Jenkins of Putney, L. Wells-Pestell, L.
John-Mackie, L. Wigoder, L.
Kagan, L. Wilson of Langside, L.
Kilmarnock, L. Wilson of Rievaulx, L.
Lawrence, L. Winterbottom, L.
Leatherland, L. Wootton of Abinger, B.
Ailesbury, M. Elton, L.
Airey of Abingdon, B. Faithfull, B.
Alport, L. Fraser of Kilmorack, L.
Auckland, L. Gardner of Parkes, B.
Avon, E. Glanusk, L.
Bathurst, E. Gowrie, E.
Bauer, L. Gray of Contin, L.
Belhaven and Stenton, L. Gridley, L.
Beloff, L. Hailsham of Saint Marylebone, L.
Belstead, L.
Blake, L. Hardinge of Penshurst, L.
Boyd-Carpenter, L. Harvington, L.
Brabazon of Tara, L. Henley, L.
Brookes, L. Home of the Hirsel, L.
Broxbourne, L. Hornsby-Smith, B.
Caithness, E. Hylton-Foster, B.
Cameron of Lochbroom, L. Ilchester, E.
Campbell of Alloway, L. Inglewood, L.
Carnegy of Lour, B. Kinnaird, L.
Cathcart, E. Kitchener, E.
Chelwood, L. Lane-Fox, B.
Cottesloe, L. Liverpool, E.
Cullen of Ashbourne, L. Lloyd of Hampstead, L.
Davidson, V. Long, V.
Denham, L. [Teller.] Lucas of Chilworth, L.
Dilhorne, V. Luke, L.
Drumalbyn, L. McFadzean, L.
Eccles, V. Macleod of Borve, B.
Ellenborough, L. Mancroft, L.
Elliot of Harwood, B. Margadale, L.
Marley, L. St. Aldwyn, E.
Marsh, L. Saltoun, Ly.
Massereene and Ferrard, V. Sandford, L.
Maude of Stratford-upon-Avon, L. Sandys, L.
Seebohm, L.
Merrivale, L. Selkirk, E.
Mersey, V. Sempill, Ly.
Mottistone, L. Skelmersdale, L.
Mowbray and Stourton, L. Stockton, E.
Murton of Lindisfarne, L. Sudeley, L.
Newall, L. Swansea, L.
Noel-Buxton, L. Swinton, E. [Teller.]
Onslow, E. Terrington, L.
Orkney, E. Thomas of Swynnerton, L.
Orr-Ewing, L. Trefgarne, L.
Pender, L. Trumpington, B.
Plummer of St. Marylebone, L. Vaux of Harrowden, L.
Vickers, B.
Porritt, L. Vivian, L.
Portland, D. Whitelaw, V.
Rankeillour, L. Windlesham, L.
Reay, L. Wynford, L.
Renton, L. Young, B.
Rodney, L. Young of Graffham, L.
Romney, E.

Resolved in the negative, and amendment disagreed to accordingly.

Lord Brabazon of Tara

My Lords, I beg to move that the House do now resume.

Moved accordingly, and, on Question, Motion agreed to.

House resumed.