Insolvency Bill [H.L.]

HL Deb 07 February 1985 vol 459 cc1233-74

4.58 p.m.

House again in Committee.

On Question, Whether Clause 85 shall stand part of the Bill?

Lord Mishcon

I should like to give the Committee an explanation. On the last occasion the Committee was very patient with me because, for reasons that I then explained to the Committee, I had to raise various points on clauses stand part. I think that it would be very churlish of me if I tried the patience of the Committee in the same way on this occasion. Therefore, I address myself to one short point.

However, before doing so, may I say to the noble Lord the Minister that I hope he has received the document, to which I referred on the previous occasion, containing many of these important legal points? If he has received the document, for my sake and for the sake of the Committee's tolerance of me, will he deal with it in some way, perhaps by making some observations on it when he thinks it is appropriate, so that the Committee can be saved further repetition today?

The one short point I make is in regard to subsection (1)(a) of this clause, which refers to supplies of goods and to cash. Is there any reason why supplies of services are excepted from this clause? Does it not mean that anyone who supplies services would be in a prejudiced position as against, for example, the wine merchant who supplies the wine for the diners' luncheon parties? This seems to me to be a little unjust.

Lord Lucas of Chilworth

I am most grateful to the noble Lord, Lord Mishcon. Indeed, I now have the document to which he referred earlier. It is an interesting document and I am quite sure that many of the points raised in it can be dealt with by discussion with the interested parties. Where there may possibly be a difference, the remedy of course is to bring the matter before your Lordships' House. Therefore, I repeat the undertaking which I gave not only to give consideration to the points which the noble Lord raised in our earlier proceedings but to study the points raised in the document. Our observations will be made clear. Again I remind the Committee that I gave an undertaking that a copy of anything written in response to that which was raised in Committee will be put in the Library.

Lord Mishcon

Will the noble Lord the Minister kindly deal with the other point that I raised? Is there any reason why the Government have left out supplies of services when they have mentioned supplies of goods and cash?

Lord Lucas of Chilworth

I regret that I cannot deal with that question because I do not know the answer.

Lord Mishcon

The honesty of the Minister is appreciated by all of us and I therefore merely ask him if he would kindly find out the answer and let me know in the usual way.

Clause 85 agreed to.

[Amendment No. 82A not moved.]

Clause 86 [Unenforceability on liens of books etc.]:

On Question, Whether Clause 86 shall stand part of the Bill?

The Earl of Selkirk

I want to ask a question about the lien of one of the officers—it may be a liquidator or any of the other officers. I am looking at the end of Clause 86 and that appears to give a free lien to the officer who may be in charge. Clause 79 says that there will be a charge. Clause 86, on the other hand, says that there will not be a charge. What is the standing of liens of this type? Clause 78 says that the office holder shall have a lien on the property. On the other hand, when we look at Clause 86 it says: Subject to subsection (2) below, a lien or other right to retain possession of any of the books … shall be unenforceable". If we move on to Clause 187 we find that it is very limited indeed.

The point that I am making to my noble friend is this. When a man is appointed to be an officer (as he is called)—no matter which one, whether an administrator or whatever—the one thing about which he wants to be quite clear is that he will get paid. Unless that officer gets a lien of some kind, many men who are quite competent to do the job will be extremely reluctant to do so. I do not quite know what the Government have in mind. The wording is a little obscure. I wonder whether they really mean what appears in rather different words in these three different instances. I should be grateful if my noble friend could answer that question because it is of some importance.

Lord Lucas of Chilworth

In response to the point raised by the noble Lord, Lord Mishcon, in regard to the clause standing part, the answer lies in the Review Committee's report in that no recommendation was made with regard to services. Therefore, the Government felt that this was not a matter which needed to appear within the Bill. But in principle we have no objection to looking at the matter. I imagine that his question arises very much out of the document to which he has referred. If I am right in that regard, then our review of that point will take place when we look at the document.

To respond to my noble friend Lord Selkirk, the difference here is that Clause 79 is concerned with the office holder having a lien, whereas Clause 86 deals with liens of a different nature being held by different people. So there is not the need for the consistency of approach which I think is worrying my noble friend.

The Earl of Selkirk

If that is the case, then I hope that the Government will look at the matter and make clear what they mean. I am advised that the situation is obscure and that it may be something that will deter people from taking on the important post which we have been examining in the Bill. If the noble Lord will do that, then I shall happily leave the matter there.

Lord Lucas of Chilworth

I am very happy to give my noble friend that assurance.

Clause 86 agreed to.

Clause 87 agreed to.

The Deputy Chairman of Committees (Lord Jacques)

We now come to Schedule 3. Amendment No. 83 was withdrawn and has been reprinted in error. Therefore, the Question before the House is that Schedule 3 shall be the third schedule to the Bill.

Schedule 3 agreed to.

Clause 88 [Fees orders]:

Lord Lucas of Chilworth moved Amendment No. 84: Page 68, line 1, leave out ("England or Wales, and") and insert ("England and Wales, or").

The noble Lord said: I beg to move Amendment No. 84. This amendment is clearly necessary to rectify a minor error in Clause 88 whereby the words "or" and "and" in lines 1 and 2 on page 68 of the Bill have been transposed. The clause as amended will provide that the fees payable by virtue of Clause 88 will be such fees as the Lord Chancellor may by order direct in relation to England and Wales. So far as Scotland is concerned, it will be the responsibility of the Secretary of State who will make that direction.

On Question, amendment agreed to.

Clause 88, as amended, agreed to.

Clause 89 [Construction of Part II]:

Lord Bruce of Donington moved Amendment No. 85:

Page 69, line 1, leave out subsection (3) and insert— (" (3) Terms, words and phrases specifically defined in the 1985 Act shall, except in so far as the context otherwise requires, bear the same meaning in this Act as in the 1985 Act.").

The noble Lord said: This amendment is put forward as a suggestion to the noble Lord opposite in an endeavour to resolve some of the complications that arise from the existence of the companies consolidation measure of 1985, which has not yet been passed, and those parts of it which overlap with the Bill before us—the Insolvency Bill—which is still under discussion.

The suggestion that has been put forward seeks to try to help or simplify the position that has arisen. I cannot pretend that it is a solution to the problem, but I shall be very glad to hear what the noble Lord thinks about it. It certainly is not an amendment upon which I would stand; it is just an endeavour to solve a problem, and in that spirit I beg to move.

The Deputy Chairman of Committees

I should explain that if this amendment were agreed to, I could not call Amendment No. 86.

Lord Lucas of Chilworth

I take note of the manner in which the noble Lord, Lord Bruce, has moved this amendment. I do not want to discuss the technical effect unless he particularly wants me to do so because there are some defects which I do not think would arise, anyway, and he is really talking about the principle here. My noble and learned friend the Lord Chancellor explained during the course of the Second Reading debate on the 1985 Bill that the plain fact is that there is no ideal time for the consolidation of companies legislation. Company law is not static, and if consolidation were to wait until all the measures in the pipeline at that time were enacted it would be delayed almost indefinitely.

The general view in the business community and the professions is that it is far better to make a fresh start now than to wait any longer, and that piling this Bill and other new developments on top of the present proliferation of legislation would only make the present confusion as to the true state of company law even worse. Frankly, that is the justification for the decision to proceed with consolidation in advance of this Bill, and it is one which I believe will commend itself to the Committee.

The amendment is on other grounds undesirable in so far as it leaves out subsection (3) and it leaves undefined certain essential terms used in this Bill. The definitions in the 1985 Bill are already applied in Clause 89(1), and they also cover the whole of Part II of this Bill. The references in paragraphs (a), (b), and (c) of Clause 89(1) are necessary because the provisions of the Bill supplement specific areas dealt with in the 1985 Bill, and the paragraphs ensure that both the existing and the new provisions can be applied as a consistent whole. I hope that that explanation meets the points that the noble Lord has been making.

Lord Bruce of Donington

I am grateful to the noble Lord. It may well be that I shall be in correspondence with him in relation to certain more detailed technical aspects of this matter, and on that basis I ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Noel-Buxton moved Amendment No. 86:

Page 69, line 36, at end insert— ("shadow director" has the meaning given by section 741(2) of the 1985 Act and section 741(3) of that Act shall apply as if the sections of this Part in which the words occur were included among the provisions of that Act recorded in that section 741(3)").

The noble Lord said: I beg to move this amendment on behalf of my noble friend Lord Erroll of Hale, who is not yet able to be with us. This amendment has something to do with what has just been said, but it does not address itself simply to matters of definition. There is a substantial point here. In the absence of a definition of "shadow director" in this Bill we must look to Clause 741 of the consolidated Companies Bill and apply that definition. Clause 741(2) defines a shadow director as: a person"— and that includes a company— in accordance with whose directions or instructions the directors of the company are accustomed to act and who is not giving advice in a professional capacity. Clause 741(3) provides that a company is not to be treated as, a shadow director of [a wholly-owned subsidiary] by reason only that the directors of the subsidiary are accustomed to act in accordance with the directions or instructions of its parent for the purposes of certain provisions of the consolidated Bill, but not of course, on the face of it, for the purposes of the provisions of this Bill.

Accordingly, it is unclear whether a parent company, in accordance with the directions and instructions of which its subsidiaries are accustomed to act, becomes liable for the debts of its insolvent subsidiaries under this Bill. There may well be good arguments that this be so, but I have not heard them advanced by the Government.

5.15 p.m.

The Cork Committee specifically forbore from making a recommendation on the matter, considering it to be outside its terms of reference. The amendment before your Lordships' Committee seeks to include the provisions of this Bill among those in Clause 741(3) of the consolidated Companies Bill, to the intent that a parent will not be liable for the debts of an insolvent subsidiary by reason only that the subsidiary board is accustomed to act in accordance with the directions or instructions of its parent.

Group liability is a substantive issue on its own. It should not be brought in by the back door, if indeed that is what is being done. Group liability should be properly considered and debated, if that is what is proposed in this Bill. I look forward in particular to hearing my noble friend the Minister on this matter. I beg to move.

Lord Lucas of Chilworth

I am grateful to my noble friend for explaining his amendment. As I understand it, the amendment seeks to do two things. First, it applies the definition of "shadow director" which is found in Clause 741(2) of the Companies Bill to the term "shadow director" as it appears in Part II of the Bill. To that extent the amendment is not necessary since Clause 89(1) of this Bill provides that Part II is to be construed as one with what is at present the Companies Bill 1985. Therefore, "shadow director" will bear the same meaning in this Bill as in the Companies Bill 1985.

The second point relates to excluding holding companies from being regarded as the shadow directors of the subsidiary. There is no justification for treating holding companies any differently from other companies, or from individuals, in these provisions of the Bill which apply to shadow directors. The provision which the amendment seeks to extend to this Bill relates to the effect of provisions governing transactions between directors and their companies and seeks to exclude from those provisions transactions taking place within groups of companies.

It would not be desirable, for example, for the transfer of funds from a subsidiary to a holding company—a normal technique in the management of group finances—to be inhibited because of the prohibitions in Clause 330 of the 1985 Bill on the making of loans to directors and shadow directors. It would clearly be unjust if holding companies were put in some form of privileged position compared with other persons who have a close connection with companies, certainly when it comes to their dealings with their subsidiaries.

Holding companies are particularly able to manipulate the operations of a subsidiary to ensure that they benefit, and the Bill as it stands offers some protection to creditors of the subsidiary from such manipulation by an unscrupulous holding company. For example, a holding company which transfers all the assets of a failing subsidiary to itself at an under value would not escape the provisions of Clause 82. That is just one example.

I should like to emphasise—and I think that this is the point my noble friend seeks—that the Bill does not make a holding company liable for the debts of a subsidiary. It treats the holding company in much the same way as any other person having a substantial influence over a company and it is thus able to benefit from its assets at the expense of the outside creditor.

Lord Meston

Would the noble Lord agree on a purely practical point—that it is unsatisfactory to grope around this Bill looking for a definition of "shadow directors" only to find that there is not one?

Lord Lucas of Chilworth

If that was so, yes, I would find it unsatisfactory. But as I understand it, the reference to the shadow director can easily be found in this Bill since, in the earlier stages, there is the reference to the Companies Act. However, if on reflection we find that that is too burdensome a job then I should be quite happy to see what I could do to find a place for that definition within the Bill.

Lord Denning

I did not know what a shadow director meant and I should like it contained in this Bill and not have to go back to the Companies Bill which is not yet an Act.

Lord Noel-Buxton

I am obliged to my noble friend the Minister for that response. Of course I cannot take in everything that he has said this afternoon, but it sounds good to me. The major point that he assured me upon was what I was seeking: that a parent company is not made liable for its insolvent subsidiary's debts by virtue only that the subsidiary directors are used to take the direction of the parent board. In the circumstances, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

The Earl of Selkirk moved Amendment No. 86A: Page 70, line 1, leave out ("winding-up order is made") and insert ("petition for winding up is presented").

The noble Earl said: This deals with the time when a winding-up become effective. The Bill as drafted says: winding up and the time at which it goes into liquidation is the beginning of the day on which the winding-up order is made or, as the case may be, the resolution for voluntary winding up passed". The court order for the winding up may be some days after the petition is presented. That gives a period during which all sorts of things can be done and the limitations imposed on the winding up will not apply probably for a week or 10 days.

I am here suggesting—and I believe this is normal practice in Scotland though I am not quite certain—that the liquidation will be at the beginning of the day on which the petition of winding up is presented. That means no lacuna during which advantages may be taken of the period when a winding up is imminent but has not taken place. This is important because it leaves an empty period when the effect of the winding up does not take place. I beg to move.

Lord Wilson of Langside

I support this amendment. I take it that the Minister will accept it in principle on a basis faintly similar to that on which he accepted the principle of the amendment moved by the noble Lord, Lord Meston, earlier. As I understand the position, Section 229 of the Companies Act 1948, which is re-enacted in Section 524 of the Companies Bill 1985, provides that a winding up order by the court commences at the time of the presentation of the petition for the winding up.

In this situation I assume that there is much force in the point made by the noble Earl and that the Government will accept that it is desirable that the law in the context of this Bill should be brought into line with the law in the context of the Companies Bill.

Lord Lucas of Chilworth

The purpose of Clause 89(5) is to provide a simple drafting formula to provide a global term for the date on which a company either has a winding-up order made against it or passes a resolution for voluntary winding-up. This is to avoid the necessity of having to repeat a phrase such as "where a winding-up order has been made against a company or it has passed a resolution for voluntary winding-up" each time such a situation arises.

Instead the Bill can say simply that the company has gone into liquidation. Clearly a company has not gone into liquidation simply because a petition for winding-up has been presented against it. Once it goes into liquidation, the winding up is retrospectively deemed to have commenced at an earlier date. The fear that my noble friend has expressed, that of there being a loophole, is not borne out.

All I can do is to assure my noble friend that that fear is not well placed. The phrase is more for convenience than anything else because of the provisions that once a company goes into liquidation that winding-up is retrospectively deemed to have commenced at the earlier date to which he referred.

The Earl of Selkirk

May I ask the Minister who deems that it is operative from the time of the winding-up? I do not know where that comes and I should be grateful if he could tell me.

Lord Lucas of Chilworth

I am advised that this is the case rather than being able to tell my noble friend from personal knowledge. Perhaps I might add, to be rather more helpful, that I shall find the exact reference and let him have it.

The Earl of Selkirk

I am grateful to the noble Lord for trying to help me. I am not wholly happy but I beg leave to withdraw the amendment.

Lord Lucas of Chilworth

The reference is Clause 524 of the Companies Bill 1985.

Amendment, by leave, withdrawn.

Clause 89 agreed to.

Clause 90 [Minor and consequential amendments of 1985 Act]:

Lord Noel-Buxton moved Amendment No. 87: Page 70, line 21, leave out from ("Act") to end of line 24.

The noble Lord said: I think it would be for the convenience of the Committee if this amendment was taken after consideration of the amendments proposed to Schedule 4. This amendment would delete the words in Clause 90 (1) stating that the amendments specified in Schedule 4 are minor and consequential. They may not be if the amendments proposed to Schedule 4 are agreed to. In any event, it is arguable that all the amendments specified to Schedule 4 are minor and consequential, particularly paragraph 4. If that is agreed I will speak to this amendment after those to Schedule 4.

The Deputy Chairman of Committees

Amendment proposed: Page 70, line 21, leave out from ("Act") to end of line 24.

Lord Noel-Buxton

In that case, I now beg to move the amendment.

Lord Lucas of Chilworth

I wonder whether I can help my noble friend. The inclusion of this brief description of the contents of Schedule 4 is meant only to be helpful to the reader. Its deletion would have no effect other than to make the Bill more difficult to follow. I do not mind. Its inclusion at this time is to be helpful. If the noble Lord would sooner have it deleted, I would not resist him.

Lord Noel-Buxton

My aim is exactly the same as that of my noble friend: not to confuse the reader. Therefore, it is probably better if I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 88 not moved.]

5.30 p.m.

Lord Bruce of Donington moved Amendment No. 98:

Page 70, line 29, at end insert— ("( ) References in the Taxes Act as amended and in regulations thereunder to liquidators and winding up shall be deemed to refer also to administrative receivers and administrative receivers for the purpose of bad debts relief for value added tax.").

The noble Lord said: I beg to move the amendment standing in my name. This amendment is put down because it is pointless for the Board of Trade to complain about, and propose outrageous methods to reduce compulsory liquidations when very many of these liquidations are brought about simply because creditors want the 15 per cent. VAT relief. This is exactly what is happening at the moment. The existing VAT regulations are such that a company cannot claim VAT as a deduction in its accounts, and therefore it pays tax, unless it can be proved that the company has gone into liquidation and that a bad debt has arisen thereby. Bad debts, therefore, are not allowable and VAT is not recoverable in that event.

This amendment is desiged to correct this. What happens now is that the courts are put to additional work by a whole volume of applications being made to them, a whole number of petitions for compulsory winding-ups being submitted; so much so that judges can spend, sometimes during the vacations, hours and hours in making these particular orders for compulsory winding-up purely so that relief for VAT may be obtained. This does not seem to be a very sensible thing to do and I hope that the Government will accept this amendment.

The Lord Advocate

I note the concern of the noble Lord opposite about this matter, but I think it proper to say that, despite what he has said, the view on this side of the Committee is that any amendment of this character is one which relates to taxation and would not be appropriate by way of an amendment in this Bill. Having said that, I should also tell the Committee that Treasury Ministers are looking at the VAT bad debt relief arrangements in the light of the provisions of this Bill, though I am obviously unable at present to advise as to any conclusions that they may have reached. I think that the point which the noble Lord opposite has raised is something which may well be within the purview of that inquiry.

Lord Bruce of Donington

I hear the noble and learned Lord's explanation, but for a very long time the procedure has been going on whereby creditors have to go through this paraphernalia and apply for a compulsory winding-up order before they can reclaim VAT on bad debts. This is silly. I understand what the noble and learned Lord says about not being able to anticipate his right honourable friend's Budget Statement, though everybody else, including the Sunday newspapers, appear to anticipate the Budget Statement a few hours and days before it is delivered. This farce of Budget secrecy and all the rest of it can go too far.

Sometimes Her Majesty's Government baffle me. On the one hand, they are all for economies in public expenditure and in the activities of bureaucracy. They say that the courts must be made cost effective and so on; and all the rest of this extremely virtuous economic attitude is trotted out at every available opportunity. In the meantime, on a Monday, before any one of the judges in the court that is concerned with these matters some 80 to 300 petitions are presented for compulsory winding-up purely in order that VAT may be recovered. Consider the cost of all this! It is ridiculous.

It is not a question merely of a taxation matter, it is a policy of good administration. Everybody throughout the country—the entire business community—knows that this is a ridiculous situation. Surely the Government are imaginative enough, without going through the paraphernalia, waiting for a Budget Statement, and saying that this is a matter of taxation policy and all the rest of it, to be able to deal with the matter quite simply. Surely the Government should consult their own dignity in this matter. Really we are trying to be helpful to the noble and learned Lord. He seems reluctant to accept even help in these matters so as to make for administrative efficiency. He does not even have to call upon the Rayner Committee to inquire into it for him. We are doing his work for him. Why can he not help himself? I regret that in this circumstance I have no alternative but to insist on the amendment if the noble and learned Lord cannot be more co-operative.

Lord Erroll of Hale

Surely a time-honoured phrase such as "in this connection" can be regarded as a code signalling that there will be something in the Budget Statement which will make this amendment unnecessary. I repeat that it is a code which some of us understand, to a lesser or greater degree. Therefore, it would be quite unreasonable, I submit to the noble Lord, Lord Bruce, to divide the Committee on a matter where, in the space of six short weeks, we shall understand the wisdom of what my noble and learned friend the Minister has just said. A little patience and we may find that we are getting what we want, though by a different route.

Lord Bruce of Donington

The noble Lord, Lord Erroll of Hale, and I served in another place at the same time. Perhaps the noble Lord's apprehension of possible codes (applying the Government vernacular for the moment) may be more accurate than mine. I certainly have no desire to prejudice any sentiments that the noble and learned Lord may seek to convey by code. In those circumstances, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 90 agreed to.

Schedule 4 [Amendments of 1985 Act]:

Lord Noel-Buxton moved Amendment No. 90: Page 165, line 5, leave out paragraph 22.

The noble Lord said: The effect of paragraph 22 is to limit the power conferred upon preferential creditors by Clause 614(4) of the consolidated Companies Bill to windings up by the court only, whereas without the amending paragraph 22, the power would apply to all windings up. I am somewhat worried about why this change should be made. The effect would be to encourage preferential creditors to seek a winding up by the court where the power could be useful to them. I think it might just be added that the effect of paragraph 22 would also be to expose directors unreasonably to the threat of automatic disqualification if, against the weight of argument, this, too, was to become law. I beg to move.

Lord Cameron of Lochbroom

I am grateful to my noble friend for speaking to this amendment. That enables me to assure him that there is nothing in any sense suspicious about the terms of the schedule in this particular. All that paragraph 22 is intended to do is to simplify the wording of, but not to alter the effect of, subsection (4) of Clause 614 of the Companies Bill. I should say that what this amendment would achieve would be merely to restore that subsection in its original words; but, as I say, the paragraph is intended to simplify the wording. With that assurance I suggest that my noble friend might wish to withdraw his amendment.

Lord Noel-Buxton

I must thank my noble and learned friend the Lord Advocate for that assurance and, on that basis, I have no hesitation in begging leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Noel-Buxton moved Amendment No. 91:

Page 166, line 14, at end insert— ("30. For paragraphs 2 to 8 of Schedule 19 there shall be substituted the following:

"DEBTS TO INLAND REVENUE

2. Any sums due at the relevant date from the company on account of tax deductions for the 6 months next before that date.

The sums here referred to—

1. (a) are those due by way of deduction of income tax from emoluments during the relevant period, which the company was liable to make under section 204 of the Income and Corporation Taxes Act 1970, less the amount of the repayments of income tax which the company was liable to make during the same period, and
2. (b) include amounts due from the company in respect of deductions required to be made by it under section 69 of the Finance (No. 2) Act 1975 (construction industry contract workers).

DEBTS DUE TO CUSTOMS & EXCISE

3. Any value added tax due at the relevant date from the company and having become due within the 6 months next before that date.

For purposes of this paragraph, the tax having become due within those 6 months in respect of any prescribed accounting period falling partly within and partly outside those 6 months is taken to be such part of the tax due for the whole of that accounting reference period as is proportionate to the part of the period falling within the 6 months.

4. The amount of any car tax due at the relevant date from the company and having become due within the 6 months next before that date.

5. Any amount due—

1. (a) by way of general betting duty or bingo duty, or
2. (b) under section 12(1) of the Betting and Gaming Duties Act 1981 (general betting duty and pool betting duty recoverable from agent collecting stakes), or
3. (c) under section 14 of, or Schedule 2 to, that Act (gaming licence duty),

from the company at the relevant date and which became due within the 6 months next before that date.

SOCIAL SECURITY DEBTS

6. All the debts specified in section 153(2) of the Social Security Act 1975, Schedule 3 to the Social Security Pensions Act 1975, and any corresponding provisions in force in Northern Ireland which became due from the company in the 6 months next before the relevant date.

(This does not apply if the company is being wound up voluntarily merely for the purposes of reconstruction or amalgamation with another company)." ").

The noble Lord said: The effect of this amendment would be to amend Schedule 19—relating to preference among creditors in company winding-up—of the companies consolidation Bill with regard to the preferred creditor status of Government in line with the recommendations of the Cork Committee. The Cork Committee divided Government preferential sums into two classes: first, those owed directly by the insolvent—for example, corporation tax; and, secondly, those that the insolvent had collected on behalf of Government but failed to pay over—for example, pay-as-you-earn. The Cork Committee recommended that the preferential status of the first class should be totally abolished, and this amendment would effect that.

With regard to the second class, which may be called quasi-trust monies, the committee said that the period for which preference should be given should be reduced to that within which a reasonably diligent collector could have collected the debt. The amendment interprets this period as one of six months.

The amendments standing in the names of my noble friend Lord Erroll and myself numbered 95, 98, 100, 102, 104, 105 and 108 would effect the same recommendation in individual insolvency.

Amendment No. 95: Schedule 5, page 166, leave out lines 20 to 23.

Amendment No. 98: Page 166, line 26, leave out ("twelve") insert ("six").

Amendment No. 100: Page 166, line 36, leave out ("twelve") insert ("six").

Amendment No. 102: Page 166, line 40, leave out ("twelve") insert ("six").

Amendment No. 104: Page 167, line 9, leave out ("twelve") insert ("six").

Amendment No. 105: Page 167, leave out lines 10 to 13.

Amendment No. 108: Page 167, line 18, leave out ("twelve") insert ("six").

Certain noble Lords would like to go further than we are suggesting, and I should be happy to go along with them. In defence of the preferred status of government, it has been argued that the Government are "an unwilling creditor". Everybody is an unwilling creditor when a debtor becomes insolvent. Further, the loss to the Government on a single insolvency is minuscule compared with their total income. The loss to an individual or a company, by contrast, can be substantial or even fatal.

Finally, it should be noted that, if the preferred status of government is maintained, the United Kingdom will find itself seriously out of step with its European Community partners and indeed with the United States of America. I beg to move.

The Earl of Selkirk

I have a similar amendment down, and I should very much like to support my noble friend in what he has said. I think I would also support the noble Lord, Lord Lucas. He said that the object of the Bill was to support the creditors. That is precisely and exactly what this series of amendments does, because it takes away an important preference which is there.

Perhaps I may say straight away that this is something which, as my noble friend has said, is being carried out in many countries today. It is regarded as wholly unfair that the Treasury should take away, at the time of bankruptcy, money which has been lost by creditors and which, as my noble friend has also said, is of enormous importance to them.

What I do not quite understand is why the Government have taken very little notice at all of the Cork Report. Mr. Kenneth Cork was appointed by Mr. Edmund Dell, and his job was to carry out a fundamental and exhaustive reappraisal of all aspects of insolvency. This is the important exercise that he did carry out, and the Government have paid not the slightest attention to it.

His recommendation was that the first priority should be the burial costs. Thereafter, all references to rates should be abolished. The preferences for income tax, corporation tax, capital gains tax and development tax should be abolished. That is the basis of this—and not only that, but it is also the basis of a recommendation of a Scottish law report. It has been, or is being, put into force in Canada, Australia, Ireland and many other countries, and I really think it is time that the Treasury came to the realisation that is a grossly unfair tax which should be deleted from the Bill. I hope that the noble Lord will realise that it is something of great importance and that he will try his utmost to get it deleted.

5.45 p.m.

Lord Cameron of Lochbroom

I wonder whether I may intervene at this stage for the convenience of the Committee, in order to set out the Government's attitude to all the amendments before the Committee which seek either to restrict or to remove the Crown's preference in respect of certain taxes and other debts.

The Government have very carefully considered these amendments, together with the speeches of noble Lords, both at Second Reading and indeed in earlier discussions on similar amendments during the passage of the Bankruptcy (Scotland) Bill through this Chamber and, of course, what has already fallen from my noble friend who has already spoken in Committee on this amendment.

In the light of these considerations, the Government accept the arguments which have been rehearsed briefly today by my noble friends for the removal of Crown preference from those debts which would be conveniently called "assessed taxes"—those which, looking simply at Schedule 19 of the Companies Bill, are set out in paragraph 2 of that Schedule and also in similar, though not identical, wording are to be found in Schedule 5, paragraph 1(1) of the present Bill at page 166. They would accept the argument for the removal of Crown preference from such debts and would propose to bring forward amendments to that effect at Report stage.

As regards those debts which are referred to more specifically in this amendment, arising where the tax is being collected for the Crown—indeed I think my noble friend Lord Noel-Buxton called them "quasi-trustee" or "trust debts", the Government would wish to have the benefit of views expressed in Committee before reaching any final view as to the full scope of the amendments to be brought forward at Report stage.

However, I think it is only fair to the Committee to say that the view of the Government, as at present advised, is that expressed by myself at Third Reading on the Bankruptcy (Scotland) Bill in regard to an amendment which was proposed, I think, by the noble Lord, Lord Ross of Marnock. Perhaps very briefly I may just rehearse the basis for that view. Your Lordships will remember that, so far as the Cork Committee was concerned, they were clear in their view that a measure of priority should be accorded to the Crown for moneys collected on its behalf, or they were regarded as being impressed with a trust, I think they said, since they would go to swell the insolvent's estate to the advantage of the general body of creditors. They thought it was not right that statutory provisions, enacted for the more convenient collection of the revenue should inure to the benefit of private creditors.

Indeed, on one view the logic of that might extend to saying that Crown preference should extend to all debts so impressed with a trust—and I use that in a loose and not in a legal sense. On the other hand, as noble Lords are aware, for some time now the preference has been limited to 12 months before insolvency. From a reading of paragraph 1423 of the Cork Committee's report, it would seem that the Cork Committee themselves gave no reason for their conclusion that the present 12 months' period is excessive. Their recommendation was that the limit should be reduced to, in general, three months and that was based entirely on the interval between returns for various taxes, although I think it is fair to say that even on the basis of their recommendation it would not always be as little as three months. I venture to suggest to your Lordships that the period of the interval between returns can provide no essentially logical basis for limiting the liability to account for collected taxes.

Of course, it is fair to say that the present amendment—and I think it is an amendment which echoes an amendment proposed to the Bankruptcy (Scotland) Bill—is of a period of six months and it might be said that that is, on one view, no less arbitrary than the period related to the interval between returns for various taxes. As I said, 12 months is the present position—what I might term the status quo—and it might be that in those circumstances it would be for those who seek to change the status quo to show why in this instance it should be changed.

However, as I said, the Government will obviously give consideration to any expressions of view which are given in this Committee on that matter. Indeed, I should say that, with the assurance which I have given as regards removal of preference for debts which arise from assessed taxes and the consequent need for amendment in that regard at least to be brought forward by the Government at Report stage, I hope that my noble friend who moved this amendment might at the end of the debate be prepared to withdraw it, in order that in due course the Government can put forward their amendment at Report stage.

Lord Bruce of Donington

I have just one question to ask the noble and learned Lord before responding to the statement that he has just made, which I must say must be welcomed in all quarters of your Lordships' House. The effect of the amendment that was moved by the noble Lord, Lord Noel-Buxton, is not only upon Crown preference but, by its very text, eliminates from Schedule 19 any mention of rates. Therefore, the passing of the noble Lord's amendment would mean that rate preference would go as well. The noble and learned Lord did not specifically refer to rates, and I should be very glad if he could inform us whether the most welcome concession which he intends to announce in respect of the assessed tax position also extends to that of rates. It would enable further consideration to be given to it by your Lordships.

Lord Mottistone

Did my noble and learned friend not say paragraph 2 of Schedule 19, and not the whole of Schedule 19? Local rates are in paragraph 7 of Schedule 19.

Lord Cameron of Lochbroom

I am obliged to my noble friend. That is the paragraph to which I specifically referred, because it is covered by this amendment. I should prefer to hear argument and debate upon this matter. Of course, I accept that it is covered by the extent of the present amendment. I am not closed in mind on this matter. No, I am reminded from another quarter that the concession which I made in regard to paragraph 2 of Schedule 19 can also comprise paragraph 7 of Schedule 19 which extends to local rates.

Lord Bruce-Gardyne

I wonder whether I may briefly intervene, since I was responsible when I was in a previous incarnation in the Treasury for considering the response to the original Cork Report from the angle of the Treasury, in the context of the responsibilities of the Inland Revenue and of the Customs and Excise. I venture to suggest to your Lordships that the compromise proposition, which my noble and learned friend the Lord Advocate has put before us this afternoon, is an extremely reasonable one, because there surely is a distinction—is there not?—between debts which an insolvent has incurred, whether in terms of corporation tax and the like to central Government, or for that matter the important point of rates to local authorities which my noble and learned friend has just clarified, and, on the other hand, moneys which never belonged to the insolvent and which had been collected by the insolvent on behalf of central Government.

As to whether there should be a grace period of six months or a year seems to me to be a fine point of debate, but it does not change the substance of the issue. On the substance of the issue, I should have thought that the distinction which my noble and learned friend has sought to make between these two types of liability in the hands of the insolvent is a very reasonable one. I would not be at all tempted, from what I recall of our discussions, to support the more sweeping amendment advanced by my noble friend Lord Selkirk, which goes a long way beyond even what Cork suggested and even that, as my noble and learned friend the Lord Advocate has pointed out, was not very obviously substantiated in the evidence that was given to Cork and in the conclusions that were drawn from it. So I hope that your Lordships will be inclined to look favourably upon the compromise which my noble and learned friend has outlined before us this afternoon.

Lord Denning

While the compromise, so to speak, is agreeable, I hope that we shall go the whole length. Let me first take rates. As we know, rates are owed to the local authority. Is there any difference between the rates which are owed by a debtor and the money which he owes for rent and, on the other hand, the money that he owes for supplies and services? Clearly, rates must share equally with all other creditors of an individual. There is no doubt whatever on that, and I am glad that no preference is to be sought for them. The distinction which is being drawn and was drawn by the Cork Committee is that there are some taxes, such as VAT, of which the person who gets them is a quasi-trustee and is collecting them for the Government. I would reject that analogy altogether. It is simply a case of debtor and creditor all the way through. The man who collects VAT is getting money for himself. He uses it for himself until he has to pay over something and then he has to pay over a certain amount—it may be deducted for input. throughput: I do not understand all these things—to the Government. I look upon each of these simply as a debtor and creditor relationship.

6 p.m.

Let me take some simple instances. Let me take the case which we discussed at an earlier stage of the Bill. A man sends his advance payment to a mail order company, or whatever. It may be £50 or £100, and he does not get the goods at all. In those circumstances, can he do anything but claim as an unsecured creditor? That was the moral side of it which my noble friend Lord Meston raised at the beginning. Why should he not have his money back? Why should he not have preference? It is his money. The same argument could be put forward in that case.

I shall give another case which continually happens. A house is damaged or a wall is broken down and the man claims on his insurance company. He gets the cost of the repairs from his insurance company. Does he hold that as a trustee for the builder who has done the work? Certainly not. The builder must sue him for the work done and for his money and the other man can get his money from the insurance company. It is simply a matter of creditor and debtor, each side, all the way through. There is no question of a trust or a quasi-trust or collecting taxes for the Government.

I would hope that we can go the whole way and not allow these preferences to the Crown or to the emanations of the Crown. They ought to rank equally with all the other creditors. This whole business of Crown preference is completely out of date. It came in a time when the Crown was regarded as all-powerful; not only that but when its functions were limited to defence, foreign affairs and the police. But now the functions of Government extend to commercial enterprises of all kinds. Debts are owed to Government departments. They render services like anyone else and there is no reason whatever why the Crown should have any preference over the other ordinary creditors of the company. The Crown ought to share equally with them all the way through and I would hope we could abolish all Crown preferences in this Bill.

Viscount Colville of Culross

I wonder whether for one moment I could venture to disagree with the noble and learned Lord, Lord Denning, on the basis of a very simple illustration. For reasons which I really do not know, VAT is chargeable on my fees as a member of the Bar. It does not happen anywhere else but it does happen in this country. What happens in practice is that when the fee note is put in to the client's solicitor, 15 per cent. is added and he pays that money over to me and in due course I pay it on to the Customs and Excise. I do not consider that ever to have been my money at all. If it was anybody's money it belonged to the professional client. He pays it because he has to, and I am the custodian of it until the time comes to send in the next VAT return when I pass it on to the Customs and Excise.

I do not consider that to be in the same category as the type of debt that might be owed by way of taxes or rates. I do not, I am afraid, consider that it was ever my money in the first place. The distinction that my noble and learned friend the Lord Advocate has made, and which has been supported by my noble friend Lord Bruce-Gardyne, seems to be an eminently sensible way of drawing the line. I welcome the concession very much, but I do not think I could justify myself in asking that it should be pushed any further.

Lord Mishcon

I do not want to enter into the argument about VAT. I respect the point that has just been made. It may very well be that others think that because VAT goes one way and the other way with regard to ordinary businesses as opposed possibly to professional people, there is a case for saying that it forms part of working capital and is used as such.

I want to raise a different point which concerns PAYE. There I think it would be completely iniquitous if a situation arose as it did do where—I bear in mind that the noble Lord the Minister wanted a debate on this in order that the Government might consider the position and all views could be taken into account: I am putting forward purely a personal view—it was decided for purely administrative reasons that those concerned would no longer assess the employee direct and collect from him direct but would get the employer to deduct the tax from wages and then forward it to the Revenue. If ever one got near trusteeship or a quasi-trusteeship, that is an example. I should have thought that, certainly with regard to PAYE, it is a very, very strong case for saying that is the Government's money and that the preferential claim should apply to it.

The Earl of Selkirk

The noble Lord, Lord Mishcon, is in full agreement with Sir Kenneth Cork, who specifically omits from his recommendation about the removal of preferences PAYE and, if I may say, VAT, so it does not come in at all.

Lord Marsh

One should never be churlish when governments return bearing gifts, and wherever possible I think they should be encouraged since it shows they are movng in the right direction. I am bound to say that I have never understood the logic of the preferred status of the Crown in the case of an insolvency because I cannot see the distinction between someone who is using goods and services which rightly belong to other persons and someone who is using for his own purposes cash, whether it be cash owed to the state or cash owed to some other person.

One of the things that concern me about this is its effect. If one takes into account the fact that the vast majority, the overwhelming majority, of insolvencies relate to quite small companies—indeed, I should think that a high proportion of them are very small companies—it should also be remembered that the creditors of those companies frequently tend to a very large extent also to be very small companies. They are small taxi companies, local traders or local shopkeepers. I would suspect that the amount involved—it may be possible that the Minister could give us some indication purely as an estimate—for the state, with its preferred status, is minimal. I cannot believe that it is significant. The amount involved on the part of the people over whom the state's claim can take preference is very considerable in many cases because they are so much smaller.

I would simply say that the Government have made a genuine and real offer of a generous compromise. Like the noble and learned Lord, Lord Denning, I think it would be even more reasonable if they were to bite the bullet and change a situation which seems to me to be indefensible in logic and almost indefensible in terms of simple justice.

Lord Mottistone

I put down my name also to the amendment of my noble friend Lord Selkirk, Amendment No. 91A.

Amendment No. 91A: Page 166, line 14, at end insert— (" .Paragraphs 2 to 8 of Schedule 19 shall cease to have effect.") I have two amendments of my own on this subject, Amendment No. 94E and Amendment No. 110B, to which I should like to speak at the same moment.

Amendment No. 94: Schedule 5, page 166, line 19, leave out from beginning to end of line 28 on page 167.

Amendment No. 110B: Schedule 5, page 168, leave out lines 28 to 39.

I have great sympathy with what the noble Lord, Lord Marsh, has just said and believe that perhaps this very welcome concession on the part of the Government—I give every thanks to my noble and learned friend the Lord Advocate for telling us about it—might be the beginning of a move of greater appreciation of the relative value of the debts of the small companies that are in difficulty and of their specific creditors. One needs to take a global view of it and indeed I think Sir Kenneth Cork and his committee tried to do that very thing. Perhaps they did not go quite far enough in this respect and were too respectful of Government moneys. Perhaps Government really need take a more balanced view, not so much about the position as it affects them—because, after all, they are the Government; they need to look at how this affects the smaller citizens and the smaller companies who have to survive in this somewhat difficult world. So while I very much welcome the concession, I hope it will be the beginning of something better in the passage of time.

I should like to ask one question of my noble friend. Will the relevant equivalent part of my Amendment No. 94E to Schedule 5 be amended in a similar way when the Government come forward with their own amendment in due course?

Lord Erroll of Hale

Perhaps I may join in at this stage to say that we should remember that the Cork Report had some sympathy with the concept of quasi trust moneys being collected, but recommended that the period for which preference should be given should be reduced to that within which a reasonably diligent collector would have got the money in. That is why my noble friend Lord Noel-Buxton and I have suggested a period of six months. Ideally we would go along with others who say that there should be no preference at all—but in framing our amendment in the way we did, we thought there would be more chance of winning it on the basis of a six-month period than by pressing for no period at all. But if the sense of the Committee is interpretated by Her Majesty's Ministers as no period at all, then my noble friend and I would certainly go along with that.

On the other hand, we ought to bear in mind that this money is not the Government's money. It belongs to us all—it belongs to the people. It is tax which has been paid by employees—admittedly by deduction—and it belongs to the general chest to which we all contribute. The fact that these may be small sums in relation to other sums which the Government may collect does not detract from the fact that it is money which belongs to us all. That fact should not be lost sight of.

Mention has been made of PAYE and VAT but national insurance contributions fall into the same category as PAYE. Ideally the small or large company should not use sums collected from employees as part of its working capital until the day comes for remitting that money to the Government. But I am sure that many companies do so because they are in difficult financial straits. Nevertheless, that does not make a case for the Government to wipe out all elements of preference—unless the Government are feeling so generously minded, in which case I am sure we all go along with them.

Lord Bruce of Donington

At paragraph 1396 of the Cork Report we are reminded: It is a fundamental objective of the law of insolvency to achieve a rateable, that is to say pari passu, distribution of the uncharged assets of the insolvent among the unsecured creditors". This remains the fundamental objective, which has been underlined by the noble and learned Lord, Lord Denning—who still remains completely in support of the outright abolition of Government preference in these matters. I must say that I fully support him in that.

At the same time, although I believe in the strictly combative nature of politics, in which I like to participate from time to time, I believe also that politics is the art of the possible. This afternoon, the noble Lord has made a very generous concession to those of us who believe in the abolition of all preference. He was good enough to say that in regard to the six-month period in relation to what we will call for the moment trust debts—although I use that term very loosely and without any fundamental conviction of that being the true description—such as PAYE and VAT, he would like to hear further argument from the Committee before the Government settle their mind.

6.15 p.m.

The existing period is 12 months and the idea of the amendment moved by the noble Lord, Lord Noel-Buxton, is that the period should be six months. The noble Lord seemed to be saying to us that he did not altogether like six months and needed to be convinced before being prepared to accept it and making his announcement in due course. I refer the noble Lord to paragraphs 1423 and 1424 of the Cork Report, which I am not going to read to the Committee but which ought to be adequate for the noble Lord's purposes in seeing what lay behind the minds of the members of the insolvency review committee.

I will ask the noble Lord to bear in mind another consideration. In my experience, small and medium size firms, regrettably, constitute the bulk of the firms going into liquidation; it is usually the small and medium size firms which are responsible for the enormous increase in the number of bankruptcies and liquidations. In my experience also, it is not so much the liability for the assessed taxes that presents any considerable problem. Most of the companies which are going into liquidation will probably have losses anyway and so no taxes will be assessable upon them—although the extent to which they may be in arrears in payment of corporation tax relating to previous years will obviously vary.

I suggest that in the bulk of cases, the companies going into liquidation tend to get even more into arrears with their PAYE, and that it is very often their PAYE taxation which forms the bulk of the claim of the Government against the assets of the company. Indeed, if payment in full was insisted upon, in many cases—again, as a matter of experience—that would probably absorb most of the remaining available net assets of the company anyway.

The Government are a little more ambivalent about this matter than is sometimes indicated. For example, the noble Lord's right honourable friend the Chancellor of the Exchequer, in a speech in another place some two or three weeks ago, made mention—somewhat proudly, I thought—of uncollected VAT being regarded by the Government as working capital of the companies concerned. Some noble Lords may remember the immortal passage, which I have carefully preserved in my own archives although I do not have it with me at this time. So the Government cannot regard this matter with altogether the purity they affect to feel at the present time. I hope therefore that the Government will adopt the Cork recommendation and accept a six-month limitation in place of the 12-month period hitherto subsisting.

If the noble Lord would care to give me a further opportunity to see him privately, if this would help to convince him further, then I will of course endeavour to do so in the interests of the general body of creditors, but I do not wish to detain the Committee on this matter. In general, we on this side of the Committee welcome the Government's announcement. We sincerely hope that in the light of that, the mover of this amendment may feel disposed—although it is entirely a matter for him—on the assurances we have been given, to withdraw his amendment.

Lord Meston

We, too, would welcome the indication from the Government and sympathise with the sentiments expressed by the noble and learned Lord, Lord Denning. One has to remember that this is intended to be a reforming statute and, therefore, one should start with a clean slate and question the fundamentals—which is what the Cork Committee did. One should start, therefore, from the position that all creditors share equally in the misfortune of being owed money by an insolvent individual or company.

There has been no reasoned justification for Crown preference, other than that it has always been there. The underlying theory which has supported it is that the Crown is an indivisible whole. The reality, of course, is that the Crown is many distinguishable parts and it is quite wrong to treat all categories of tax as one single category. That is simply not tenable. The Inland Revenue is a club to which we all have to belong but that does not mean that the club subscription should be paid in preference to any other debt.

It is not just income tax. The Bill in its original form covered the entire range of taxes. If I may, I shall repeat what I said at Second Reading. There is no justification for giving betting tax and bingo tax preference over the butcher or the baker. However, there are taxes which I respectfully agree should be considered in a separate category. VAT, where one is in effect a collector of the tax, is one example. Like the noble Viscount I am registered for VAT. I receive and pay VAT on my fees. Like him, I try hard to remember that it is not my money: and in case there is anyone from Southend listening, I look after it carefully.

I also agree with observations by noble Lords about PAYE and national insurance contributions. I suggest that they, too, should be looked at slightly separately. Ultimately, it comes down to this. It is probably right not completely to remove Crown preference but certainly right to reduce it and to qualify it in order to give the conscientious trade creditor some incentive on a liquidation, other than simply VAT bad debt relief, and to give the innocent consumer who is a creditor some hope. One must say, quite frankly, that there is little else in this Bill that we have seen as it has progressed which will give hope to the innocent consumer.

Lord Noel-Buxton

I am sure that we are all most grateful to my noble and learned friend the Lord Advocate for the statement he made. Indeed, that gratitude will extend beyond this Committee. I am also most grateful to my noble friend for the generosity with which he invited this debate. Needless to say, I have absolutely no hesitation in withdrawing this amendment.

Amendment, by leave, withdrawn.

[Amendment No. 91A not moved.]

Schedule 4 agreed to.

Clause 91 agreed to.

Clause 92 [Application for interim order]:

Lord Lucas of Chilworth moved Amendment No. 92: Page 72, line 7, after ("made") insert ("in respect of that individual").

The noble Lord said: Clause 92 is concerned with the situation where an individual intends to make a voluntary arrangement with his creditors and application is made to the court for an interim order which, if granted, gives the individual time to formulate his proposals. Subsection (6), to which this amendment relates, provides that any court in which proceedings are pending against an individual may, on proof that an application has been made for an interim order, either stay the proceedings or allow them to continue on such terms as it thinks fit. The purpose of this amendment is to make clear that the application for the interim order must have been made in respect of the same individual against whom the court proceedings are pending. I beg to move.

On Question, amendment agreed to.

Clause 92, as amended, agreed to.

Clauses 93 to 99 agreed to.

Clause 100 [Preliminary]:

Lord Meston moved Amendment No. 92A: Page 79, line 19, leave out ("twelve months") and insert ("three years").

The noble Lord said: The purpose of this amendment is to tighten up the jurisdictional provisions of Clause 100. Very briefly, Clause 100 provides that: A bankruptcy petition shall not be presented … unless the debtor is personally present in England and Wales on the day on which the petition is presented or, at any time in the period of twelve months ending with that day—

1. (a) has been ordinarily resident, or has had a place of residence, in England and Wales; or
2. (b) has carried on business in England and Wales".

The simple purpose of the amendment is to enlarge the period from 12 months to three years; the intention being to catch the offshore bankrupt or the fly-by-night.

In extending the time the amendment is intended to cover the person who has left the country within the preceding three years. A director of a company who has left the country when the company collapses and has later been found to be guilty of wrongful or fraudulent trading, or some misfeasance, often cannot be made bankrupt personally because his liability is not established until more than a year after his departure. Your Lordships may think it is offensive that someone cannot be made bankrupt because he managed to leave for his Mediterranean villa—probably built with other people's money—one year and one day before the bankruptcy petition. I beg to move.

Lord Bruce of Donington

We on these Benches support this amendment. It arises, of course, from the experience of the noble Lord, Lord Meston, and, indeed, many of us, that the proceedings in order to establish any liability by the director very often take a long time, partly due to the state of the lists in the courts and the delay that often takes place in establishing the facts and the liability. No honest director has anything to fear from this amendment. Three years is a very good period and we should have thought that the Government would adopt this without any hesitation.

6.30 p.m.

Lord Lucas of Chilworth

We intend to review Clause 100, because a number of representations have been made from outside your Lordships' Committee. We have had representations from the Revenue and also from members of the Insolvency Rules Advisory Committee that the clause is over-restrictive. We were thinking about whether to reintroduce domicile into Clause 100. I am most grateful to the noble Lord, Lord Meston, for putting down the amendment. Now that he has put his views, we should certainly like to consider whether the approach that he suggests may not be more favourable. I am grateful also to the noble Lord, Lord Bruce of Donington.

In short, we take note of what both noble Lords have said. We are not happy with Clause 100. I invite the noble Lord to withdraw his amendment on the assurance that the Government will bring back an amendment to meet the criticisms that have been made.

Lord Meston

I am most grateful to the noble Lord. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Claue 100 agreed to.

Clauses 101 to 105 agreed to.

Clause 106 [Period of bankruptcy]:

[Amendments Nos. 92B to 92E had been withdrawn from the Marshalled List.]

Lord Meston moved Amendment No. 92EA: Page 85, line 3, after ("subsection (3)") insert ("and section 107").

The noble Lord said: This body of amendments covers Clauses 106 and 107.

Amendment No. 92EB: Page 85, line 9, leave out ("and").

Amendment No. 92EC: Page 85, line 10, at beginning, insert ("in a case in which a certificate has been issued under section 104(6) above and has not been revoked by the expiration of the period of twelve months beginning with the commencement of the bankruptcy; and

(c)").

Amendment No. 92ED: Clause 107, page 85, line 26, after ("above") insert ("or subsection (1A) below").

Amendment No. 92EE: Page 85, line 27, leave out ("five") and insert ("three").

Amendment No. 92EF: Page 85, line 28, at end insert—insert— ("(1A) In a case to which paragraph (b) of section 106(2) above applies, if the court is satisfied, on the hearing of the petition or on the application of the official receiver made at any time before the discharge of the bankrupt, that the conduct of the bankrupt (whether before or after the making of the order) has been such as to make it inappropriate for him to be discharged as provided by that paragraph, the court may direct that the bankrupt shall not be discharged except by an order of the court under subsection (1) above. (1B) in any case except where a direction has been given under subsection (1A) above the bankrupt may on the hearing of the petition or at any time thereafter apply for an order that he be discharged from bankruptcy. (1C) the court may on an application under subsection (1B) above make an order discharging the bankrupt from bankruptcy if it is satisfied that the bankruptcy was not caused or substantially contributed to by any improper or imprudent conduct or want of care on the part of the bankrupt and that it is appropriate in the circumstances that he should be discharged, and the court may under this subsection make an order discharging the bankrupt immediately after the commencement of the bankruptcy.").

The purpose of these amendments is to give the court greater flexibility in relation to discharge from personal bankruptcy. The Bill as presently drafted provides in the great majority of cases for a three-year period after which there is a discharge. That may be appropriate in the great majority of cases of a first bankruptcy, but there are a few hard cases where it is, I suggest, wrong and offensive to limit the period of discharge even to three years. It would therefore be desirable to allow the court to extend that period from the outset.

I appreciate the argument which we have already heard in the course of this Bill that an automatic, arbitrary time limit is administratively more convenient, but it is not always fair and sensible, as I think your Lordships recognised in the case of directors' automatic disqualification.

This will not substantially add to the administration involved in bankruptcy discharge and, indeed, this is an amendment which cuts both ways. It would give the court greater flexibility. It would also provide that there should be a lesser one-year period in cases of small bankruptcies—what are known in this Bill as summary bankruptcies—usually in cases where the bankrupt has become insolvent for reasons beyond his control and then only in a small way. As I say, it cuts both ways. It gives greater flexibility, and, I would suggest, greater justice. I beg to move.

Lord Lucas of Chilworth

I am most grateful to the noble Lord for explaining the purpose of his amendments. The series of amendments seeks to modify the provisions of the Bill as regards the discharge of an individual who is bankrupt. I very much regret that I shall have to speak at some length to these amendments. The Bill introduces a new system for the discharge of bankrupts, and I think it would be helpful to the Committee if I were to set out the reasoning behind the provisions in the Bill which give rise to my invitation to the noble Lord to withdraw most of his amendments. However, there is one in particular to which I shall come shortly which we believe has great merit and which we should like to adopt in principle.

In saying that the Bill introduces a new system for the discharge of bankrupts, I have to say that that is partly because the present law has proved unsatisfactory and partly because one wishes to institute a straightforward system of discharge. The circumstances for a deviation from the norm will usually be where the individual concerned has recently been subject to previous bankruptcy proceedings or where he fails to fulfil his obligations and duties in relation to the present proceedings. In the former case the bankrupt will have to apply to the court for his discharge under Clause 107 of the Bill. In the latter the official receiver will be able to intervene and ask the court to suspend the period up to automatic discharge; and, if the court does so, time will start to run again only when the court is satisfied with the bankrupt's conduct. Thus a bankrupt who failed to surrender to the proceedings at all could be effectively prevented from obtaining his discharge and remain subject to the disabilities of bankruptcy.

The approach that the Bill makes in that regard represents a radical departure from present law, but I think that your Lordships will no doubt bear in mind that the law was framed in accordance with attitudes of the 19th century. The Government are convinced that sweeping measures are required to bring the system of discharge from bankruptcy up to date. That was of course emphasised in the White Paper, A Revised Framework for Insolvency Law, and the Government are satisfied that in a modern society the emphasis should be on the rehabilitation of bankrupts and that a three-year period of restriction is sufficient for those who have failed financially.

The restrictions on a bankrupt's freedom to obtain credit or carry on business in a name other than that under which he became bankrupt without disclosing his status are not light burdens, and we are of the opinion that a bankrupt should normally be relieved of those burdens after a period of three years. Where a person becomes bankrupt for a second time we view that matter rather differently. The Bill deals far more strictly in terms of discharge with the individual who has been given his chance to make good, so to speak, but has again failed to fulfil his obligations.

One of the effects of the amended provisions would be to enable the court of its own volition, or on the application of the official receiver, effectively to suspend a bankrupt's discharge on the basis of his conduct before the bankruptcy. In saying that, I assume that when the noble Lord, Lord Meston, refers in Amendment No. 92EF to inserting a new subsection in Clause 107 which states: In a case which paragraph (b) of section 106(2) above applies", his intention is that the reference should be to paragraph (b) now appearing in Clause 106(2) and not the new paragraph which he seeks to insert by his proposal. If I have misunderstood, I am sure that he will correct me.

I have to ask the noble Lord, Lord Meston, this question. What kind of conduct are we referring to in talking about the individual's actions prior to his bankruptcy? Are we really harking back to the old bankruptcy facts which were set out in Section 26(3) of the 1914 Bankruptcy Act? If so—because that is how it seems to me—I suggest to the noble Lord that his views are less enlightened than I had frankly expected. Some of the matters mentioned in that Section 26 are of course criminal offences under the Act and under the Bill. Where such offences have been committed, one of the main purposes of the Bill is to ensure that the official receiver has sufficient time and powers available to him to see that the offenders are prosecuted. It really follows, from what I have said, that I am really not able to accept the suggestion that the bankrupt's conduct before his bankruptcy should have any effect upon the period up to his discharge.

It also follows that I am unable to accept that the court should be empowered, on the hearing of a bankruptcy petition, to make a direction as to the bankrupt's discharge. Such a direction could only be based on the bankrupt's conduct before bankruptcy ensued; and even if that were acceptable, I would find it difficult to see on what evidence a court could base its consideration of the matter. The bankrupt's affairs would not at that date have been investigated and the evidence of a petitioning creditor or the bankrupt himself could hardly be relied upon to give the court an unbiased view.

The Bill, however, provides for the court to suspend the automatic discharge provision in cases of non-co-operation in the proceedings until such co-operation is forthcoming.

In the final analysis, I think the suggested variation achieves no significantly different result from the present provisions of the Bill, in terms of the bankrupt having to go to the court to explain himself and to justify why the court should withdraw the inhibition which it has placed upon his ability to be discharged from bankruptcy. The official receiver makes a report to the court expressing his views and the court can take that report into account in reaching a decision. decision.

In addition, Clause 106(3) of the Bill gives the court, when suspending the automatic discharge provisions, a very wide power to insert in its order conditions which are to be fulfilled by the bankrupt. The court will wish to be satisfied that any such conditions have been complied with before it will consider removing the inhibition which it previously imposed.

I feel therefore that the present provisions of the Bill are more than adequate to enable the court to deal as it thinks fit; in other words, to have the discretion that the noble Lord, Lord Meston, seeks. The differentiation between the first and subsequent bankruptcies will effectively be removed from the amendment tabled to Clause 107(1). It will allow a second-time bankrupt (if I may so describe him) to apply for his discharge after three years from the making of the bankruptcy order, instead of the five years currently proposed by the Bill. It will thus be possible for both a first-time and a second-time bankrupt to be discharged after the same period of three years. The Bill at present differentiates between those two in relation to discharge. I think it is right that we should have a distinction. We remain of the view that a person who becomes bankrupt on a second or subsequent occasion should not be entitled to apply for his discharge until five years have elapsed.

The noble Lord, Lord Meston, seeks, in his new subsections (1B) and (1C) to Clause 107, to retain the concept of an application for discharge from bankruptcy for first-time bankrupts. But what the Bill does is to replace that concept for that class of bankrupt by enabling them to have the bankruptcy order annulled if they enter into a voluntary arrangement with their creditors. The relevant provision is to be found in Clause 92(4) of the Bill, and we think this is perhaps a better approach from both the point of view of the bankrupt's creditors and the bankrupt himself. At least the creditors will receive something towards repayment of the debts owing to them, and the bankrupt, providing he is able to formulate an acceptable scheme which will almost certainly involve payments from a future income, will be able to have the bankruptcy annulled without having to appear in court on a discharge application.

6.45 p.m.

It is interesting to note that very few bankrupts apply for their discharge under the present provisions of Section 26 of the Bankruptcy Act 1914. In 1983, only 171 such applications were dealt with. Given that there were some 6,500 bankruptcies occurring in 1983, I think the Committee will appreciate that the percentage of bankrupts applying for a discharge is small. In fact, of the 171 only 12 discharges were granted unconditionally. On the basis of those figures, I think the Committee will agree that the system of discharge application which presently exists is little used and that the voluntary arrangement route which I have described does offer a more preferable alternative.

I should now like to deal with Lord Meston's amendment to Clause 106(2). This allows an accelerated discharge after 12 months for a bankrupt who is the subject of a certificate of summary administration. Such an individual will, under Clause 104 of the Bill, be a person who presented his own petition for bankruptcy, has liabilities less than the small bankruptcies level dealt with in subsection (1)(b) and subsection (8) of Clause 104. The present intention is to fix this level at £15,000. The certificate of summary administration is intended primarily to cover what is sometimes known as the consumer debtor and the small businessman. I have no objection to Lord Meston's proposal in this respect and I should be happy to accept this one in principle. But I should, however, be grateful if he would withdraw it because we should prefer to bring our own amendment forward in due course because there is a need to ensure that the provisions regarding the revocation of a certificate of summary administration and the Official Receiver's ability to apply in such cases for suspension of discharge on the basis of non-co-operation are adequately cross-referenced, and indeed are secure and readily understood.

To conclude, I say this. Subject to the undertaking that I have given in regard to the accelerated discharge provisions, I am satisfied that the new discharge procedure forms an integral and important part of the revised bankruptcy code, represents a clear step forward from that past and does provide a somewhat better answer to what I am quite sure the noble Lord, Lord Meston, was attempting. With that explanation of how we see the provisions of the Bill working, I invite the noble Lord to withdraw his amendments.

Lord Meston

I am most grateful to the noble Lord for his most detailed and helpful reply. The intention of the amendment or amendments was not to weaken the rehabilitative provisions of the bankruptcy discharge clauses in this Bill, but really, among other things, to deal with the hard core of bad first bankruptcies. Such bankruptcies are certainly rare, as the noble Lord has already said: nevertheless they are perhaps deserving of special consideration. The intention of the amendments was also to take account of the fact that not all second bankruptcies are blameworthy. However, I am most grateful for the noble Lord's observations and indeed his concession in respect of at least one amendment. Having listened carefully to what he has said, I of course beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 92EB and 92EC not moved.]

Clause 106 agreed to.

Clause 107 [Discharge by order of the court.]:

[Amendments Nos. 92ED, 92EE, and 92EF not moved.]

Clause 107 agreed to.

Clauses 108 to 117 agreed to.

Clause 118 [Duties of bankrupt in relation to official receiver]:

Lord Meston moved Amendment No. 92F: Page 93, line 38, leave out ("including") and insert ("except").

The noble Lord said: The purpose of this amendment can be stated briefly. Clause 118 as presently drafted provides that a bankrupt has a duty to deliver up to the official receiver all his books, papers and other records including any which would be privileged from disclosure in any proceedings, The amendment simply seeks to substitute for the word "including" the word "except"; in other words, to exempt him from the duty to deliver up privileged documents. The effect is to seek to preserve legal professional privilege for documents in the possession of a bankrupt. Privilege is sometimes an inconvenience but it is an important personal right and a considerable aid to the administration of justice. Ultimately, it is a guarantee of liberty and should only be removed for the most compelling reasons. It is on that simple basis that I move the amendment.

Lord Lucas of Chilworth

With the leave of the Committee, I shall speak to Amendment No. 92F and also to Amendment No. 93ZA which has much the same effect. Amendment No. 93ZA: page 105, line 38, leave out ("including") and insert ("except"). Clause 118 as currently drafted imposes a duty on a bankrupt to deliver all books, records and so on which are either in his possession or under his control, and which relate to his estate, to the official receiver. These include any which would be privileged from disclosure in any proceedings. Likewise, a trustee is ensured assess to such documents by Clause 137. The amendments would exempt such privileged records from delivery to the official receiver.

The review committee's report identified at paragraph 911 the anomalies that currently exist in this area, so that a bankrupt who is under a statutory duty to assist the official receiver and his trustee by virtue of Section 22 of the Bankruptcy Act 1914 is at the same time able to claim privilege in order to withhold relevant information from the official receiver. The committee recommended that such privilege should not be available to a bankrupt at a private examination and the Government have adopted this recommendation in relation to bankruptcy generally.

Both the official receiver and a bankrupt's trustee are officers of the court and we consider it right that they should not be frustrated in carrying out their duties. In this context, the Bill as it stands will ensure that the official receiver has access to all documents and matters relevant to a bankrupt's affairs for the purposes of his investigation and will also ensure similar access for the bankrupt's trustee so that he can maximise realisations for the benefit of creditors.

I feel that these considerations outweigh the bankrupt's ability to claim legal professional privilege in relation to documents in his possession or under his control when bankruptcy occurs. For those reasons, I would ask the noble Lord to withdraw this amendment.

Lord Denning

I agree with the Government's view. The bankrupt should deliver all his papers over to the trustee. After all, he could waive the privilege himself. The trustee stands in his shoes. For the trustee to be able to do this work, it is essential that he should have access to all the documents.

Lord Meston

I am grateful for all those observations. I certainly agree with the Minister, with all the confidence that I can command, that the present state of the law is unclear. Whatever else my amendment or the Bill in its present form achieves, it achieves certainty. At this stage I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 118 agreed to.

Clauses 119 to 127 agreed to.

Clause 128 [Control of trustee by creditors etc.]:

Lord Lucas of Chilworth moved Amendment No. 93: Page 101, line 10, leave out ("appoint") and insert ("establish").

The noble Lord said: This is a technical drafting amendment. Clause 128(5) refers to creditors appointing a supervisory committee whereas elsewhere in that clause and in the Bill creditors are described as establishing such a committee. The amendment will therefore substitute "establish" for "appoint" in Clause 128(5). I beg to move.

On Question, amendment agreed to.

Clause 128, as amended, agreed to.

Clauses 129 to 136 agreed to.

Clause 137 [Acquisition by trustee of control]:

[Amendment No. 93ZA not moved.]

Clause 137 agreed to.

Clause 138 agreed to.

Lord Meston moved Amendment No. 93A: After Clause 138: insert the following new clause:

("Postponement of trustee's rights.

.—(1) The court may postpone the trustee's rights of possession and sale of the principal residence of the bankrupt or of his spouse or former spouse or any dependant of the bankrupt or of his spouse or former spouse for such period and upon such terms (if any), including terms as to payment, as may seem just.

(2) It shall be the duty of the court in deciding whether to exercise its powers under subsection (1) above and, if so, in what manner, to have regard to all the circumstances of the case, first consideration being given to the welfare while a minor of any child who has not attained the age of eighteen, and the court shall in particular have regard to the following matters—

1. (a) the means available or likely to become available to any person for whose benefit postponement is sought;
2. (b) the amount of the bankrupt's income to be or likely to be contributed to his creditors and the amount to be or likely to be left for the maintenance of himself and his dependants;
3. (c) the size, standard of amenity, cost of upkeep and suitability of the principal residence in relation to the needs of any person for whose benefit postponement is sought (including any needs as regards proximity to a place of work, education or training) and the suitability, availability and cost of any alternative accommodation;
4. (d) the amount likely to be realised by a sale of the principal residence or of the trustee's interest therein;
5. (e) any hardship, disturbance or serious inconvenience likely to be caused by a sale of the principal residence;
6. (f) any hardship likely to be caused to any creditor by the proposed or any postponement;
7. (g) any offer by the bankrupt to move if given help (whether out of the proceeds of sale or otherwise) in rehousing his dependants; and
8. (h) any arrangements that have been made or are likely to be made with any mortgagee of the principal residence.

(3) The court may from time to time vary the period of any postponement granted by virtue of this section and may vary or revoke any term imposed in relation to any such postponement.

(4) In determining whether and in what manner it shall exercise its powers under subsection (3) above the court shall have regard to all the circumstances of the case, including all the matters to which the court was required to have regard under subsection (1) above and any change in any of those matters.").

The noble Lord said: In many respects I regard this as one of the most important amendments. It concerns the matrimonial home or the family home. Frequently the main asset in bankruptcy is the family home. It is needed, or at least wanted, by both the family and the creditors. The present law attaches little or no importance to that fact. The law therefore fails to protect the less able victims of bankruptcy. However sympathetic the trustee and however sympathetic the court, both feel, almost invariably, that their duty requires them to require the family to give up possession of the home and for it to be sold to realise money for the creditors. The courts almost invariably hold that there should be such an order for sale on the basis that in the present state of the law the creditor's voice is the more powerful voice and should prevail. In most cases the family gets very little time; it is only a matter of months before they have to pack up and go. That is so however great the hardship. At paragraph 1116 the Cork Committee summed up the position in this way: Eviction from the family home therefore may be a disaster not only to the debtor himself (whose action may have led to it) but also to those who are living there as his dependants who may not, and often do not, have any legal or beneficial rights in the property which they can enforce". Indeed, one must remember that the family has not always benefited from the bankrupt's profligacy, if that is the right word, and are truly the innocent victims in many cases. They simply do not know what is going on.

7 p.m.

These cases involve a sale, even if the child is in the middle of an important stage of his or her educational career. In one case that I had the husband was made bankrupt some 20 years after he had left the home. The wife remained there; the husband had retained an interest in the property and 20 years after he left the trustee in bankruptcy emerged from the woodwork and required the property to be sold. Of course, this situation often overlaps with divorce and the family has the double trauma.

The insolvency court does not have any of the flexible or considerable powers of the divorce court. Therefore, if there is a divorce, the children lose not only their father but also their home, and indeed the husband can use the very fact of his bankruptcy to avoid a transfer of property order in the divorce proceedings. Generally speaking, the result is to add to the burden on the public housing sector.

The Cork Committee considered all these arguments and recommended the proposals which form the basis of this amendment. They are not radical. They do not propose, as is the case in some jurisdictions, that the home should be completely exempt. They simply give a wider discretion to the court to strengthen the really very weak position of the wife and child. The purpose of this amendment is not therefore to exclude the rights of creditors; it is simply to postpone the rights of creditors in certain meritorious cases.

It is indeed right that in many cases the property should only be kept for the benefit of the family on terms—that is to say, financial terms—as to payment, and indeed that is an echo of the Cork report's recommendation that debtors should be encouraged to meet their liabilities out of income rather than capital. Of course, it does not greatly prejudice the position of the genuinely deserving creditor, because if the creditor is to suffer hardship which outweighs the hardship to be suffered by the family, then the creditor will, as hitherto, prevail. However, the larger institutional creditors can bear the postponement, particularly if they are to receive some interest.

The omission of the recommendations of the Cork Committee in this respect from the Bill as presently drafted is, as I ventured to observe on Second Reading, the waste of a valuable opportunity for an important piece of law reform which, as I understand it, would bring us in line with several other common law jurisdictions. As I say, the amendment does not exempt the home; it simply gives the family the right to retain the home in certain deserving circumstances and ultimately would serve to preserve the integrity of that family. I beg to move.

Lord Denning

As my noble friend Lord Meston has said, this is one of the most important amendments in the Bill. We get away from the technicalities of insolvency; we come to the human side of life and the social justice of life. As I have been concerned with the family home ever since I was a judge at first instance, when I was concerned with what the lawyers used to call the "deserted wife's equity", perhaps I may summarise in not too much detail what has happened.

In 1949 when I was a judge at first instance I heard the following case. A husband who owned the house and in whose known name it was, left the wife and went off with another woman. The wife was left in the home with an invalid son who was 18 years old. The husband told the court, "This is my house; my wife and child have no right in it whatever". The Master accepted that argument and ordered the wife and child out. On appeal, the case came to me as a judge at first instance and, from looking at some old authorities, I received some support for the view that the wife had a right to a roof over her head and the husband could not turn her out.

The next husband had a better idea—he transferred the house to his new mistress and got his new mistress to sue the wife. We did not hold with that, either. The third husband went bankrupt and his trustee in bankruptcy said, "I am now the owner of the house. I want to turn the wife out", and so that case came before the court in which I presided in 1952. It was the case of Bendall v. McWhirter, which was a leading case on the question of the wife's equity to stay in the house. It was argued by Mr. Muir Hunter, who was a member of the Cork Committee, (and I expect that he was behind a good many of the committee's recommendations) and we held that the trustee in bankruptcy had no right to turn the wife out. At page 484 of the report I said: The result of the whole case is that the wife's right to stay in the matrimonial home does not come to an end automatically on the husband's bankruptcy. The trustee in bankruptcy takes subject to equities. He takes therefore subject to her right, for it is an equity". After several instances I said: In these circumstances the justice of the case may often be met by allowing the wife to stay in the house temporarily until she finds alternative accommodation and the court can make appropriate orders to that end". In 1952 I thought that we had got away with it, but the principles in that case came before the House of Lords in an important case called the National Provincial Bank v. Ainsworth. The House of Lords held in 1965 Appeal Cases 1175 that we were all wrong, that the wife had no such equity against the trustee in bankruptcy. They held that the trustee in bankruptcy and the others could turn her out.

However, Lady Summerskill acted promptly and in a year or two this House, at the instance of Lady Summerskill, passed the Matrimonial Homes Act 1967, which upheld a wife's equity in nearly every case, except at the instance of Lord Upjohn. In Section 2(8) the trustee in bankruptcy was the one who could turn her out, and he is about the only one who could disregard the wife's equity. That took place in 1967. Is that still to remain the law?

Let me tell your Lordships that since that time parallel situations have arisen when the husband is the owner of a house, or the wife may have a part share, or the question of selling arises. In 1974 in the case of In re Turner, A Bankrupt, in 1 Weekly Law Reports, Mr. Justice Goff said: In my judgment, weighing the two conflicting claims, that by the trustee, based on his statutory duty, gives him the stronger claim and requires me to treat his voice as the one which ought to prevail in equity". That took place in 1974. The trustee's voice still prevails even in equity, so that the wife can be turned out by the trustee in bankruptcy.

Recently in a parallel case—the very important case of Williams and Glyn's Bank v. Boland—a similar point arose, and we held in favour of the wife. The husband had gone bankrupt, disappeared or whatever, and we held that the wife had a right to stay and, as a matter of social justice, the bank could not turn her out or override that right.

The position under the law as it stands at the moment is that the trustee in bankruptcy, when he succeeds to the husband's title to the house, can in law turn out the wife although she has nowhere else to go, and he can also turn out her children, simply to try to sell the house and get something for the creditors. Usually the trustee acts humanely and does not insist on it. However, the Cork Committee recommended that that should be changed. They recommended, in effect, that the law should be restored to what the Court of Appeal said in Bendall v. McWhirter in 1952. So as that decision of mine was overruled, I very much welcome this amendment which will restore that decision which we decided in 1952. I hope that the Government will accept the view recommended by the Cork Committee.

Lord Mishcon

I have the idea that if all of us are as brief and as concise as the noble and learned Lord, Lord Denning, has just been, it might even be that we could finish this Bill before the Recess. Having said that, I therefore propose to be brief. I ought to say in parenthesis that the only time I ever regretted being a Member of your Lordships' House was when I found that your Lordships' House differed from the view of the noble and learned Lord, Lord Denning, when he was administering mercy at times in his Court of Appeal.

Having said that, I hope that the Government can help by saying that they accept the principle of this amendment. I am not going to go over all the arguments; they have been very well dealt with by the noble Lord who moved the amendment and by the noble and learned Lord, Lord Denning, who has just sat down. I want to add only one point. I hope that the amendment will be agreed to in principle. I merely wonder whether the noble Lord who moved it would not care to reconsider the actual wording of the amendment. The reason I say that is this. The Cork Committee did give a definition of a "family home". I must say, looking at page 256 of the report, that at the moment I like that definition. I am not very keen on phrases such as "principal residence", as though we are dealing with somebody who owns two, three or four houses, and we are dealing with his principal residence. I hope that "family home" will come back and that the restriction to the members of the family mentioned in the Cork Report will be kept as against the wording in the amendment. Having said that, I have said all that I have to say on the matter.

The Earl of Selkirk

I am very grateful to the noble Lord, Lord Meston, for raising this matter. All of us should like to think that houses were like tools of the trade, clothes and furniture, but, of course, that is not practical. I shall only repeat what the noble Lord, Lord Mishcon, has said. Will the noble Lord in charge of this Bill please look at the amendment and see what he can do because it is most important that civilisation holds together.

Lord Houghton of Sowerby

I shall not detain the Committee for more than a moment. Nine times out of 10 I follow the view expressed by the noble and learned Lord, Lord Denning, and I certainly support him on this occasion. But I really rise to recall the Bill which went through another place in 1967 and which I had the honour of introducing at the request of Lady Summerskill. I took that Bill through all its stages in the House of Commons, without uttering a single word of explanation. When the Speaker said, "Second Reading. What day?", all that I had to say was, "Now, Sir". When it went into Committee I said, "Now, Sir". When it went out of Committee I said, "Now, Sir"; and when it went into Third Reading I said, "Now, Sir". That is how the Bill was carried. I had no idea what history I made that afternoon.

7.15 p.m.

Lord Lucas of Chilworth

I had intended to say something about the points which the noble Lord, Lord Meston, raised when introduing this amendment. Of course he raised the matter on Second Reading and he has enlarged in this evening's Committee stage on his feelings as expressed then. I think that what the Committee really want to hear is, "Yes, the Government are generally sympathetic to the principle that lies behind the amendment". But having said that, I should not like the Committee to go away feeling that we would in any way lose sight of the rights of the creditors. Inevitably, of course, a postponement of the sale of any asset of a bankrupt means that creditors may have to wait longer for their money. It is really a question of weighing up the various factors so that one gets an equitable basis.

I take very serious note of what all noble Lords from all quarters of the Committee have had to say. We should like to examine much more closely the propositions contained in Lord Meston's amendment just to see whether a more appropriate balance between the interests involved can be achieved and also to make quite sure that the court has a proper latitude in which to exercise its discretion. The noble and learned Lord reminded us of the human and social consequences of bankruptcy and felt that with this amendment we were moving into an area where perhaps the heart should rule more than the head. I think that I have given the noble and learned Lord an assurance.

The noble Lord, Lord Mishcon, raised the question of definition. I am quite sure that both we and the noble Lord, Lord Meston, would want to have a look at that. I am grateful, of course, to my noble friend Lord Selkirk, as I am to the noble Lord, Lord Houghton of Sowerby, for giving general support for the concept that lies behind the amendment. With that assurance, I ask the noble Lord to withdraw the amendment.

Lord Meston

I am most grateful for that indication and for the support which I have received from all quarters of the Committee. If I may respectfully say so, I am particularly grateful for the lucid explanation of the law from the noble and learned Lord, Lord Denning. This is, indeed, a very important amendment: it is important that we get it right. I should be the first to concede that the wording is not perfect and I hasten to exonerate anybody else behind the scenes, because it is my wording and perhaps I was not as fresh as a daisy when I drafted it.

But clearly in view of the indications that I have received, it would not be my intention to press the amendment at this stage. I would certainly echo the observation of the noble Lord the Minister that this is a delicate balancing exercise for the court and that the court should have the maximum latitude. That, indeed, was my intention in the phraseology of the amendment. But at this stage I say no more other than that I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 139 and 140 agreed to.

Clause 141 [Power to disclaim onerous property]:

Lord Lucas of Chilworth moved Amendment No. 94: Page 110, line 6, leave out second ("the") and insert ("his").

The noble Lord said: This is a technical amendment. It is down to put beyond doubt that when a trustee disclaims onerous property his resultant discharge from all personal liability in respect of that property dates back to the commencement of his trusteeship. It does not, for example, date back to the commencement of a previous trusteeship, should that occur. I beg to move.

On Question, amendment agreed to.

Clause 141, as amended, agreed to.

Clauses 142 to 145 agreed to.

Clause 146 [Priority of debts]:

[Amendments Nos. 94A to 94C not moved.]

Clause 146 agreed to.

Schedule 5 [Preferential debts]:

[Amendments Nos. 94D and 94E not moved.]

Lord Noel-Buxton had given notice of his intention to move Amendment No. 95:

[Printed earlier: col 1244.]

The noble Lord said: In view of what the Government so kindly said in their statement on the aspects of this Bill relating to company insolvencies—these are the aspects relating to personal insolvencies—I do not move the amendment.

[Amendment No. 95 not moved.]

[Amendments Nos. 96 to 111 not moved.]

Schedule 5 agreed to.

Clauses 147 to 152 agreed to.

Clause 153 [Extortionate credit transactions]:

[Amendment No. 111A not moved.]

[Amendment No. 112 had been withdrawn from the Marshalled List.]

Clause 153 agreed to,

Clauses 154 to 184 agreed to.

Schedule 6 agreed to.

Clauses 185 to 196 agreed to.

Lord Meston moved Amendment No. 112A: After Clause 196, insert the following new clause:

("Circumstances where set off is not available

.—(1) Where this section applies set off shall not be available—

1. (a) between debts due to or by the Crown under the provisions of any statute and debts due to or by the Crown in respect of contractual obligations;
2. (b) between debts of any nature due to or by one Government department and debts due to or by another Government department.

(2) This section applies—

1. (a) where a company is being wounsd up by the court or voluntarily; or
2. (b) in the case of a company to which a receiver or manager or administrative receiver has been appointed and is in office; or
3. (c) where a bankruptcy order has been made against an individual: or
4. (d) where a composition or scheme has been approved by a meeting summoned under section 95 of this Act and has taken affect.").

The noble Lord said: Amendment No. 112A is, in a sense, connected with the question of Crown preference. The Cork Committee drew attention to the way in which the Crown can manufacture a preference at the expense of the ordinary creditor by setting off totally dissimilar debts due to one of its other agencies or departments with debts due to another, and indeed, by setting off dissimilar debts in this way, can achieve further preferential treatment. It was recommended that these rights to set off should be abolished, and that is, in brief, the purpose of this amendment. I beg to move.

Lord Denning

I should like to support this amendment, which the Cork Committee recommended. It was a way by which Government departments and the Crown could in effect get a benefit for themselves, and the Cork Committee said, no. With all these government departments one government department would get a set off which really was available to another one. I suggest that the Cork Committee are quite right in removing this Crown preference in respect of departments.

The Earl of Selkirk

I also support what the noble Lord has said. I thought that this matter had been settled in the 1947 Act. I thought that set offs had been abolished. I remember that the Lord Chancellor at that time, Lord Jowitt, was pleased with this Bill. He prided himself that he had got it through. However, it has apparently been defective in respect of set off. I hope the Government will be able to accept the amendment or, if not, at least take it back and see how it can be improved.

Lord Cameron of Lochbroom

I must disappoint your Lordships, and perhaps it should not surprise your Lordships that I do so, because I cannot accept this new clause for reasons similar to those which I set out in connection with a similar amendment proposed to the Bankruptcy (Scotland) Bill.

May I just ask your Lordships to look again at the new clause, and in particular first of all subsection (1)(a). I would suggest that this would have the effect of placing the Crown in a significantly worse position than other creditors. This is because it applies only to Crown debts and seeks to prevent the Crown from setting off its contractual debts against debts due under statute.

Other creditors will be able to continue to set off their contractual debts against their statutory debts. May I instance one particular example? If, for instance, a local authority owes a bankrupt builder the sum of £5,000 for work done by him and the builder owes that local authority the sum of £5,000 in rates, then the local authority can set off the debt owed by them against the rates owed to them.

I take another example of an employer who, for example, might owe his redundant and now bankrupt employee statutory compensation in respect of the redundancy. But the employee might owe his former employer money in respect of an unsecured loan for a car. In such circumstances the employer can plead set off on a demand for the redundancy payment made by the trustee for the former employee. Why should the Crown be placed in a worse position than other creditors in this respect?

I turn to subsection (1)(b). Here the new clause would have the undesirable effect of making the Crown's right of set off depend upon the portfolio of the particular government department. Surely it cannot be correct that the principle of set off should be dependent upon the allocation of government business between government departments, particularly when such an allocation may be done for reasons of administrative convenience.

I should perhaps observe too that this clause would of course extend throughout the United Kingdom and to the Scottish Office and as much to the various departments of state as it does down here. The result of this would be that, for instance, set off would be more readily available in the case of the Scottish Office than it would be between departments down here, for the simple reason that the Scottish Office comprehends within itself various functions which are separated among other government departments down here.

Surely too it is wrong to say that if VAT and PAYE are collected by one department there can be set off, but that this same set off is not available if the collection of these taxes is, as at present, the responsibility of two departments. An argument on this basis, too, becomes more unacceptable in the light of the fact that both Customs and the Inland Revenue are answerable to the Chancellor of the Exchequer. It is the Crown, and the Crown alone, which is the recipient of all taxes and because it delegates the power of collection to different administrative arms that is not a reason, I suggest, for saying that set off cannot apply.

7.30 p.m.

I urge the Committee to accept that it is preferable to leave matters as they are at present under the Crown Proceedings Act 1947. Noble Lords will be aware that that Act requires that the Crown, where there are court proceedings, has to obtain the leave of the court if it wishes to set off a debt due by one government department against debts due to another. I suggest that this provides an independent and impartial judicial control over the exercise of the Crown's right of set off without in any sense infringing the constitutional doctrine of the indivisibility of the Crown, which as I understand is well settled as much south of the Border as it is north of the Border.

There is another aspect of the matter, which I do not wish to weary your Lordships with at this stage, about mutuality of debts because there is a difference between the law on this matter north and south of the Border. That is why again I draw to your Lordships' attention the fact that this section would extend throughout the United Kingdom. It would have an unfortunate effect if it were to be brought in because it would impinge upon the present common law principle of complete balancing of accounts in bankruptcy, which is accepted in the Bankruptcy (Scotland) Bill. I would not suggest to your Lordships that any such inroad should be made in this way into a common law principle of Scots law without a proper and thorough examination of the whole subject of what is known as compensation in the context of Scots law.

For all these reasons I make it clear that on behalf of the Government I cannot accept this amendment, and with the explanation I have tendered perhaps the noble Lord, Lord Meston, may feel that at this stage he will not press it further.

Lord Meston

The noble and learned Lord is right that I am indeed disappointed. I had hoped that the theory—and it is only a theory—of Crown indivisibility would not prevail as apparently it has not prevailed in the question of Crown preference discussed earlier.

The concept of set-off is not always fair and is not always convenient. Although I understand the natural reluctance of the Scottish Office to lose its money, I would not at this stage entirely accept all the arguments put forward by the noble and learned Lord. Nevertheless, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 197 agreed to.

Clause 198 [Admissibility of statements of affairs]:

Lord Lucas of Chilworth moved Amendment No. 113: Page 151, line 41, after ("Act") insert ("and any other statement made in pursuance of a requirement imposed by or under this act or rules made under this Act.").

The noble Lord said: Clause 198 as drafted provides that any statement of affairs prepared for the purpose of any provision of this Act may be used in evidence against any person making or concurring in making it. In addition to the statement of affairs required in insolvency proceedings from directors and bankrupts, it is generally necessary for those persons to make other statements in connection with the insolvency to the official receiver or an insolvency practitioner. It is considered, therefore, that the provisions of Clause 198 should be applied to all other statements made by any person, particularly as, by virtue of Clause 115(3)(a), a statement of affairs will not necessarily always be submitted.

The clause is to a large extent a re-enactment of provisions in Clause 663(3) of the Companies Bill and of the Bankruptcy Act 1914. I suggest that it is in the public interest that statements made in the course of bankruptcy and winding-up proceedings be admissible. Accordingly. I beg to move the amendment.

On Question, amendment agreed to.

Clause 198 agreed to.

Clause 199 agreed to.

Clause 200 [Meaning of "associate"]:

The Earl of Selkirk moved Amendment No. 113A:

Page 154, line 12, at end insert— ("(12) Without prejudice to the provisions of this section, a person is an associate of an individual, an unincorporated body or company if, in regard to that person, unincorporated body or company he is a conjunct or confident person.").

The noble Earl said: This is purely a Scots matter. This deals with the question of the difficulty of what is an action at arms' length. One will probably never receive a perfect answer to that. In this case I wish to add the words that have been used for a long time in Scotland and which admirably explain what is wanted. This clause deals with the meaning of the word "associate" and the words to be inserted are, Without prejudice to the provisions of this section, a person is an associate of an individual, an unincorporated body or company if, in regard to that person, unincorporated body or company he is a conjunct or confident person". I believe those words have been used for about 300 years in Scotland and could be continued without interfering with anything else because the concept is already well examined and well interpreted in the courts. I beg to move.

Lord Cameron of Lochbroom

Far be it from me to suggest that concepts of Scots law should be rejected in this Committee, indeed in this House. But I have to tell my noble friend that these words occurred in the Act of the Scottish Parliament 1621, an Act which it is proposed to repeal in Schedule 8 of the Bankruptcy (Scotland) Bill which has just passed through this House. In its place the word "associate" is introduced.

I accept that the word "associate" has given rise to problems in discussion in this Committee, and I know that my noble friend Lord Lucas is considering the matter again. The "conjunct or confident person" is a phrase which over the years has gathered together a great deal of interpretation in Scots law. I do not suggest that it is appropriate to bring that matter now into English law as well, particularly as we have just removed it from Scots law. With that explanation perhaps my noble friend might feel able, no doubt with sadness, to withdraw his amendment.

Lord Wilson of Langside

Arising from the reply of the noble and learned Lord the Lord Advocate to the noble Earl, far be it from me to put the law back to 1621 or even to 1721, but I wonder whether the Lord Advocate has regard to the anxieties expressed in this context by the Law Society of Scotland that the concept of "associate" introduced in the Bankruptcy (Scotland) Act, and now into the Bill, may not catch up on the existing concept of the old Scots "conjunct or confident person".

I appreciate that the reply of the noble and learned Lord met the letter of the law, but are there not implications in the representations of the Law Society of Scotland which I have no doubt he has heard in this context, concerning the possibility that people who should be caught by the law have always been caught by the law in Scotland but will not now be caught? His reply did not meet that point.

The Earl of Selkirk

I am disappointed by the reply of the noble and learned Lord and I would also go so far as boldly to say that he is wrong. He leaves out cousins, mistresses, persons living together, and, as far as I can see, solicitors themseves. Are those covered in the clause?

Lord Cameron of Lochbroom

I have listened to both my noble friend and to the noble Lord, Lord Wilson of Langside. All I would say is that it is accepted that we have to get the definition of "associate", which is what we have in mind here, absolutely correct. When reaching a view on the matter, we shall take account of all representations which have been made.

The Earl of Selkirk

My noble and learned friend the Lord Advocate is obdurate. I beg to leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 200 agreed to.

On Question, Whether Clause 201 shall stand part of the Bill?

Lord Mishcon

This clause deals with the sad matter of one of the Members of your Lordships' House being adjudicated bankrupt. I immediately say that I have no interest of a personal nature in this clause at the moment. Having said that, sometimes the legislative left arm does not know what the legislative right arm is doing. I ought to draw to the attention of the noble and learned Lord and to the attention of the noble Lord the Minister that the Bankruptcy (Scotland) Bill, for which the noble and learned Lord was responsible in this House and which is now in another place, provided in Schedule 7, paragraph 11(b) that—and I quote: the disqualifications to which a person adjudged bankrupt is subject under the said section as amended by this Act shall cease to have effect if and when—(i) the sequestration of his estate is recalled or reduced; or (ii) he is discharged under this Act.". That means that somebody who is a Member of your Lordships' House and who is adjudicated bankrupt in Scotland will cease to be disqualified upon his discharge. If your Lordships happen not to choose Edinburgh as the place where you are adjudicated bankrupt but the capital city of England, you will find, under existing law, as I understand it, that you have got to wait five years after discharge before you can properly apply for a writ in order to attend the deliberations of the House. If I am right, something appears to be very wrong. In those circumstances, I wonder whether the noble and learned Lord, not at this hour but at some time or other, will clarify the position if he does not want to do so right away.

Lord Meston

One feature is perhaps welcome: that the law of bankruptcy at last catches up with bishops.

Lord Cameron of Lochbroom

I am grateful to the noble Lord opposite. Obviously, we shall have to look at this to see whether there is really an answer to it. I do not have it at my fingertips at present.

Lord Mishcon

I should be grateful if the noble and learned Lord could write to me on this matter because it may be necessary for me to do something at Report stage. But, naturally, I should prefer the Government to do it in order to get it right in this Bill.

Lord Cameron of Lochbroom

I shall certainly undertake to do so.

Clause 201 agreed to.

Remaining clauses agreed to.

Schedule 7 agreed to.

Schedule 8 [Transitional provisions and savings]:

7.45 p.m.

Lord Lucas of Chilworth moved Amendments Nos. 114 to 117:

Page 188, line 36, leave out ("A person against whom") and insert ("Where")

Page 188, line 38, after ("date") insert ("person")

Page 188, line 39, leave out ("he shall")

Page 188, line 40, at end insert ("shall").

The noble Lord said: It may be to the convenience of the Committee if I move with Amendment No. 114, Amendments Nos. 115, 116, and 117. They are all quite technical amendments with no significance. I give the Committee that assurance. I beg to move.

On Question, amendments agreed to.

Lord Lucas of Chilworth moved Amendment No. 118: Page 188, line 46, leave out ("section") and insert ("sections 157(2), 158(2), 161 and").

The noble Lord said: This amendment to paragraph 16(2) is necessary to implement to the fullest extent the recommendation contained in paragraph 1887 of the review committee's report so that the consent of the court is no longer required for the prosecution of certain offences committed by a bankrupt. Instead, in all cases where proceedings for an offence under the 1914 Act are instituted after the bankruptcy provisions of the Bill came into force, it will be the Secretary of State or the Director of Public Prosecutions whose consent will be required under Clause 160(6). So, in effect, these old Act offences, if I may so describe them, will be dealt with on the same basis as the new Act offences.

On Question, amendment agreed to.

Schedule 8, as amended, agreed to.

Schedule 9 [Repeals.]

[Amendment No. 119 not moved]:

Lord Lucas of Chilworth moved Amendment No. 120:

Page 189, line 22, in the third column at beginning insert—

		("Section 467(3) to (5).
		In section 470(2) the words "on such terms as to caution as it may think fit".").

The noble Lord said: I beg to move Amendment No. 120. This amendment repeals certain provisions in the Companies Bill 1985 relating to receivers in Scotland which are superseded as a consequence of the provisions of Part I of the Bill relating to insolvency practitioners.

On Question, amendment agreed to.

Lord Lucas of Chilworth moved Amendment No. 121: Page 190, line 44, column 3, at end insert ("Section 583.").

The noble Lord said: This amendment is technical. Clause 583 of the Companies Bill 1985 is to be replaced by Clause 67 of the Insolvency Bill. It is therefore necessary to repeal Clause 583 of the 1985 Bill to avoid duplication between the two Bills.

On Question, amendment agreed to.

[Amendment No. 121A not moved.]

Lord Lucas of Chilworth moved Amendment No. 122:

Page 194, line 15, at end insert—

("1984 c. 28

The County Courts Act 1984.

In Part V of Schedule 2, paragraph 19.").

The noble Lord said: This is a technical amendment which adds a further repeal to Schedule 9. It falls within Part III of the schedule as it is a repeal relating to bankruptcy. The enactment repealed is now spent. I beg to move.

On Question, amendment agreed to.

[Amendments Nos. 123 and 124 not moved.]

Schedule 9, as amended, agreed to.

House resumed: Bill reported with the amendments.