§ 3.8 p.m.
§ The Lord Advocate (Lord Cameron of Lochbroom)My Lords, on behalf of my noble friend Lord Lucas of Chilworth, I beg to move that this Bill be now read a second time.
Seventy years have elapsed since the last major Bill on bankruptcy law was introduced and this area of the law has remained largely untouched now for over a century. Much the same can be said in relation to corporate insolvency law. At the same time major changes have taken place in business practice and in society generally; so much so that the insolvency legislation is in need of a major overhaul.
876 Amendments to the bankruptcy law in Scotland are being dealt with in a separate Bill—the Bankruptcy (Scotland) Bill—which your Lordships' House has already considered. The provisions relating to corporate insolvency are, broadly speaking, common to England and Wales and Scotland, although again there are entirely separate provisions concerning company receivership. The task of identifying those areas of the law requiring modernisation and amendment was given to the Review Committee on Insolvency Law and Practice chaired by Sir Kenneth Cork. Its report, published in June 1982, represents the most comprehensive study so far undertaken in this area of the law. I am sure that I speak for all your Lordships in offering sincere appreciation of the valuable contribution the committee has made to highlighting the deficiencies of the existing legislation and the ways in which these deficiencies may be set to rights.
Since that report was published wide consultation has taken place, first on the report itself, and subsequently on the basis of the White Paper A Revised Framework for Insolvency Law, published in February last year. Very many helpful comments were received on the Government's proposals from interested bodies and individuals. The outcome of these consultations is the measure we are considering today. It is founded on a broad spread of opinion and includes the majority of the review committee's proposals, either directly or in spirit. I think this underlines the importance of the work undertaken by the review committee chaired by Sir Kenneth Cork.
I am sure your Lordships will wish to know the main purposes of the Insolvency Bill. I shall explain these briefly now before dealing in more detail with the Bill's contents.
The first purpose is to ensure that those who act as insolvency practitioners are fit to do so. The second purpose is to combat the abuse of limited liability by a small minority of persons whose actions undermine the legitimate commercial purpose for which it was established, as well as to encourage directors to take a close interest in the affairs of their companies and to take early action when financial difficulties loom. The third purpose is to clarify the law on receivership and to create a new insolvency mechanism, known as company administration, specifically designed to facilitate company rescue and reorganisation. The fourth purpose is to simplify and reform corporate and personal insolvency procedures to reduce unnecessary involvement of the courts and the insolvency service. This will help the smoother working of insolvency procedures and enable the insolvency service to concentrate on its protective and investigative work.
The Government will be bringing forward some amendments to the Bill during its passage in this House. These will mainly be of a technical nature to improve the insolvency procedures. They will include provision to give effect to the announcement made in another place on 29th November last year that essential utilities should be prevented from ensuring more favourable treatment than other creditors on the insolvency of a customer; that is by threatening to discontinue supply. They will also reflect the usual helpful contributions that I am sure will flow from the professions now that the Bill has been published.
877 I now turn to a more detailed explanation of the Bill's main themes. I am sure noble Lords will forgive me if I do not proceed clause by clause. There are, of course, rather too many for that. I shall therefore deal first with the question of insolvency practitioners, professional qualifications and licensing.
The evidence submitted to the Review Committee on Insolvency Law and Practice confirmed the view that the majority of insolvency practitioners carry out their duties in a way which gives no justifiable cause for complaint. But, unfortunately, a minority of practitioners have engaged in questionable activities to the detriment of creditors. It is the Government's view that it is not only desirable but also essential that the public should have confidence in those who handle insolvencies.
At present, with few exceptions, anyone can act as an insolvency practitioner. The review committee recommended that measures should be introduced to ensure that professional standards are observed by all insolvency practitioners and that in future fidelity insurance should be compulsory for all forms of insolvency proceedings. The committee further recommended that transitional arrangements should be made to allow experienced but unqualified practitioners to act.
The Bill adopts these recommendations and provides that a person will not be qualified to act as an insolvency practitioner unless he has a certificate authorising him to act and has provided security for the performance of his functions. In addition, a person will not be qualified to act in a particular case unless he is independent of the company or individual concerned. These provisions will apply also to practitioners who act as interim trustees and permanent trustees within the terms of the Bankruptcy (Scotland) Bill.
The Bill further provides for the Secretary of State to issue a certificate authorising an individual to act as an insolvency practitioner. If the Secretary of State intends to refuse to grant or revoke a certificate, the applicant or holder may have the matter considered by an independent tribunal to be set up under the Bill.
The Bill also provides that the Secretary of State's functions as regards the issuing, renewal and revocation of certificates may be delegated to an appointed body. I should perhaps at this point mention that no final decision has been taken about the level of experience and training which will be required of an applicant for a licence or in respect of those bodies to which the Secretary of State's licensing function will be delegated.
I would also stress that the Bill does not restrict the certification of experienced but unqualified persons to existing insolvency practitioners. It provides for unqualified persons who obtain the necessary practical experience in future to apply for a certificate. It is not intended that these provisions will apply to receivers appointed by a fixed charge holder, but they will apply to administrative receivers as defined in Clause 89 of the Bill and to company administrators appointed under Clause 15.
I now wish to explain to your Lordships the Government's proposals for dealing with abuse of limited liability. Earlier, I made it clear that one of the 878 main aims of the Bill is to encourage company directors to take a closer interest in their companies' affairs in order that they may identify and tackle financial problems at an early stage and to penalise them if they fail to do so. The Bill has three new provisions designed to achieve these aims. First, there is the imposition of personal liability for all or part of the debts of a company if a person allows it to trade wrongfully. Secondly, there is the extension of the power of the court to make a declaration of personal liability for a company's debts against a person who takes part in the management of a company when he is disqualified or acts on the instructions of a person he knows to be disqualified. Finally, there is a strengthening of the court's powers to disqualify a person from acting as a director of a company.
This is an area in which the Government's proposals have caused most comment. We have been accused of being either too weak or too draconian; the nature of the accusation of course tends to depend on whether it stems from the creditors' or from the directors' side of the fence. I am sure, therefore, that your Lordships will wish me to go into some detail in explaining the Government's proposals.
The review committee was concerned at the ease with which a person can allow a limited liability company to become insolvent, form a new company and then carry on trading much as before, leaving behind him a trail of unpaid creditors and in the worst cases repeating the process several times—the so-called "phoenix syndrome". To combat abuses of this sort the committee recommended that there should be a new form of civil liability for a company's debts, known as "wrongful trading". Clause 11 of the Bill, therefore, allows the court to declare a director of a company which has gone into insolvent liquidation personally liable for the liabilities of a company if it is satisfied that the company has traded wrongfully. Wrongful trading will occur if before the liquidation a director knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation and he did not take steps that he ought to have taken to minimise the potential loss to the creditors.
I now turn to the question of disqualification of directors and others from acting in that capacity. It was proposed in the White Paper published in February of last year that directors who allowed their insolvent companies to be wound up compulsorily should be automatically disqualified for three years from taking part in the management of a company. Automatic disqualification for directors involved in insolvent compulsory liquidation is designed to help to ensure that directors carefully monitor the financial position of their companies at all times and thereby avoid the need for compulsory liquidation. It is the duty of all directors, non-executive as well as executive, to take timely action to minimise loss when financial difficulties arise or can be foreseen. Where the directors of a company have allowed it to get into such a state that the court has to intervene in its affairs, it is right that their fitness to act as directors should no longer be taken for granted.
One of the Government's major objectives is to encourage directors to take a close interest in their company's affairs and to identify and tackle financial 879 problems at an early stage. By taking early action, directors can rehabilitate their company or at least minimise loss to creditors. However, the Government recognise that not all directors involved in a compulsory liquidation have failed to live up to their responsibilities. The Bill therefore provides grounds for relief, so that the truly innocent director is safe.
The Bill provides that on the making of a winding up order the court will be required to make a provisional disqualification order against those appearing to have been directors 28 days before steps were taken to put the company into liquidation, unless the company can only be wound up compulsorily or it was in voluntary liquidation or subject to an administration order when the winding up petition was presented. The provisional disqualification order has no effect for three months after it is made, and then takes effect for a period of three years. During the period of 28 days following the making of the order, the director may apply to the court for annulment of the order on the grounds stated in Clause 7(5). The Government believe these grounds are sufficient to cover the case of directors who innocently find themselves involved in a compulsory liquidation.
As a result, there will have to be changes in the way some directors approach their duties. Existing and prospective directors will have to be careful to familiarise themselves with their companies' financial affairs, and to make arrangements to monitor their progress regularly. Those who come on to the board as part of a rescue operation (sometimes known as "company doctors") and the providers of risk capital are strongly placed to do this. There may be individuals who will have to limit or even reduce their commitments so as to devote sufficient attention to their companies. I am certain that your Lordships would not regard this as unwelcome.
Some have argued that, in order to avoid automatic disqualification and personal liability for wrongful trading. directors will place their companies in voluntary liquidation prematurely. There is no reason why this should happen. Directors who monitor their company's financial affairs closely will identify and tackle problems at an early stage. The board which does this will probably, if the company's operations are viable, be able to avoid liquidation entirely. They will certainly have time to explore options, which could range from a fresh injection of capital to invoking an appropriate insolvency procedure.
I now wish to say something on the Bill's provisions on company rescue procedures. The review committee recommended that more emphasis should be placed on business rescue and reorganisation, and suggested that a new insolvency procedure should be established—the company administration procedure—under which the court may appoint an administrator if it considers that the appointment would promote one of the purposes set out in Clause 15.
A key element in company rescue is that the possibility should exist of giving the company a breathing space, during which plans can be put together to return the company to operation on a sound financial basis, or at least to secure survival of 880 parts of the business as going concerns. The absence of this breathing space all too often means the demise of any hope or rehabilitation or reorganisation of companies. The administration procedure therefore provides for a statutory moratorium on all actions and proceedings against a company, including creditors' rights to enforce their security.
An important issue in relation to the new procedure is the use likely to be made of it as opposed to receivership. No clear-cut answer is possible at this stage, but certainly it will be of value where no floating charge exists and no receiver can be appointed to keep a company trading. The Government's expectation is that the procedure will also be of value in circumstances where a large company with a complex organisation encounters severe difficulties but where it is evident that a good deal, if not all of the business, can be saved. Here, the moratorium will provide the breathing space needed to prevent a downward spiral into financial chaos.
I will turn now to the provisions amending the law relating to receivership. The review committee drew attention to two principal areas of weakness in the existing law as it applies in England and Wales. The first was that the nature of a receiver's powers and duties was not clear, and the second concerned his accountability to unsecured creditors. The main thrust of the provisions, therefore, is to remedy deficiencies in these areas. I should point out that in relation to the accountability of receivers some amendment is required to Clauses 42 and 43 of the Bill. They are designed principally to benefit unsecured creditors, and amendments will be introduced to make this clear. For convenience, I will describe these provisions as we intend that they will stand after this clarification.
The Bill will then contain four provisions aimed at meeting the criticism that administrative receivers should be more accountable to unsecured creditors. First, it will provide that unsecured creditors, as well as secured creditors, should be notified of an administrative receiver's appointment. Secondly, it will require the administrative receiver to prepare a report within three months setting out the company's position, his proposed course of action and the prospects for repayment of creditors other than his appointor. Thirdly, it will require the administrative receiver, unless the court otherwise directs, to lay his report before a meeting of unsecured creditors. At this meeting the unsecured creditors will be entitled to appoint a supervisory committee. The committee will be empowered to obtain information from the administrative receiver, and require him to attend before it. Fourthly, the administrative receiver will be obliged to give notice of his resignation to creditors. The debenture holder's power to dismiss the administrative receiver will also be removed and given to the court. This will protect administrative receivers from pressure to commit acts which may be in the debenture holder's interest but which are detrimental to other creditors.
The Bill sets out in Schedule 2 the powers which administrative receivers will be deemed to possess subject to provision to the contrary in debenture documents. It also grants further powers to administrative receivers to facilitate their work. These are to be found in Clauses 37 and 38 and 78 to 81. Clause 37, 881 in particular, is designed to enhance the ability of the administrative receiver to rescue businesses rather than selling them on a break-up basis.
Finally, I should like to clarify the position in relation to Scotland. Separate provisions regarding floating charges and receivership exist in Scotland at present, and will continue to exist by virtue of Clauses 462 to 487 of the Companies Bill. Clauses 44 to 51 of this Bill amend the existing Scottish provisions in the light of the new English and Welsh provisions.
I now wish to consider the detailed procedural parts of the Bill relating to the winding up of companies and the insolvency of individuals. It is essential that a modern insolvency code should ensure that the causes of commercial failure are the subject of close inquiry, both in the interests of those who have suffered financially and in the public interest, to help promote a healthy environment in which business may flourish. Much, however, of the detailed procedure underlying these principles is now outdated, and the review committee emphasised the need for the law relating to insolvency to be brought up to date. Many of the recommendations made by the review committee on the detail of insolvency procedures have been accepted, and provisions based upon them are either contained in the Bill or will appear in the rules and regulations which will complement it.
So far as the official receiver is concerned, simplification of procedures and an emphasis on private practitioners taking on the role of liquidator or trustee in more cases are intended to allow him more time to concentrate on his investigative function with a view to the institution of criminal proceedings. In addition, the official receiver still has an important role to play in protecting assets in the early stages of windings up by the court and in bankruptcies.
Various measures are also included with a view to the harmonisation of winding up and bankruptcy proceedings—another of the major themes of the review committee's report. Secondary legislation will have an important role to play in this area and many of the minor and harmonising amendments to procedures will appear in the rules and regulations in due course.
Part III of the Bill, therefore, constitutes a new code, which replaces the Bankruptcy Act 1914, covering both the formal bankruptcy procedures and the legal framework in which voluntary arrangements can be negotiated, which can help debtors avoid the stigma of bankruptcy. The new bankruptcy provisions have been designed to establish a humane but efficient system for dealing with those who cannot pay their debts, with an emphasis on allowing the debtor the opportunity of continuing to make a living, so as to provide for himself and his family and to make a contribution from future income towards the payment of his creditors.
In line with the undertaking which I gave on the Bankruptcy (Scotland) Bill, the Government are currently examining the level of penalties for offences throughout the proposed insolvency legislation.
I am aware that I have dwelt at some length on the contents of this weighty measure. I trust that there will be general agreement as to the urgent need for reform of the insolvency legislation. I hope, therefore, that 882 your Lordships will welcome the Government's proposals as a useful and desirable reform of this area of the law. I beg to move.
§ Moved, That the Bill be now read a second time—(Lord Cameron of Lochbroom.)
§ 3.32 p.m.
Lord Bruce of DoningtonMy Lords, the House will be grateful to the noble and learned Lord for having taken us briefly through the extremely complex provisions of this Bill, which contains no less than 203 clauses and some nine schedules. For our part on this side of the House we find ourselves in general support of this measure and we shall seek to facilitate its passage.
Of course, there will remain a number of points of difference—differences of principle—which have been aired by a number of interested professional bodies which have helped the Government in the framing of this legislation. I feel that these differences with the Government's approach will consequently not be expressed on party lines but will probably come from the House as a whole, regardless of party. It is therefore to be hoped that the Government will have every sympathy with some of the constructive suggestions and amendments that may he put forward in due course.
I should like to associate myself and my colleagues with the noble and learned Lord's appreciation of the work done by the Insolvency Review Committee, under the chairmanship of Sir Kenneth Cork. It may be well known in this House, and indeed outside it, that Sir Kenneth speaks with very great authority in that he and his brother, Mr. Norman Cork, have for many years conducted a very large professional practice concentrating in some respects on insolvency matters. Therefore, the Cork Report itself is not only a reflection of an intellectual appreciation of what the law is and, indeed, what the law should be, but also a result of long practical experience by most of the distinguished gentlemen who have been members of the Insolvency Review Committee and of the very skilled staff, some of them very senior, who have assisted all the members of the committee.
I should have thought that it might have been better if the Cork Report, as it has come to be called, together with the revised framework of insolvency law in the Government's White Paper, Cmnd. 9175, were to have been the subject of debate in the other place, and here, before the Government proceeded to draft their legislation. The Cork Report became available in June 1982, which is two-and-a-half years ago, and the Government's White Paper, which represented their second thoughts on their earlier, preliminary thoughts, has been available for nearly a year. I should have thought that it would have been better if some parliamentary opinion had been sought on the contents of those two documents before the Government brought forward legislation.
It is true, of course, that the Government have taken counsel of the various professional bodies and other interests and that they have paid some attention to them, even though they may not have been able to accept all the recommendations. However, in our view, that does not replace an initial parliamentary 883 debate on the whole principle of the matter, so that the Government would have had the benefit of the opinion of both Houses on the reports before legislation was brought forward.
The result is an extremely complex Bill. I observe somewhat wryly that the Bill has been designed to simplify. I do not know how many of your Lordships have ventured to go through the 203 clauses, but in any way to associate simplicity with them is, I think, possibly a slight over-statement. It will not have escaped the notice of connoisseurs of parliamentary Bills—and all your Lordships are, of course, connoisseurs—that there are no less than 49 references to "the rules", but what the rules are is at the moment mercifully hidden from us. It does not always make for good continuity of thought if, every now and again when the Government draftsmen or their political overseers suddenly come to a difficult point or to something for which they cannot think up an answer to put before parliamentary counsel, they shove into the Bill the words "in accordance with the rules". It would be useful to know—and in Committee we shall probably make more pertinent demands—at every stage where "the rules" are mentioned (and there are some 49 instances, unless my counting late at night has misled me) just exactly what they mean.
Coming to the Bill itself it is, of course, unnecessary for me to follow the ground which has been so adequately covered by the noble and learned Lord, bearing in mind that there will be further explanations in reply to this debate by the noble Lord, Lord Lucas of Chilworth. However, company liquidations and bankruptcies are becoming a matter of very considerable national importance, and it is right that Parliament should consider the legislation and the procedures relating to them.
At the risk of incurring the occasional spark of political displeasure, I am bound to point out that company liquidations and bankruptcies are the one area in the economy which appears to be expanding at the present time, despite the efforts that it is said are being made to revive the economy. In 1981 there were 8,227 company liquidations and in 1984 the figure had risen to 13,647. Bankruptcies were 4,976 in 1981 and last year they were over 6,000. We are in the presence of a considerable problem.
I should like, however, to emphasise one matter in complete agreement with the words that have fallen from the lips of the noble and learned Lord. The vast majority of liquidations and bankruptcies that occur in the United Kingdom are the result of inadvertence, miscalculation or misfortune. The vast majority of companies in the United Kingdom, whether large, medium-sized or small, are conducted by their directors with considerable rectitude. It is not right that the whole body of directors in the United Kingdom, whether of public, private or close companies, small or medium-sized, should be regarded as not to be trusted. As the noble and learned Lord said, it is only in a minority of cases in the United Kingdom that directors behave either fraudulently or recklessly or indulge in outright theft.
Although such cases receive very great publicity—and rightly so—they do not represent the 884 whole caucus of directors of limited liability companies in the United Kingdom. It is important to remember that when we come to later stages of the Bill. I am sure that the House will agree that it would be unwise if we were to take restrictive steps in respect of a very small minority indeed which might inhibit people from assuming directorial responsibilities, particularly of medium-sized and small companies.
Your Lordships may recall that in the Financial Times in August last year it was revealed that more than half the businesses set up in 1983 were likely to collapse within the decade. Indeed, the record of failure of new ventures—new ventures which, of course, have been encouraged by the Government, with, I may say, the support of Her Majesty's Opposition—after their initial start is alarmingly high. I would submit to the House that this is not the time to place restrictions upon directors which would inhibit them as non-executive directors in giving aid and assistance to these newly formed companies and indeed to medium-sized companies in difficulty. I think that the role of the non-executive director in many of these smaller companies can be crucial.
I am not referring for the moment to the proposed role of the new administrator, which is referred to at a later stage in the Bill. I am referring to the normal commercial practice of small and medium-sized firms seeking to have on their board directors of experience who can perhaps guide them into some of the fields of commerce, finance, marketing and R & D, as well as financial accounting and otherwise, to the very great benefit of the company concerned. If, for example, directors were to be inhibited by the provisions of this Bill from offering their services, I think that we should be doing the business economy a very great disservice. Therefore, in approaching the Bill as a whole, while taking every step to prosecute the wrongdoer (the person who connives at wrongful trading, fraud or anything else of that kind) and making provision for the sternest punishments for those delinquent directors, including, where necessary, recourse to their private assets, it is important that we make quite sure that we do not take steps which, while achieving that aim—and a very laudable aim it is, too—inhibit the new non-executive directors from functioning.
I have had some experience as a management consultant in advising companies in difficulties in order that they might recover their position, improve their performance and in very many cases avoid going into liquidation. I think that I speak for quite a number who find themselves in that field. They do not want to put themselves in a position where, quite inadvertently, they are subject to a provisional disqualification order against which they may then appeal. That goes contrary to the concept of justice as we understand it, in that a person ought not to have to prove his innocence. The onus should be the other way: his guilt should have to be proved. I have some reservations, therefore, about the automatic disqualification provisions set out in the Bill from Clause 7 onwards. I shall not go into that further now because these are Committee points.
There is, however, one particular point on which I would he open to be persuaded about the onus being left on the director. I have no firm views about this at the moment and have still to consult my colleagues, 885 but my view is that, where a receiver, or a liquidator in the case of a voluntary winding-up, discovers, and as a result of his investigations is prepared to swear an affidavit for submission to the court, that the company has not kept books of account properly, the court might feel constrained to issue a disqualification order.
The responsibility for keeping books of account—and by that I mean not the superstructure from the primary books of account which are, of course, the profit and loss account, the balance sheet, the movement of funds, and so on, but the prime books of accounts—was laid on companies, and therefore their directors, by Section 147 of the Companies Act 1948. It was repeated in Section 12 of the Companies Act 1976, and is now enshrined in Section 221 of the new consolidated Act of 1985, requiring that companies keep proper books of account.
There can be no excuse whatsoever for the very simple provisions of the Companies Act, in this respect, not being kept. There can be no excuse for ignorance by any director of the fact that proper books of account have not been kept. I have had a little personal experience in this field by way of post-liquidation investigations. I find that in the overwhelming number of liquidations involving small and medium-sized businesses proper books of account have not been kept. How, therefore, can directors be informed of the state of affairs of their company in order to bring them even within the scope of Clause 7 of the new Bill? It is of course entirely impossible for them to be informed.
I am well aware that the noble and learned Lord, Lord Denning, has rather strong views about the onus of proof on people who are accused of offences. It may well be that the noble and learned Lord, Lord Denning, would disagree with me when I say that in these cases the onus of proof could quite properly lie upon the director to prove that he did not know that proper books of account had not been kept. In my view, this is one of the basic problems that lie behind the failures of many newly-established businesses, small and otherwise—of course, outside the scope of those who deliberately do not keep books anyway.
The number of prosecutions at the instance of successive Governments under Section 147 of the Companies Act 1948, or under Section 12 of the Companies Act 1976, has probably been derisory. It should also be borne in mind that the Government already have powers under the Companies Acts—notably, I think, at Section 323, but I may have the wrong section—and they have a right and an obligation, to bring actions against delinquent directors. These powers have very rarely been used. I am bound to say that the proposal that directors should be automatically disqualified and then, in effect, should have to prove their innocence may have been put in by the Government because they are not willing to enforce their own laws or the laws that are already on the statute book. It may be very costly if they do, but the laws are there to be obeyed. The Government who make the laws (or who do not amend them, if they inherit the position) have a responsibility to enforce them. I suspect that a disinclination to go to the trouble and expense of initiating prosecutions may be—I repeat, may 886 be—behind this desire of the Government to shift the onus of proof.
Like many other noble Lords, I am certainly open to arguments and reason on this matter—and, indeed, in our view on this side of the House that is how this Bill should be approached. In my view it should be open to creditors, to liquidators and to receivers to make application to the court for the disqualification of a director, rather than leaving it the other way round. Since applications are a costly matter, the courts ought to be given the power, in all meritorious applications, to make an order for costs in the applicant's favour. If they had that power, they would of course by the same token have the power to order a person making a frivolous application, or an application not well-founded, to hear his own costs for so doing, and, in suitable cases, perhaps even bear the costs of the other side as well. I think this would be a far better way of proceeding, and would put the onus back where I think it ought to be. After all, directors are individuals. Where they are accused of an offence, then they should not be required to prove their innocence; the onus should lie the other way.
I have taken a long time on that particular point because it has attracted a very considerable amount of attention in the press. A number of organisations, such as the CBI, the Institute of Directors, the Law Society, and so on, have all taken a very considerable interest in this matter. I sincerely hope that we may regard the existing clauses as open to review.
Perhaps I ought to say to the noble and learned Lord, if he will excuse my temerity, that when we come to Clause 7 it will be possible to avoid personal disqualification even under the existing provisions of the Bill, as far as I understand them. I am not a lawyer, and I stand open to correction by any noble and learned Lord or any Peer who is a member of the legal profession, but it seems to me, looking at Clause 7, that once an application under Section 223 of the Companies Act has been made—which itself, of course, then becomes, under certain circumstances, an act of bankruptcy—it will be possible for an unscrupulous managing director, when he knows that a Section 223 notice has come in, immediately to call a meeting of members, dispensing with notice of the meeting on the assumption that he can get all the shareholders, so that they can thereupon pass a resolution to go into voluntary liquidation. They could then file that with the registrar, and publish it in the London Gazette. It would of course become a creditor's voluntary liquidation, and in those circumstances would avoid the whole of the compulsory procedure which is set out at Clause 7, and would in fact prevent it happening. That is the way that I read it. The noble Lord may have some correction, or may tell me in due course that I am wrong.
In so far as insolvency practitioners are concerned, I agree with the noble and learned Lord that there have been many cases during the past few years in which those acting in company liquidations have not quite lived up to the standards that are commonplace among the professions. There has very often been connivance between the directors of a company and a related (or, indeed, unrelated) liquidator without any qualifications at all, as a result of which the creditors 887 have received a very raw deal altogether, the assets being "flogged off" for very little, often back to a new company founded by the directors of the old company. Therefore, quite rightly the Government have accepted the provisions that were set out in draft by the Insolvency Review Committee. We agree entirely with those provisions. I have, of course, to declare a personal interest in this part of the Bill, since I have acted as an insolvency practitioner and I am, as the House knows, a partner in the firm of Halpern and Woolf, which customarily acts in this field.
I believe, however, that the clauses in this part of the Bill should be amended to bring them more in accordance with the requirements of the Companies Act in relation to the appointment of auditors. As your Lordships are aware, auditors of companies are restricted to members of certain professional bodies. There should be some provision so that the appointment is made following consultation with those bodies together with, in this case, the Law Society and the Insolvency Practitioners Association. This is possibly a matter that can be considered.
In so far as receivers are concerned, I welcome the provisions of the Bill. They do not go all the way with the provisions recommended by the Cork Committee, in spite of the fact that the noble and learned Lord was kind enough to announce four additional amendments, which are quite acceptable, to delineate more closely the responsibility of receivers. There is only one aspect on which I should like to make some observations. It was dealt with by the Cork report. Where there is a floating charge on the assets of a company, unsecured creditors often find that they are left completely in the cold. On the realisation of the assets to meet the requirements of those in whose favour the security is granted, there is little remaining for them. It was recommended by the Cork Committee that a 10 per cent. fund should be set up so that, if necessary, after the realisation of the floating charge on the assets of a company there would be some fund out of which to reimburse the liquidator himself, with something left over for the unsecured creditors.
That brings me to the position of the unsecured creditors themselves. Their position is, of course, bad enough if a receiver is appointed by a debenture holder. Although it is the duty of the receiver to secure the most favourable realisation of assets that he can, not only for the discharge of the debenture itself but also for the benefit of unsecured creditors, it becomes a little difficult for the unsecured creditors. If the unsecured creditors in a company liquidation are to receive a better deal than they get at the moment, it will, I think, be necessary for us to revise Schedule 5 to the Bill, which deals, with the whole question of preferential debts, notably debts due to the Inland Revenue, to local authorities and to others.
Some steps will have to be taken, as they are in the United States, to protect what we shall call for the moment the consumer creditors, who pay deposits for goods that are never received by them. They are not creditors in the ordinary sense of being creditors for goods supplied. They are very often people who apply for goods that they never receive at all. This is an aspect of the Bill that we shall have to deal with a little 888 more closely with a view to giving some degree of preference to them, as happens in the United States.
There are many other aspects of the Bill with which I could deal, but I have already spoken for a little too long. All I can say is that we on this side will give the Bill our critical examination. We shall bring forward constructive amendments wherever we consider them necessary. We are hopeful that, in view of the fact that the Second Reading of the Bill and its subsequent processes are taking place in this House, the Government may take a slightly more relaxed attitude towards amendments which they may not like but which can, after all, he debated in another place when it comes to review the activities upon which we, in this House, shall be engaged. We welcome the Bill as a whole. We shall do our very best, in collaboration with noble Lords on all sides of the House, to make it a better Bill where necessary, and to facilitate its passage.