Insolvency Bill [H.L.]

HL Deb 15 January 1985 vol 458 cc894-925

4.31 p.m.

Second Reading debate resumed.

Lord Taylor of Gryfe

My Lords, we now return to the subject of the Insolvency Bill. I apologise to the House for being on my feet longer than I ought to be in one day. Perhaps this may even be just the forerunner to the amount of time we shall devote to this Bill at the Committee stage, because this is a complex Bill. I know of no Bill since the British Telecom Bill on which I have had more professional advice, lobbying and representation. I am indebted to the various professional organisations which have been good enough to give me their views.

Like the noble Lord, Lord Bruce of Donington, I do not regard this as a party Bill. Thankfully, this House will be discharging its responsibilities sensibly as a revising Chamber looking at a piece of legislation in a totally objective way with the purpose of improving it as law. Therefore we welcome the attempt of the Government to deal with the complicated problems which arise in dealing with insolvency procedures.

This has been digested over a number of years. I think it was Edmund Dell as president of the Board of Trade who appointed the Cork Committee to look at insolvency law with a view to modernising the present cumbersome insolvency procedures. I know that we on these Benches, and those on other Benches, have been pressing the Government to do something about this, not simply because of wrongful trading and substantial abuses which are exercised within the present law, but also because since Cork reported in June 1982 there have been 33,000 company liquidations.

As the noble Lord, Lord Bruce of Donington, said, this is a growth industry because the rate of liquidations is still tending to show increases. Therefore it is important that the regime which governs these insolvencies should be well understood and that certain protections should be built in to save depositors, shareholders and creditors from existing abuses.

The House will be happy to hear that my comments at this stage will be limited to a few generalisations because the detail of this Bill will be examined in the course of the Committee stage. In looking at the Bill as an attempt to improve the present law there are one or two deficiencies which I hope will be clarified in the course of Committee stage. One which interests us greatly and on which I have had representations from the Consumers' Association, Justice, and other organisations concerned with consumers, is the so-called protection of depositors, the people who take out hire-purchase agreements with companies who go "bust" and have little protection within the existing provisions.

These are members of the public that I would regard as in a different class from the ordinary trade creditors. The ordinary trade creditor in his dealings with any company where money is lost is able to reclaim VAT, had debt relief, and in any event has a profit element included in the sales price and can write this off against his corporation tax return. It is the consumer, the small person, who suffers greatly and who has no adequate protection as a consumer in the legislation that is proposed.

There is also the point that while trade creditors can reclaim VAT bad debt relief in a liquidation, they cannot do this in a receivership. Perhaps we could have some examination of this point. Nor is it clear whether this can be done in a scheme of arrangement or in administration, and perhaps this could be looked at as the Bill proceeds.

There is also the question of preferential rankings. There has been no change in the Government's preferential rights, and indeed there has been an extension whereby the right of set off between Government departments is being used more aggressively in the legislation before us. This is a point that might be seriously looked at.

The question of the disqualification of directors is the subject which has had the greatest amount of publicity and discussion because a lot of people are interested and involved, and many Members of this House probably feel themselves vulnerable to the provisions of disqualification of directors. It has been rightly said by various organisations who have written to me that it is highly desirable in the public interest that some suitable and effective mechanism should be available to deal with directors who fail to conform to acceptable standards and who are not fit to be in control of a company. We subscribe to the view of the Government that it is necessary that that should be done.

However, we are strongly of the view that within the present provisions it will sometimes be extremely difficult to attract people to rescue operations in companies which require assistance and secure support from men of great experience. For example, a man might readily be a director of Imperial Chemical Industries and feel that he has some talent to assist a company which seems to be having a rough time. If he joins the board of that company to assist its revival and the company does not in fact succeed, he could well be vulnerable to losing his directorship of Imperial Chemical Industries. It occurs to me that there will be a reluctance on the part of experienced directors who hold other and prestigious appointments as non-executive directors of companies who might be invited to carry this unusual degree of risk to their other commitments by playing a responsible part in the rescue of companies.

It is an interesting point, and I am sure that this will be discussed at great length. I do not know whether the directors of Dunlop, for example, rather than having received a golden handshake for their exercise might suddenly become liable under the provisions of the Act. I feel that this is an area which requires clarification.

For example, take the director of a family business who feels that he has certain skills in a local community to give to the revival of a particular company in the area for which he just feels a social responsibility. By making his services available to that company, if the company fails, then within the provisions of this legislation there could be a charge that he has been negligent and he could lose his directorship of his own family company. I am all in favour of people taking risks in trying to rescue companies and stimulate the economy, but I feel that this provision might be inhibiting.

There is also the question of insolvency courts. Unlike in bankruptcy, where there are special bankruptcy courts, there is no insolvency court which can deal with the specialised nature of insolvency problems. Perhaps we could have some reassurance on that point. There is a real minefield in the area of reservaton of title which requires to be more clearly defined in the legislation. This is another area that might be looked at between now and the Committee stage. The rights of associated companies and directors' loans are sometimes used for voting purposes in a liquidation to the benefit of directors as opposed to the benefit of creditors. This is something else that we must protect in the legislation that we are examining.

I very much welcome the assurances of the noble and learned Lord in taking care of the special provision of Scottish law. I know it is a matter very close to the heart of the noble and learned Lord the Lord Advocate, but there is a feeling in Scotland expressed through the Institute of Chartered Accountants and the Law Society of Scotland that their representations have not been adequately considered. The Scottish Act is a distinct, self-contained code in the areas which it covers. The concern is that the changes that may be made in this Act to bring it into line with the provisions proposed for England and Wales without due consideration of the distinctive features of the substantial and procedural context of law and practice as contained in Scottish law in the 1972 Act are not truly accounted for. I know that this is a matter of deep concern to the noble and learned Lord the Lord Advocate. Perhaps in the process of making subsequent amendments he may further consult the professional bodies in Scotland that I have mentioned with a view to taking account of the Scottish law on this matter.

I do not want to detain the House long because we shall be examining the details of this Bill. We support the desirability of providing that insolvency practitioners will have certain minimum qualifications and that this requirement should apply both in relation to corporate and individual insolvency including acting as a trustee, both interim and permanent, in Scottish sequestration under the Bankruptcy (Scotland) Bill which this House has dealt with recently.

I do not expect an immediate response or reply tonight to some of the points made, but many submissions have been received by all of us who have taken an interest in the Bill. I am impressed by the representations from organisations such as Justice and the Consumers' Association in dealing with the consumer—the neglected element in this whole legislation. I hope that in the Committee stage we will have an opportunity of sensibly amending these provisions.

4.43 p.m.

The Earl of Buckinghamshire

My Lords, it is something of a relief to find a subject, after some eight months of listening to your Lordships' debates, on which I may speak with a degree of interest. I should declare self-interest since I am a director of a limited company. In making my maiden speech I ask for the customary courtesy extended by your Lordships.

I wish to make it quite clear that I accept and welcome the main thrusts of this Bill. It has been apparent for many years that the insolvency law has been in need of reform. The need for reform has been brought to our attention most clearly by the Cork Committee findings. I am not sure that Sir Kenneth Cork will approve totally all aspects of this Bill, and many of its omissions, but clearly we all owe a debt of gratitude to the work of that committee.

This Bill seeks to strengthen insolvency procedures and to improve professional standards of directors and insolvency practitioners. I agree with noble Lords' comments with regard to simplification. With over 200 clauses to the Bill it is complex and certainly not simple. As there are over 200 clauses, I wish to confine myself to discussing two aspects of it. These matters have been raised by noble Lords who have preceded me, so I apologise if in the course of my speech I duplicate anything that has already been said.

The two clauses about which I wish to speak are Clause 11, which deals with the concept of wrongful trading, and Clause 7, which deals with the disqualification of directors. In discussing these two clauses it is, I am sure, realised that limited liability has been significantly abused. The major area of abuse has been caused by the Phoenix syndrome, with dishonest directors moving from one company to another, leaving debts which cannot be met. The Office of Fair Trading estimates that over 200,000 people suffer each year by a loss of over £18 million in prepayments. Only today in my car as I drove to the House I heard of another case of a liquidation where over £40,000 was owed to people.

Your Lordships may have reservations about the introduction of a liability based on constructive and subjective knowledge where we are thinking about wrongful trading. This is because there will be much doubt and uncertainty as to the circumstances in which liability can arise. This, as a side effect, may deter those most able to turn a company around, and serve to hasten the demise of a company. It is not good to have any uncertainty in the wording of the Bill.

An argument will be put forward that directors have the availability of appointing an administrator rather than going into voluntary liquidation. I have to ask whether this will assist in turning around companies. Creditworthiness is very important and there must be serious doubts whether other solvent companies will extend credit to a company under an administrator which still operates under the threat of a wind-up.

Detailed consideration will be required on Clause 11 as the penalties for wrongful trading are stringent. The Bill provides for directors to be personally responsible, without limitation of liability, for the debts of the company. Your Lordships may wish to note that, following pressure from the Institute of Directors, the Insolvency Bill repeals that section of the Social Security Act 1975 which has been used to make company directors personally liable for national insurance contributions in a liquidation. We now see it replaced and extended under Clause 11.

The concept of penalising "wrongful trading" cannot be disputed. The form of words needs to be carefully considered in the framework of this Bill. The benefit of hindsight will be used to the utmost and I doubt whether, in the majority of cases, there is any one moment in time when directors could have concluded that the course they were taking would lead inevitably to insolvency. I am aware that such judgments have been made in the past. Your Lordships may recall the case of Rolls-Royce in the early 1970s when the inspector's report stated that the company was lost from the moment it took the fateful decision to develop the RB.211 engine. Presumably this Bill would catch those Rolls-Royce directors for wrongful trading, but are they the directors with whom we are primarily concerned who would be penalised for a decision relating to commercial risk turning out to be wrong? Your Lordships may consider that the present definition is unfair in certain areas and not strong enough in others to catch delinquent directors with whom we are primary concerned.

I now turn to automatic disqualification of directors under Clause 7. Much comment has been made on this clause. Mr. Alex Fletcher has been reported in the Financial Times as stating that: honest and responsible directors have nothing to fear". I am quite sure that is true. A shadow trade spokesman for the Opposition said that there would be considerable anxiety at the automatic disqualification of directors. He added that this provision may fail to catch the dishonest director and contradict one of the intentions of the Bill by hastening companies into liquidation. I was particularly interested here in the comments made by the noble Lord, Lord Bruce of Donington, on the deterrence aspect of this Bill where company directors of good repute will be unwilling to serve on other companies which may well need their services because of the fear of losing their major directorships.

It is the automatic nature of this disqualification that is the problem. There is a view which says that automatic disqualification is arbitrary, failing to distinguish between those to blame and those to exonerate. One answer is that the innocent, of course, will obtain relief from the court during the three-month period, but side effects may be that directors will resign rather than remain to protect the creditors' interests and, indeed, it may give creditors an opportunity to assert unreasonable pressure under threat of a petition. I am afraid that the good intentions listed here by the noble and learned Lord, Lord Cameron, may be somewhat hopeful in this area of improving the standards of directors.

Alternatives to the measures in this clause have been put forward to the Minister. One of these is that in every winding up, whether voluntary or compulsory, the liquidator would be obliged to report whether or not in his opinion the Secretary of State should seek a disqualification order. The onus would then switch from the need of the director to prove his innocence, at his own considerable cost, to the obligation of the Secretary of State to establish a prima facie case for disqualification. The burden of administration—and I do not think that we should underestimate this—on our courts would switch from the courts to the Secretary of State whose powers for this purpose are already in place.

It may be considered that the way this clause is currently drafted will catch only the innocent and leave free those who are most guilty, because of the emphasis placed on compulsory liquidations. Furthermore, I have no doubt that your Lordships will wish to consider carefully whether or not the introduction of the concept of "guilty until found innocent" is a concept that should be lightly introduced into our legal system. In asking this question I am well aware of the convenience of a system which will disqualify dishonest and delinquent directors so easily and assist to remedy the abuse of limited liability. But I am also aware, as the noble Lord, Lord Bruce of Donington, has said, that the Government departments have failed to use the powers that are already in their hands.

I have raised two areas for your Lordships' consideration. There are many others which in due course will be fully debated by your Lordships. But, having had a Scottish connection for some time and following Scottish Lords in this debate, I cannot resist drawing the attention of the House to the concern that is expressed in Scotland with some parts of this Bill. In particular, I think the aspects concerning voluntary wind-ups and court wind-ups need to be closely considered.

In conclusion, may I say that the new remedies for wrongful trading and misapplication of assets will be of benefit in making it possible to bring action against delinquent directors. However, there are weaknesses present in the Bill. Although it is a welcome move to enable the liquidator to apply to the courts for a disqualification order in a voluntary wind-up, your Lordships should note that it is the creditors who will have to pay the costs. Equally, this Bill does not allow for individual creditors to bring action to recover debts; and this I know is something which the Consumers' Association has raised.

Secondly in my concluding areas, it is a widely held belief that in the insolvency profession the present remedies for disqualification exist under the four Companies Acts and the Theft Act 1968, so that civil and criminal liabilities potentially exist for delinquent directors. There are two problems to this. The one which has already been mentioned is the failure of Government departments to bring actions on applications from the Official Receiver's Department. The second problem is that criminal law does not assist in the recovery of debts.

This Bill is extremely important in the business and industrial regeneration that this country requires. It is critical to strike the right balance between encouraging the growth of our business and industrial base through the willingness of directors to take commercial risks and the rights and protection of those who deal in good faith with companies that go into liquidation. Your Lordships may consider that to introduce legislation that could stifle commercial risk taking and deter company directors of integrity from undertaking the vital jobs of rescuing companies who would otherwise go into liquidation could be thought about again. No doubt your Lordships could think of more than one public company presently undergoing such a process. Reform that does not catch the fly-by-night directors is equally in need of reconsideration.

I am told that professional bodies such as the Institute of Directors, the Law Society, the Institute of Chartered Accountants, and the Consumers' Association have all expressed reservations on these two clauses. Their viewpoints may be different, but they are all united in the desire to catch those directors who trade with the intent to defraud the public, and it is the means rather than the end which is under discussion. Therefore, my Lords, while I welcome the main parts of this Bill, I have some reservations and I look forward with great interest to listening to the views of your Lordships.

4.56 p.m.

Lord Denning

My Lords, I am sure that all your Lordships will join with me in congratulating the noble Earl on his speech so well and clearly spoken. I, more than twice his age, would say that he is a standing symbol of the work of the hereditary principle. His words today and the research that he has done have contributed much to our knowledge of this Bill. I am sure that during the Committee stage his words will be of the greatest value to your Lordships, and I hope that we shall have the benefit of his help for many years to come.

This Bill is of the first importance. Our law as to bankruptcy is archaic, antiquated, abstruse. I have always shied absolutely clear of it, and I think that most lawyers have, too. They talk about the act of bankruptcy. I do now know myself what it is. You have to look at the statute; and then you do not understand it. You have to have a receiving order and you have to have goodness knows what. Thank goodness we have Mr. Muir Hunter. Queen's Counsel, who has edited the standard book on the subject, Williams on Bankruptcy. He was on Sir Kenneth Cork's committee and they have made a jolly good job of modernising the bankruptcy proceedings for personal individuals, which was completely out of date, the last statute being that of 1914.

Having said that, for the commercial community of this country the provisions dealing with companies and the directors of companies are of the first importance. Although they are tucked away, so to speak, in an abstruse Bill, they will affect the whole of our company law system. Let me remind your Lordships that our company law system of limited liability goes back only about 100 years, to 1862, the year of the first Act. Since that time it has become universal throughout the world that a company has a corporate personality of its own in law different from all the directors or shareholders. It alone is responsible for its debts and obligations. If it cannot pay its debts, it can be wound up. But no one, no creditor, can attack the director who orders the goods or any officer of the company, or go against him in his personal capacity. There is the veil of corporate personality which protects the individual from any personal liability at all. That is the fundamental principle of our company law.

But then you have to reckon with this. Although most directors are efficient and good and look after their businesses, there are some who are dishonest and delinquent. Let me speak plain. Let us see how directors are appointed. Take your PLC or public limited company. How are the directors appointed? I do not know whether many shareholders attend annual meetings that appoint directors, but there are usually only a handful there. The new directors are appointed by the outgoing directors, or they are a self-perpetuating oligarchy. Mark you, in most great companies they are very well selected and appointed, but they are a self-perpetuating oligarchy who are appointed largely by themselves and not by the shareholders.

If one takes the private limited company—the one man with his 100 shares and £2 capital paid up—he appoints the directors. He appoints himself, of course, and his wife. He runs that company and of course he has no personal liability. If the company takes orders for goods, as many of them do, it can get money for the orders, pocket the money, and not supply the goods. The poor individual who has paid the money has no recourse. This report draws attention, in paragraph after paragraph, to what is called the phoenix symbol. It is time the community at large knew what that phoenix symbol is.

A man acquires or forms a private company in which he holds a majority of the shares. He himself may be a director—he and his wife and one or two of his friends. What do they do? They incur debts; they milk the assets; and within a year, perhaps, the company goes into voluntary liquidation. A liquidator is appointed and the liquidator proceeds to sell the assets; the liquidator is not necessarily a qualified man at all. A good buyer comes on the scene. The director who has been running that company gets a new company. He buys it "off the shelf- by buying the shares of the company, and he buys the assets of the former company from the liquidator at a giveaway price. So he gets the assets of the first company into the hands of the second company. He changes the name of the second company to be very like the name of the first, so that people get mixed up between the two; and then having got this second company going, he goes through the whole process again. He incurs debts and gets such assets as there are; and he winds up the company. In each case he leaves a trail of creditors behind him.

That is the phoenix symbol—this bird that rises from the ashes of the old; it then expunges itself and another phoenix arises from the ashes, leaving trails of creditors behind. That is the dishonesty which is pointed out in page after page of this great report by Sir Kenneth Cork. Let me pause for a moment to praise that report as I would wish to praise it. It is absolutely first-class, and the most experienced people of the country—lawyers and accountants—have done a marvellous job in pointing out the defects and analysing the difficulties.

Having said that, having exposed these delinquent and dishonest directors, let me say that the report also has regard to the important spirit of enterprise. This company law system which we have has fostered enterprise. People have taken risks and they have done it under the company name. That is quite right, and we must preserve and maintain our company law system because of that spirit of enterprise. Those things would not have been undertaken had they not been free of personal liability. Let me emphasise that too, as the report does.

This report, which has been largely accepted by the Government, modernises our law in this way. It ensures that all the people involved—the liquidators, the receivers and the trustees in bankruptcy, and all the people who deal with this complicated subject—are now to be qualified. They are to be qualified as insolvency practitioners and they are to come from the ranks of the people who know about it—the lawyers and the accountants. I have known many of them and a first-rate body they are—qualified insolvency practitioners. They are in future to be the only people to handle these important matters.

In the past they have misunderstood their role. We had a case not long ago where a receiver was appointed for the debenture holder, the debenture holder being a bank which had lent a manufacturing company a lot of money. When it was not repaid they appointed a receiver for the debenture holder. He was selling a factory with a lot of machinery in Gloucestershire or somewhere nearby. He did not advertise the sale properly but only sent out notices to a few people. He advertised the sale and had it held on a cold day in January or February. It turned out to be a very cold day with snow everywhere, and hardly anybody turned up. He said, "Well, I'll sell the best I can". He was not going to postpone the sale at all even though few people were there. The receiver said, "I am not concerned with the creditors; I am only concerned with my bank. I am a receiver for the debenture holder, the bank. I have nothing to do with those creditors". There were one or two cases in the book which supported that view. He sold off the assets at about a quarter of the price they were worth: the bank got what they could and the unsecured creditors got nothing. I am glad to say that in the Court of Appeal we held that the receiver for the debenture holder has not only to consider the debenture holder but to consider the others, too. We hope that we put that right. But that case shows the importance of having qualified practitioners to run our insolvency system, whether it is ordinary bankruptcy or a company winding-up. This is the first recommendation in Sir Kenneth Cork's report. Excellent it is, and it will be maintained in this Bill.

I will deal with another point, which is not controversial. The receiver on a floating charge is a very good system when a company is in difficulty and you do not want to spoil the company; you want the company still to run and to carry on business, perhaps selling off one piece and leaving another piece. That is a very good institution. What this report has said is: do not let us confine receivers to debenture holders; provide for a floating charge. As a general position, have an administrator. If a company is on the verge of going broke, let us have an administrator.

The administrator would be a qualified practitioner. He would come in and would run the business as it ought to be run, perhaps selling off some parts and retaining others. At all events, this is altogether a new system in our law. When a company is in difficulties or on the verge of going broke, let us have an administrator to come in and run it. That is the second new institution in this Bill. I will not go through all the others. Those are the good points.

But what about the dishonest and delinquent directors? We have had provisions, going back to 1976, to deal with fraudulent trading. In their recommendations Sir Kenneth Cork and his colleagues have brought a new concept—that of wrongful trading—into our company law. They actually went so far as to draft a clause for the legislators to say what wrongful trading is and how it should be dealt with so that when a company is in voluntary liquidation, it can he brought to hook. I do not mind the new clause as it is brought in in Clause 11 of the Bill. That goes most of the way to meet Sir Kenneth Cork's clause. It applies when a company is in insolvent liquidation and when, some time before the commencement of the winding up, the director knew or ought to have concluded, that there was no reasonable prospect that the company would avoid going into insolvent liquidation". In other words, when the director knew or ought to have known that the company was going broke. If he knew or ought to have known it was going broke, then he may be guilty of wrongful trading.

If that is found against the person who knew—not against the innocent ones—then we have this new concept in our law that such a man is to be personally liable. He can no longer bring down the veil of corporate personality and say that it is only the company. If he carried on business when he knew or ought to have known that the company could not pay its debts and could not pay for the goods—if it ordered goods and he knew that it could not pay for them—then he may be personally liable. There will be the discretion of the judge and all sorts of safeguards for the innocent man, but if there is wrongful trading, then he is abusing the company law system and he is abusing the corporate veil. When he abuses it in that way, he should be personally liable.

That is the new wrong of wrongful trading which Sir Kenneth Cork and his committee drew up. It drew up the whole clause. It has been adopted by the Government in this Bill and surely it is right. There may be details to be looked into, but in principle it is right. A director who has been guilty of wrongful trading can be personally liable himself—he cannot put it on to the company—to such an extent that the judge wishes. That is wrongful trading.

Apart from that, some directors have proved themselves so unfit that they ought to be disqualified. I have told your Lordships before that no qualification is needed to become a director. A man can appoint himself, his friends or whoever; but if he behaves badly or wrongly, he can be disqualified. There are provisions in this Bill for disqualification. These too are of the first importance. The director who has wrongfully traded can not only be made personally liable but can he disqualified.

The other important clause is Clause 7. As the committee and the Government point out, when a company goes into compulsory liquidation, when a company lets things go so badly that the court has to intervene to say that this company must be wound up compulsorily—usually there would be something wrong going on on the board, something dishonest, discreditable or whatever it may be—there is provision under Clause 7 for automatic disqualification. It is provisional at first—the director can get out of it if he says he had nothing to do with it—but after three months or so, it can be made an automatic disqualification for three years. He cannot serve as a director of any other company for another three years. That is the automatic disqualification clause. There may be some question about the burden of proof but I will not go into that now. It just shows that the other way of dealing with delinquent directors is disqualification. These are the great new remedies brought into our law. There is the personal liability of dishonest directors, or incompetent directors if need be; and there is also automatic disqualification which they can get out of if they show that they have been acting properly. Those are the main provisions, as I would see it, of the Bill.

There is only one further point which surely needs a mention—that is the position of Crown creditors; the income tax people who say, "Oh well, for centuries the Crown has had a preference over anyone else. If anyone goes bankrupt or cannot pay his debts in full, we the Crown can take it for our taxes." They have done it for goodness knows how long. There is no justification for it that I can see except on historical grounds. But they have always done it. I put aside value added tax and things like that which have to be collected for the Government. I refer to ordinary income tax and ordinary rates. Why should the income tax people have preference over the rest of the unsecured creditors? Unsecured creditors have often supplied goods and not been paid. They have often had to try to get judgments to get the monies paid. They are not voluntary creditors at all. They have had contracts. There is no distinction at all in principle.

Sir Kenneth Cork and his colleagues said how ordinary people are outraged that the Crown and the tax people should have this preference over everybody else and get their debts in full before unsecured creditors get anything. I am glad to say that Sir Kenneth Cork and his colleagues were of that view like most ordinary people. But the Government look after themselves. In this Bill they say, "We do not want any of that. Let the Crown keep its taxes". It is not a good or plausible reason. It does not convince me and it does not convince Sir Kenneth Cork and his committee. I should like to see an amendment which would he in accordance with ordinary justice to the effect that Crown debts and other debts all rank together. If it is 10 shillings in the pound, then everybody ought to have it. The Crown should not take one pound while the unsecured creditor has one shilling. They should all be equal.

There are several points in the Bill to be looked into. In conclusion, I would say that Sir Kenneth Cork and his committee have done magnificent work. It is a magnificent report. I should like to see it implemented in full. The Government with their extra White Paper have modified it a little and have not gone all the way, but they have gone far enough. I hope that their new Bill will commend itself to your Lordships, subject to any modifications which are brought up in Committee. I support the Bill.

5.18 p.m.

Lord Aylestone

My Lords, I have only one point to raise on this Bill. It is a small point in relation to the wider scope of the Bill, but nevertheless it is an important point affecting some company directors who are involved in companies which fail and become insolvent. It is a point which has already been made in the debate by my noble friend Lord Taylor of Gryfe and others. I think it is worth bearing it in mind for Committee stage, and, from whatever direction the amendment may come, we will certainly look at it very carefully and if necessary support it.

Under Clause 7, the Bill disqualifies a director from holding a directorship in another company, or could do, for as long as three years. There are unquestionably cases of negligence, or even something worse than negligence, where this is undoubtedly right. There are exceptions which the Bill, as drafted, recognises. However, there is a different case, a case on the other side of the coin, that of what I term the specialist director or, if you wish, a doctor/consultant director, who is brought onto the board of a company for a specific purpose. It may be because of his specialist knowledge.

He is invited to join the board because at that stage the company are struggling on the verge of insolvency. He has to look very carefully at the situation before he agrees to accept. One of the problems he has to bear in mind is that if things go wrong it could result in his disqualification as a director of any other company.

May I suggest that one way of considering this problem is by taking a hypothetical case—in fact, I know of one such company and I know some of its directors. The case which I shall treat as hypothetical concerns a company that is very anxious to continue trading and which has diverse interests in engineering, in potteries, and in a number of other areas. It is anxious to continue trading and extremely anxious to retain its labour force as far as is possible. The company certainly has no intentions of going into liquidation unless it is forced to do so.

In this particular hypothetical case the company has decided to invite onto its board a director who is extremely skilled in certain respects: in capital restructuring, in market arrangements, and in many other areas, too. He is invited to join the board. But on considering the invitation he realises that if he accepts and is successful and the board continues then everything in the garden will be lovely and his efforts will have been worth while—but what if he fails? What if the company goes into liquidation?

Having been on the board for rather longer than six months, he would face the possibility—and I will not put it any higher than that—of disqualification from joining any other board for a period of three years. Under the Bill, he could of course apply to the court for annulment of his disqualification, and there is no doubt that his case would receive careful consideration. But that would be a costly procedure. At least, he imagines it would be; and I imagine that, too. Maybe we are both wrong; if so, we shall probably be told. Nevertheless, that course of action was not necessary in a particular case I have in mind.

However, the time limit in the Bill as drafted would be likely to disqualify such a director for a very much longer period of time. This is a Committee point. I believe that the House understands it because it is a point which has been mentioned before. I hope that the Minister, when replying, will say something about it. A number of directors would be anxious to help a struggling company, but under such terms they would be nervous and hesitant about doing so; they would not want to join the board of such a company because of the provisions contained in this Bill—although, as I have already said, they are very necessary in many cases.

5.23 p.m.

Lord Milne

My Lords, I echo the congratulations so beautifully expressed by the noble and learned Lord, Lord Denning, on the excellent maiden speech of the noble Earl.

Within the compass of a Second Reading speech it is scarcely possible to do justice to this Bill. I propose therefore to limit my remarks to corporate affairs, of which I have had practical experience on both sides of the fence and in the grey area of company medicine. I find that my views are very close to those expressed by the noble Lord, Lord Bruce of Donington. I agree that the Cork Report is a most remarkable document. Nothing like it has been attempted for years; and the authors are to be congratulated. This report will be essential reading on the subject for many years to come.

Those used to present practice will welcome the many proposed changes in the law, some in detail but some fundamental. There are also some notable discrepancies between the report and the Bill. I imagine that Part I, dealing with the appointment, etc., of practitioners, is unexceptionable. Chapter I of Part II, on the disqualification and liability of directors, is much more controversial, but as it has been discussed, and will be discussed, in detail, I will not elaborate except to repeat that in my view first-time disqualification with or without liability would discourage enterprise, particularly in exposed industries; would freeze the recruitment of experienced non-executive directors; would hit small business rather than large, where directors are more insulated by holding company status and open to the possibility of takeover or rescue; and would punish the majority for the sins of the few.

Further, insolvency may occur through no fault of management, however carefully they may monitor the company's affairs—such as through a prolonged strike. As the Bill is drafted, it seems as though speed rather than equity is the aim, no doubt to avoid the particular abuse which the noble and learned Lord has described as the phoenix.

One defence for the directors—an obvious one—is that the company could pay its debts at the time of the winding up order. In assessing solvency for this purpose under Clause 7(5)(d) contingent liabilities though not, apparently, contingent assets, are to be brought into account. This means that directors ex post facto are to be judged on liabilities, the values of which at the time they could not possibly know, and which may well be unquantifiable and which may turn the balance.

If directors are to suffer these indignities, surely they must be judged on the outcome of the liquidation when contingencies, both plus and minus, can be evaluated and permitted to rank. Admittedly, this may take some time where lawsuits or guarantees are involved. As the Bill stands, a board may be stampeded by the threat of large legal claims into making a wrong decision. Subject to the above, if the Government are resolved on disqualification, then that under Clauses 8 or 9, on an application, is less repugnant. Surely, automatic disqualification on a second offence might be a reasonable compromise.

Much has been said about the liability of directors for wrongful trading under Clause 11. If the present law is too tightly drawn, then the wording of the proposed clause seems to me to be unfortunate for what is a perfectly reasonable concept. It will, I am sure, be amended during the passage of the Bill.

On the ranking of creditors, I am sure there will be general disappointment—as voiced by the noble and learned Lord, Lord Denning—that the Government have not accepted the recommendations of the report on preferential creditors or on VAT. While considering preferential claims, the wording of Schedule 5(1) is I think suspect so far as corporation tax is concerned.

Although admittedly it is a very difficult question, neither the committee nor the Bill has tackled the problem of insolvency and liability within groups of companies. I am well aware there are outside considerations, but the matter may arise anyway in certain circumstances through wrongful trading. Where inter-group accounts can be shown to be long-term or of a capital nature there seems to be a strong argument for deferral by statute.

To conclude, I have exposed my own reservations about the Bill. There is much else besides, mostly embracing the recommendations in the report. Subject to those therefore I welcome the Bill.

5.30 p.m.

Lord Hutchinson of Lullington

My Lords, I venture to intervene in this debate not because I am an expert in this highly complex field of the law—and I am delighted to find that my general distaste for this branch of the law has been shared all these years by the noble and learned Lord, Lord Denning—but for two other reasons. First, I am aware of the reservations and disappointments felt by a number of my erstwhile legal colleagues on studying the provisions of the Bill which they, as practitioners, will have to understand and operate. Secondly, I have for long been concerned, along with the ordinary consumer, at the ease with which unscrupulous operators have hitherto been able to make use of the bankruptcy laws to fleece the public. Indeed, I have noted, too, in the criminal courts how difficult it is to obtain a conviction for fraudulent trading as that offence is now defined.

The committee's purpose was to achieve unification, or at least harmonisation, of the various codes governing the law of insolvency. It set out to recommend a system which, is simple and easily understood and to satisfy reiterated demands, that the law be expressed in modem language". While congratulating the Government on bringing forward so massive a Bill within 2½ years of the appearance of this remarkable report, I am bound to express the practitioner's profound disappointment that all the relevant law has not been concentrated into one Bill—which is the case in nearly all the principal commercial countries of Europe, as I understand it—and, further, a Bill which might have set up, as recommended by the committee, an insolvency court with exclusive jurisdiction in all insolvency matters and forming part of the High Court. As it is, the practitioner will have to refer extensively to the provisions of the new Companies Bill and to other statutes such as the Deeds of Arrangement Act 1914. In addition, although the Bill gets rid of the old concept of an act of bankruptcy, it preserves intact the criminal bankruptcy provisions of the 1973 Act which are based on that very concept. These provisions have not been successful in achieving any substantial financial recoveries in the criminal courts for the benefit of victims, and I am extremely sorry that the opportunity to consider their reform has been missed.

Much of the Bill is also found by practitioners to be dense and verbose. It must be clear to all noble Lords that its 194 pages are very far from being "simple and easily understood". Furthermore, as has already been mentioned, the Bill makes remarkably extensive use of remitting matters of substance to be dealt with by subordinate legislation. Schedules 3 and 6 contain no fewer than 52 provisions (I think the noble Lord, Lord Bruce, calculated it as 49) to be included in company and individual insolvency rules. It is impossible for a practitioner to understand the policy behind the Bill without a thorough perusal of a draft of the rules themselves—much as we were unable to assess the provisions of the Police Bill without digesting the contents of the codes.

Hitherto the advisory committee on bankruptcy rules, chaired by a distinguished chancery judge and with a highly expert membership, has had a duty to review the rules and make recommendations to the Lord Chancellor. Now, as I understand it, under Clause 194 that committee is to be stripped of its advisory function and it is the Lord Chancellor who is to initiate rules after no more than consultation with the committee. Surely a broader and better informed rule-making authority is called for in these circumstances rather than a less informed and narrow one.

Like all other speakers, I welcome Part I and the laying down, at last, of professional standards for insolvency practitioners. I also welcome the advent of an administrator and the creation of an administration procedure. It will of course help the rehabilitation of companies which get into trouble and the restoration of their profitability with the keeping in operation of their viable parts, all for the benefit of creditors.

Part II introduces in Clause 11—as has been mentioned by a number of speakers—the concept of wrongful trading. That was suggested by the committee, and in my opinion is very long overdue. As I have already said, the offence of fraudulent trading involves proof of dishonesty and is based on the need to prove that there was no reasonable prospect of debts being paid as they fell due. That is a very difficult concept to establish in the grey area of irresponsibility, over-confidence and stupidity, all of which shade imperceptibly into dishonesty. That area was very well touched on, if I may say so, by the noble Earl in his maiden speech which was full of experience and wisdom.

Wrongful trading gives rise only to civil liability. It will encourage directors to consider the financial position of a company at a much earlier stage; but, although it may catch the irresponsible director of the smaller company, it could also push larger companies into liquidation at a much earlier—and sometimes a much too early—stage, impelled by a very natural fear of the possible consequences which may befall their directors.

The committee proposed a well-considered power to be given to apply to the courts for anticipatory relief to cover the short period in which to get a company on its feet; but again this very sensible idea has not been taken up in the Bill. Clause 11—here I venture with trepidation to differ from the noble and learned Lord, Lord Denning—seems to be very obscure and confusing. It is a great pity that the draftsmen have not adopted the clear and simple wording of the draft clause on page 404 of the report, to which the noble and learned Lord referred.

As regards automatic disqualification of directors of wound-up companies, I should have thought that most experienced practitioners would be against compulsory disqualification, and indeed against compulsory penalties in almost all cases; whether it was hanging for sheep stealing, for capital punishment for murder or 12 months' disqualification for driving with an excess of alcohol. These automatic penalties always lead to irrational decisions and questionable procedures. The committee recommended mandatory disqualification only on proof of some delinquent conduct, which surely would be a much wider course to follow. No doubt the provision is directed to the encouragement of voluntary liquidation. Indeed, that is a course which I suppose rogues will now follow. Whether it be in the manner that the noble Lord, Lord Bruce, indicated, it will obviously give rise to this course now being taken by such operators.

Voluntary liquidation with power to apply for a disqualification order is, I know, in the Bill, but I would ask the House whether a liquidator is likely to embark on such an application. He will be concerned with getting in the money and would be unlikely (would he not?) to expend further money and effort on taking that course and making such an application, which would inevitably give rise to a period of dispute.

Finally, there is the plight of the unsecured creditor. The committee makes a point of highlighting the volume of evidence it received which was, in its own words: deeply hostile to a law which so often frustrates any fair distribution of uncharged assets to unsecured creditors". It wanted to ensure that no debt would be accorded priority unless shown positively to be fair and equitable and to command public acceptance.

It recommended—and we have already heard about this from the noble and learned Lord, Lord Denning—that certain Government preferences (tax arrears, rates, PAYE, VAT) should either be abolished or should have the period of the preference shortened. As I understand it, abolition has been incorporated into the insolvency laws of a number of other countries. Alas, that has not been reflected in the Bill, and Crown preference has been retained. I was delighted to hear the castigation of that decision which fell from the lips of the noble and learned Lord. The excuse that the Crown is an involuntary creditor as regards tax has no basis at all other than an historical one. Indeed, the committee was at pains to point out that the Crown possesses exceptional remedies for obtaining prompt payment of its debts which are not available to ordinary creditors.

Lastly, in relation to unsecured creditors, they would, I suggest to the House, be put at a disadvantage in this Bill in regard to the appointment of an administrator. If the holder of a floating charge wishes to exercise his right to appoint a receiver, it will not be possible under the provisions of this Bill to appoint an administrator. The result may well be that the receiver, owing an allegiance to the chargee, will wish to realise the assets as quickly as possible, leaving nothing for the unsecured creditor; whereas, if an administrator was appointed, he would want to keep the business going as long as it was possible to assist the unsecured creditor.

Those are the only points about the Bill that I wish to make at this stage. As I say, it is a matter of congratulation for the Government to have produced a Bill in this time, and of course one must welcome the Bill as a whole. But the Cork Committee report was a report of great lucidity and very great brilliance. I do not think that anyone could describe this Bill in those precise words.

5.44 p.m.

Lord Mottistone

My Lords, I should like to add my congratulations to my noble friend Lord Buckinghamshire, who not only made a splendid maiden speech, but also covered so much of the ground that I proposed to cover that it will make it much simpler for me to address your Lordships. I hope very much that we shall not only hear a lot more of him, but perhaps also have his support when it comes to the Committee stage, which I always believe is the greatest fun in any Bill.

Like my noble friend, I should declare an interest, as a director of a very small company. One is of course at once worried by what one reads. In contributing to your Lordships' debate, I, too, have been advised by lots of people, but in the main by the CBI and also by the Institute of Directors. I was hoping very much to succeed my noble friend Lord Caldecote, who asked me to apologise to your Lordships for his having to go away to an appointment which came up earlier than he expected in relation to the debate. He invited me to say what I thought that we had both discussed. I shall do my best on his behalf; but, as your Lordships know, he has great experience in finding funds for small companies and is very well aware of the problems relating to small companies in getting them going and getting people of great competence to serve on their boards, where that is necessary.

I agree in principle with the Bill and in detail with most of its substance. I, too, should like to add my congratulations to Sir Kenneth Cork on his report, which formed the basis of this Bill, or at any rate part of it.

I recognise the threat of what the noble and learned Lord, Lord Denning, described to us so succinctly as the phoenix company and the directors of that sort of company who are obviously the people whom nobody wishes to succeed. One wholly welcomes any efforts to restrain them within this legislation. However, as many noble Lords have said, there is another side to the picture. My noble and learned friend, Lord Cameron, said—and I hope that I quote him correctly—that the aim of the Bill was to encourage directors to take a closer personal interest in the affairs of a company. That is right, and in so far as it goes, it is wholly to be welcomed. All directors should take a closer personal interest. But the question is whether some features of the Bill do not in fact negate that very good intention. It would seem to me that the key to what needs to be achieved is to encourage good, as well as bad, directors to take a close personal interest in companies, especially those in difficulties.

If one turns to the item that many noble Lords have commented on—the question of automatic disqualification for three years of all directors in a company compulsorily wound up—one cannot help questioning whether, as written at the moment, Clause 7 does not provide a disincentive to join a company that is starting to struggle for the very people whom my noble friend, Lord Caldecote, would wish to put into it. Other noble Lords have said this and there will be amendments to cover it. It is something that my noble friend on the Front Bench, in whose name the Bill is, may like to note.

Questioning of the wording of Clause 7 in its present form has come from all sides of the House. It came from my noble friend Lord Buckinghamshire who is, as it were, fresh to the scene. It came from the Cross-Benches; and I think that we might have some more support from the Cross-Benches at Committee stage. It came from the Alliance Benches, and it came from the Opposition Front Bench. Questioning would also have come from my noble friend Lord Caldecote had he been here. This is not, as has been said, a party political Bill, but in this particular area there is room for making quite certain that there is not a disincentive, either for people to start up companies and take risks—that is, for decent, honest people to do this—or for people to save a company which may be in difficulty.

Of course, if a company is in genuine difficulties, it might result in that company going into voluntary liquidation so as to avoid this particular penalty, rather than the directors making a real effort to turn the business round. That surely is not what my noble friend the Minister wants. It cannot be his intention to encourage companies that are trying to get themselves started to go into voluntary liquidation. This applies particularly now when they are creating employment in the country. Everybody agrees that it is the small companies which are starting up which will get the country moving again along its proper way. Yet this legislation will create a position where people will be more likely, in unnecessary circumstances, to go into voluntary liquidation than they would have been before. That must be wrong. I hope my noble friend will take this point and will therefore be very sympathetic to any amendments that may be put before him at a later stage to try to put it right. I shall not labour the point, since other pople have mentioned it.

There is also a problem with the wording of Clause 11 in relation to wrongful trading. That point, too, has been tackled from other sides of the House, but I should like to add my voice to it. As a matter of principle I very much dislike, wherever it appears—in legislation, or elsewhere—the excessive use of the phrase "ought to". I think that much of the trouble in the world today is caused by people saying that so-and-so ought to have done something or other. The fact of the matter is that if so-and-so did not do something or other, he probably had a very good reason—and I am not talking about businesses. It is no good my saying that the noble Lord, Lord Mishcon, ought to make a speech which appeals to me, because he does not want to make a speech which appeals to me. Why should he? He is speaking from another Bench. However, if I was being very self-centried about it, I might think that I would be happier if he did make a speech which appealed to me. I object, and have objected for many years, to the use of the phrase "ought to" because it causes far more trouble in this world than many other little phrases. To find it in legislation, and what is more to find it in legislation in the past tense, where it says, "ought to have concluded", is presumptuous. It is really very presumptuous to assume that people ought to have done something when they in fact did not. So I think we have to alter that part of the proposal regarding wrongful trading.

The next point which I really cannot resist making concerns the preferred creditor status of the Government. On the whole the noble and learned Lord, Lord Denning, was more complimentary about this Bill than the rest of us have been. He did not even really take Clauses 7 and 11 to task. But he came in against the preferred creditor status of the Government. Sir Kenneth Cork has done this. I am not otherwise going to be involved in it, but I have had a brief from the National Farmers' Union and they have said that they think this is disgraceful. The point is, why on earth should the Government, who have lots more money than the small creditors, have any preference over the small creditor? The Government will not go "bust" if they do not receive their £1,000 or £2,000 for PAYE or whatever, whereas the small creditor who does not receive £750 may well go "bust". So it really is jolly unfair of the Government to continue to look after themselves.

As the noble Lord, Lord Hutchinson, has just said, there are other countries—and I understand it is shortly to be the case in France and West Germany and is already largely the case in the United States—where the government is on all fours with other creditors. I think it is quite right that they should be. I shall endeavour to assist any noble Lord who tables an amendment to try to put that right.

I have one other small point before I finish. The Consumers Association have been in touch with me on the telephone about it. They said—and I agree in principle with this—that the Cork Report studied the situation fairly carefully and recommended that there should be special arrangements for small creditors and that certain sums should be set aside from any assets that eventually were available to make sure that the small creditors received preferential treatment. In a sense it follows on from what I have just been saying. It seems to me that this is very reasonable because large creditors are either large companies in their own right or are people who have committed their services in a fairly massive way and so they know what they are doing. But the small creditor is not so aware of the penalties that might result if the company suddenly gets into difficulty. So it seems to me that what Sir Kenneth Cork was referring to in that respect was sound. It seems that here is an omission from the Bill which perhaps might well be rectified at an appropriate stage during its passage through this House.

With those main provisos, and taking into account those areas in which I hope we shall persuade the Government to change their mind, I wish to repeat that the Bill as a whole is an excellent one and I have great pleasure in supporting its Second Reading.

Lord Mishcon

My Lords, I—

Noble Lords

Order!

Lord Mishcon

I am so sorry, my Lords.

5.57 p.m.

Lord Meston

My Lords, as your Lordships have all observed, the need for reform is clear. It is also clear, with respect to the noble and learned Lord, Lord Cameron, that it is not a question of simply overhauling the machinery but a question of rebuilding the machinery, as Cork in its undiluted form recommended. Only then can the law deal with the diversity of provisions for corporate and personal insolvency and with the accretion of piecemeal legislation dating back to the last century. If the noble and learned Lord, Lord Denning, finds the present law abstruse, it truly must be. Like him and the noble Lord, Lord Hutchinson, I endeavour to steer clear of it if I can, but I cannot always avoid it.

The Cork Committee described the present state of affairs as in decay and liable to further decay. That echoed the Justice report of 1975, which described the 19th century structure as ill-adapted to the needs of the small debtor and of his creditors, as well as of society generally. That, in turn, echoed the Blagden Committee in 1957, which identified three objectives in this area of the law which I suggest still hold good. They were: first, to penalise and deter the dishonest debtor; secondly, to assist the honest and perhaps unfortunate debtor to rehabilitate himself and his dependants; and, thirdly, to distinguish those two categories for the benefit of the trading community. The Blagden Report suggested that practical experience showed that the law failed badly in all those primary objectives.

The statistics have already been mentioned to your Lordships. Last year was a record year for insolvency. I hesitate to join in criticising the mathematics of the noble Lord, Lord Bruce of Donington, and perhaps it does not matter, but I think he said there were 6,000 bankruptcies last year. I am told that there were 8,000. For example, yesterday 200 companies were listed in the High Court for undefended winding up. That is a typical, if rather light, Monday morning's list in London alone.

Those statistics are a symptom of the economic state of the country. They are a symptom of the growth of dependence by businesses and by individuals upon credit, at all levels of society. The idea "Never a borrower nor a lender be" has become as outdated as the propositions of Mr. Micawber. A modern-day Micawber would be seeking credit facilities to deal with his temporary cash flow difficulties.

I would also suggest that the statistics are a symptom of the failure of any Government to implement the recommendations of the Payne report in 1969 for a rationalised debt enforcement body and debt counselling service. The fact is that bankruptcy is one of the blunter instruments of debt collection. At one extreme, the unscrupulous creditor can threaten his debtors with the stigma of bankruptcy. At the other extreme, the unscrupulous debtor can use the threat of the proverbial penny in the pound to stave off his creditors. Distinctions have therefore to be drawn. The statistics do not conceal only dishonesty or folly: they conceal also disappointments and frustrated hopes. Not all failures are blameworthy, and not all the blameworthy are criminals, or at least can be proved to be criminal. Indeed, not all of their dependants know what is going on, or benefit at the expense of the bankrupt's creditors.

A cynic has observed that if you go "bust" for £700 you are probably a fool, if you go "bust" for £7,000 you are probably in the dock, and if you go "bust" for £7 million you are probably rescued by the Bank of England. That leads me to suggest that we must consider the less able creditors who themselves can be pushed to the limits of solvency. In practice, I suggest that this must mean setting the level of fees and deposits for small creditors in insolvency proceedings at a reasonable level so that they do not feel that they are risking good money after bad. It is still, the position I think that it is cheaper for a creditor to give his debtor the necessary fee to present his own petition in bankruptcy than to pay the higher fee for presenting a creditor's petition.

Another way of assisting the smaller creditor, as many of your Lordships have observed, is by reducing, without removing, the status of the Crown in its various manifestations as a preferential creditor. If your Lordships look at Schedule 5 to the Bill, you will see that betting and bingo tax come before the butcher and the baker and the innocent consumer. It simply cannot be right. The Crown is untroubled by the payment of fees to commence proceedings. It is able to proceed in London, unlike other creditors, wherever the debtor or those creditors may live and however inconvenient it may be. And, of course, it has the preference to which I have already referred.

Very often the modest trade creditor has only one incentive in proceeding at all, and that is to get value-added tax bad debt relief. It is possible, in my submission, to devise a structure that does not remove the incentive to the powerful creditor and yet does not drive away the smaller creditor and prevent him pursuing his proper remedies. The Cork Committee provided a comprehensive package: this Bill is selective. I would respectfully echo many of your Lordships' remarks that the Cork report was a remarkable report and that its recommendations were clear. I would suggest that there is a heavy burden on the Government to justify any departure from the recommendations of the Cork report. I would also agree that the Bill provides far too much for sub-ordinate legislation. Even the Rules Committee, as the noble Lord, Lord Hutchinson, observed, has been demoted and emasculated, if that is the appropriate phrase to use in respect of a Chancery judge.

I agree with some of the criticisms of the wording of the clauses dealing with delinquent directors and wrongful trading. I join in congratulating the noble Earl on his clear and interesting maiden speech in this respect. It is right, I suggest, that there should be an automatic and mandatory disqualification of directors which does not depend upon their criminality, or upon their being involved in more than one liquidation, or upon the Official Receiver taking the initiative. One has to remember that there is a menace to the public not just from the crook but from the technically honest, over-confident entrepreneur who soldiers on in the belief that he can trade his way out of the financial mess into which he has got himself or that somehow or another his ship will come in. He goes on robbing Peter to pay Paul, or, in modern jargon, robbing Nigel to pay Nigel; in other words, paying his national insurance at the expense of value-added tax or his value-added tax at the expense of income tax. I would go further and say that the burden should be on the disqualified director, once disqualified, to show that he is fit to be allowed back into the commercial ring.

The other side of the same coin is the personal liability of directors. It is right that there should be a higher degree of personal liability on those who use corporate vehicles. The original theory, as the noble and learned Lord, Lord Denning, observed, was that companies were independent bodies that could outlive their members. That has been overtaken in practice by the members of companies creating and killing them off with ease, to the detriment of creditors. The separate but similar theory of limited liability of the members of a company as a means of assisting commerce is of no use at all where the company's liability is more limited still. Companies are bought off the shelf for a few hundred pounds and other people's money is too easily removed offshore. Again, I respectfully agree with the noble Lord, Lord Bruce of Donington, that basic book-keeping is often overlooked. One comes across that all too often in practice. To use the vivid expression of one wise judge, "People cling modestly to the corporate veil as if it concealed some closed monastic order, vowed to silence and poverty".

The same principle must also apply to the abuse of the corporate group; in other words, where a holding company hides behind some under-capitalised subsidiary. These problems only add to those of the consumer who falls foul of the unincorporated trader operating behind some uninformative name such as "A and B Builders". The difficulties of the consumer in that respect have become all the more difficult since the repeal of the Registration of Business Names Act.

I turn to a few more parts of the Bill. I welcome the re-casting of Section 42 of the Bankruptcy Act and Section 172 of the Law of Property Act into modern language. It has been very difficult to grapple with them in the past. I welcome Clauses 84 and 153, which enable the court to set aside or vary extortionate credit bargains. Those clauses are borrowed from Sections 135 to 139 of the Consumer Credit Act. The problem of course is in the definition of the word "extortionate", because it is not enough to show that a rate of interest is exorbitant. It has to be shown to be grossly exorbitant. A further problem in this Bill is that, unlike the Consumer Credit Act, the burden is not on the creditor to show that his rate of interest is not exorbitant. I look back with some nostalgia to the Moneylenders Act and the presumption against interest in excess of 48 per cent.

Finally, may I turn to a matter which has not been touched on by any of your Lordships; that is, the interaction of matrimony and bankruptcy. I do not suggest that one inevitably leads to the other, or vice versa. In a typical case of course the main asset is the family home. It is needed by the family and by creditors alike. By the law in its present state the creditors almost invariably prevail, however sympathetic the trustee in bankruptcy and however sympathetic the court. The impact of bankruptcy can be devastating on the home and family, and the courts have none of the flexible and powerful powers which they have on divorce. The wife and even small children can be lucky if they get a few months' grace before they have to give up possession. The wife will retrieve only what she can prove to be her strict beneficial interest. Children in these circumstances often suffer a double loss, because if there is a divorce they lose their father and then shortly lose their home, and it can be at a critical time in their education.

The Cork Report, at paragraphs 1114 onwards, in a carefully reasoned and compelling passage, put forward proposals for the postponement in appropriate cases of the creditors' interests to those of the dependants of the debtor. Typically that would be until the children reach their majority or until the wife remarries or cohabits or goes off elsewhere. Of course it has to be an appropriate case. Commercial creditors can bear this postponement. Of course it is without prejudice to the powers of the court to set aside wrongful dispositions to a wife. Of course it should only be a postponement in the interest, and of course interest should accrue. I would suggest it should be encouraged in cases where payments to the creditors can be made out of income in the meanwhile.

It is a great misfortune, I suggest, that the Cork Committee's recommendations in this area have not been adopted in this Bill, and I would urge the Government to look again at those paragraphs of the report to bring this country in line with other common law jurisdictions. To disregard Cork in this area would be to waste a valuable opportunity for important law reform. Subject to those observations, I join in giving a qualified welcome to this Bill and urge that there should be some constructive amendment.

6.13 p.m.

Lord Mishcon

My Lords, I apologise to the noble Lord, Lord Meston, if I somewhat prematurely endeavoured to carry out my task of winding up this debate on behalf of the Benches which I proudly occupy. In winding up I shall do my level best to deliver a speech which will completely satisfy the noble Lord, Lord Mottistone, if for one moment he would agree to accept these words from me. He obviously is not so prepared, because he is discussing a very weighty matter with somebody else. I was just telling the noble Lord—and I thought that he would smile back at me—that on this Bill, which has no politics in it, I was endeavouring to make a speech which would wholly satisfy him.

Insolvency is not a very thrilling or amusing subject, and I thought that your Lordships would agree with me if I observed that it would only be somebody like the noble and learned Lord, Lord Denning, who could turn such a dull subject into a matter of complete and absolute pageant. The way in which he illustrates the points that he makes, with such lurid recollections of cases that came before him, in that magnificent and individual style of his, is always a delight to your Lordships.

I must from these Benches—it is the first opportunity anybody has had from these Benches —congratulate the noble Earl, Lord Buckinghamshire, on his very welcome speech.

Perhaps I may try to summarise what we have been discussing this afternoon. It has been a very interesting debate, and like all of your Lordships I want to pay my tribute to the Cork Committee, to the 11 members of it who sat through innumerable sittings, and the three gentlemen who I notice were invited to attend those meetings because of their very special qualifications. We have before us a report of some 460 pages, described by others of your Lordships as a memorable report. As has already been said, your Lordships will want to know with very clear reasoning why and where the recommendations of this committee, which sat for so long and so arduously, and which made its recommendations with very valid logical reasoning and experience behind them, are varied from or not indeed included in any way in this Bill.

The background of the Bill is 100 years of a history of this subject, which has not been looked at by the Legislature with any amount of reforming zeal. After that time, as the noble and learned Lord, Lord Denning, said, we have got to go back to a picture of limited liability in this day and age which is so different from the time when limited liability was first thought of. There were then companies, few in number, where it was thought that it was right and proper that people should venture into trade without a personal liability. But nobody then envisaged the welter, the millions, of limited companies which would grow up and possibly the only object of which was endeavour to evade liability, which was never the object of those who first conceived the idea of limited liability.

And so we at once, in trying to face these problems, looked at the Cork Report with the greatest of interest. We found that the first evil that they thought they had to deal with was the question of the liquidator who was either not worthy of being a liquidator because he was acting in a very dubious capacity, or who did not have the competence to do so, even though there was no evil in his mind. Your Lordships, I know, will have welcomed the suggestion that there should be qualification attached to the job of liquidator. I am hoping, quite obviously, that that qualification will be automatic in regard to the profession to which I have the honour of belonging, and automatic, too, for the recognised bodies of accountants.

I hope that, in another respect, the qualified surveyor will not be forgotten, because very often in a case of receivership, in particular where it is merely a question of realising property or advising on property, there is no earthly reason why a properly qualified surveyor should not at least be regarded as a proper person to serve as a receiver, and possibly even in some cases as a liquidator.

Then the Cork Committee obviously went on to consider a matter of great concern to the nation. I might almost describe it as involving the "Checkpoint" cases, which have horrified the public and where it is obvious that swindling of the worst possible order has taken place by what have been described as the phoenix companies. I think the committee has done a very thorough job here. I do not know why the Government departed from its recommendations.

I at once turn of course to the problem of the automatic disqualification of directors. Like the noble Lord, Lord Hutchinson, I do not like automatic penalties unless they have to be invoked. I should not necessarily have agreed with him about the drunk-in-charge case, but nevertheless I do want to take up the question of the disqualification of directors.

There are three things wrong, as I see it, with the provisions in this Bill on disqualification. First of all, the Cork Committee dealt with the question of disqualification on a mandatory basis and on a discretionary basis. I shall not take up your Lordships' time in repeating what they have said. However, I invite your Lordships to look at the way in which they dealt with that matter at page 409 of their report. I thought that they did so in a very just way: where certain things had gone dreadfully wrong, that could be proved mandatorily; where there was some doubt about it, the court had to exercise a discretion.

Quite apart from the points that have been raised so eloquently by Members of your Lordships' House as to the discouragement that there might be in certain circumstances—especially to the non-executive director who is very often valued in a company because of his specific experience but who is not required as a rule to take a very active part in the conduct of the company—it really is and must be wrong for someone to be disqualified automatically for a fixed period of three years, regardless of whether or not it is a most serious matter in respect of the conduct of the company's affairs so far as he is concerned, or whether it just borders on the fact of meriting disqualification. There is just a fixed period of three years which cannot be varied.

Quite apart from that, I am trying to envisage the procedure during the period of the three months' suspension whereby a perfectly decent, honourable director tries to get rid of this automatic disqualification. Anyone who knows the justice of our courts will know that every opportunity must be given for an investigation of such a serious matter. The lists in our courts are crowded. How long is such a procedure to take before a man knows whether or not the disqualification is to be lifted? Where is the Government's suggestion—if that is what they have in mind—for some sort of summary, but completely just, procedure? There is nothing about it in the Bill. Therefore, if the ordinary court procedures are to be adopted, I venture to think that this cannot be a just way in which to deal with the matter and that Cork is very much better.

Finally, on that point, I cannot for the life of me understand why it is that somebody who is a director of a company that is compulsorily wound up is subject to an automatic disqualification; whereas someone who is a director of a company wound up because of a creditor's voluntary liquidation is not subject to an automatic disqualification. I do not understand it. I can only say that, in the course of some experience professionally without being a specialist in this field at all, I can think of most dreadful cases which have ended up with a creditor's voluntary liquidation. I can also think of some perfectly innocent cases which have ended up for some reason as a compulsory or as a court liquidation. It sometimes happened that although everybody else agreed that there should be a voluntary liquidation, there was a persistent creditor who could not give any reason for it but who said, "I am going for compulsory liquidation. I do not like the look of this board and I do not like the fact that I have lost my money. I am going for a compulsory liquidation". In the old days especially, if I may be learned for a moment, the court would say, "Ex debito justitiae you are entitled to a compulsory order". So much for the question of disqualification.

As regards the question of wrongful trading, I must say that I do not know why the Cork Report's definition of "wrongful trading" has been departed from. I personally prefer it to that which is in the Bill, but that may be a Committee point. However, I do consider that the following point should be raised at Second Reading. Why is it only the liquidator who can apply for this personal liability? The liquidator may for some reason—possibly lack of funds—not want to do it. Why should not an ordinary creditor be able to apply for this, if necessary with the leave of the court, showing a prima facie case, so that it is not used for blackmail purposes?

I should like to move on rapidly to the various points that have arisen in the debate. I must say that there appears to have been expressed—and I believe that this is the view of the noble Lord, Lord Mottistone, with whom, as he has noticed, I agree, and I think it is the view of everybody on the various Benches who has dealt with the question of preferences—some worry about the fact that the Government appear to be clinging on to their present rights in spite of the fact that other countries have decided not to do so. The Cork Report deals with these matters on pages 320 and 321—and again I shall not quote them—in a very reasonable way.

As regards the question of the floating charge, I must quote from page 336 of the report because I think it worthy of appearing at all events in your Lordships' Official Report on the Second Reading of this important Bill. The first case that really decided the question of the separate identity of the individual from the company, to which the noble and learned Lord, Lord Denning, referred, was the famous case of Salomon v. Salomon & Co., in 1897. The great Lord Macnaghten delivered of himself the following words in Salomon v. Salomon & Co., in 1897: I have long thought, and believe some of your Lordships also think, that the ordinary trade creditors of a trading company ought to have a preferential claim on the assets in liquidation in respect of debts incurred within a certain limited time before the winding up. But that is not the law at present. Everybody knows that when there is a winding up debenture holders generally step in and sweep off everything: and a great scandal it is". If a great scandal it was in 1897, it has not lost its quality of being scandalous in 1984.

The Cork Committee suggested that this fund of 10 per cent. out of the assets realised by the receiver for the debenture holder ought to be there for the unsecured creditors so that the liquidator has something by way of costs in order to pursue whatever remedies he thinks he has (it may be against the receiver himself or generally) and there is something left for the unsecured creditors. The Government were wrong in omitting that recommendation from their Bill.

I must have mercy on your Lordships at this time of the evening and shall therefore rapidly make merely two points and then sit down. The first point I want to make is how correct it is to have endorsed the Cork Committee's recommendation about the administrator procedure and how helpful I hope that that will be in rescuing many worthy companies from disaster.

The second or final point I make is not quite so much in praise of the Government. I do not understand—and I say this deliberately—the penal way in which a director of a company, when it becomes insolvent if it is a compulsory winding up, is treated by the Government in this Bill, and the absolute kid glove method of dealing with individual bankrupts who may be just as guilty in regard to their bankruptcy and cause just as much hardship as any limited liability company can cause. I do not understand this business of the automatic discharge after three years, provided that in the bankruptcy itself there has been no breach by the bankrupt of what he ought to do. Again, along with the Cork Committee, I think that there ought to be the procedure that we have at present of an application for discharge. If the bankrupt does not make it, then the court itself considers the position after five years. Why should there be an automatic release so that once again other people can he owed money which is not paid to them? In many of these cases they are little people and they are subjected to the gravest disadvantages by the behaviour of individuals just as much as they are by companies. In concluding my winding up, of course I say along with others that there is much good in this Bill; it is not so good where the Government have not followed the Cork Report.

6.30 p.m.

Lord Lucas of Chilworth

My Lords, first may I thank all noble Lords who have contributed to this afternoon's debate on the Second Reading of this important Bill? Seldom have I been able to take part in a Second Reading debate which has been so full of accord, if I may put it that way. Neither have I had the opportunity before at a Second Reading of being able to congratulate a maiden speaker, and I congratulate my noble friend Lord Buckinghamshire on his spech to us this afternoon, although I have to tell him here and now that I could not agree with quite a lot of what was contained in that speech.

We have considered four major themes in the Bill before us. They included the provision first to curb the unprofessional activities of insolvency practitioners by introducing a system requiring all those acting in this capacity to be professionally qualified and/or licensed. Secondly, we have considered curbing the continued abuse of the privilege of limited liability by directors and others, and encouraging directors to take very much earlier action when financial or other difficulties loom in the affairs of a company.

Thirdly, we have discussed placing a greater emphasis on business rescue by introducing the concept of the company administration procedure and by reforming company receivership law. Lastly, we have considered how to simplify and reform both personal and corporate insolvency procedures so that they work more smoothly and reduce some of the demands on the courts and the insolvency service.

We have had a wide-ranging and interesting discussion on the objects of the Bill. Clearly there are a number of areas which we shall have to discuss in much greater detail at a later stage. I would give the noble Lord, Lord Bruce, the assurance he implicitly sought in his opening remarks when I noted down, "Yes. The Government will view quite sympathetically any suggestions that may be advanced for the improvement of this important piece of legislation".

The first of the themes we discussed was that of the insolvency practitioners. The Bill provides that the practitioners will in the future be professionally qualified or licensed by the Secretary of State for Trade and Industry. Questions have been raised about the arrangements for certification of those currently with experience and those who obtain sufficient experience in the future. I have listened carefully to your Lordships' submissions on this point. May I take this opportunity of assuring your Lordships that the requirements proposed will provide adequate arrangements for such persons.

The noble Lord, Lord Bruce, and the noble Lord, Lord Mishcon, both mentioned the classes (if I may put it this way), of persons who may become insolvency practitioners. I am sure that the noble Lord, Lord Bruce, will be aware that discussions are taking place with the accountancy bodies and the Law Society on who should be able to act as a practitioner. There will also be discussions with other interested bodies before any final decision is made. On the specific point that the noble Lord, Lord Mishcon, made with regard to a qualified surveyor acting as a receiver, he will know—and I merely underline it—that they usually act as receivers on behalf of debenture holders holding a fixed charge on real property. They still will be able to do so because insolvency practitioner provisions would not apply to appointments such as that.

I am tempted to spend some little time on this section of the Bill under the heading of disqualification and wrongful trading because this has, perhaps not surprisingly, dominated most of this afternoon's discussions. Again I listened carefully to everything that has been said about the new régime. It is interesting because particularly outside Parliament it has been said with force on both sides that on the one hand we are not doing sufficient to curb abuse by directors of limited liability, and on the other hand that we are being too harsh.

In all the conversations and consultations we have had over many months now what we have tried to do is to secure an acceptable balance between these considerations. I believe—and I put it quite sincerely to your Lordships—that the provisions before your Lordships today strike that balance. The Bill avoids imposing on directors a régime which would actively discourage legitimate commercial practice, and yet it strengthens the law to curb serious abuses of limited liability. The noble Lord, Lord Aylestone, recounted a story—and indeed others have done so—about that. I want, if I have the opportunity, to turn specifically to those points a little later on.

What one has to accept is that voluntary liquidation does not necessarily exonerate a bad director. I think the point the noble Lord, Lord Mishcon, made was that all he had to do was go into voluntary liquidation and he let himself off the hook. That is not so, because the concept of wrongful trading then comes in and the receiver, or the liquidator, who then has sufficient grounds to believe that that is what that director took action specifically to avoid can petition the court and that director would get, as it were, his just deserts.

Lord Mishcon

My Lords, I know that the noble Lord will not expect me to interrupt very often, and I promise not to do so. But he is referring to a point that I am supposed to have made which was not the point that I made. The point I made was in the differentiation that he makes between a voluntary and a compulsory liquidation. Why should the director of the voluntary liquidation company be free from these provisions whereas the director of a compulsorily wound up company is subject to them? That was my point.

Lord Lucas of Chilworth

My Lords, I obviously have not expressed myself very well. What I am saying is that a director of a company which goes into voluntary liquidation does not necessarily escape the penalties that the director of a company going into compulsory liquidation, or compulsory wind-up, may face. We may debate this further later; but I hope that on reading what I have said the noble Lord will appreciate the difference.

I do not share the view that has been expressed today on this automatic disqualification. The Bill provides grounds for directors and others to avoid the automatic disqualification. Obviously there will be some shift in emphasis of attention that directors must pay to the fulfilment of their duties. That is more likely to be beneficial than harmful.

We have discussed the business rescue scheme, the third of the Bill's themes concerning the increased emphasis to be given to rescue. The Bill introduces the new insolvency mechanism, the company administration procedure. I was glad that the noble Lord, Lord Mishcon, welcomed this without reservation in the brief remarks that he made this evening, contrary to the comments that my noble friend Lord Buckinghamshire made with regard to this, because he suggested that as soon as an administration manager had been put in, doubts would creep in with customers, with suppliers, and so on, as to whether the company was good, and whether the company was able to continue. I am suggesting that for all those people there is a much greater chance of the company continuing rather then either going into voluntary liquidation—in which case there may not be much hope of it continuing—or waiting for a compulsory wind-up, in which case the company has gone. So it is, as it were, a third strand. I believe it will be a very valuable addition. We will be examining later in our consideration of the Bill the procedure for this new strand and I am sure that we shall be able to identify some refinements.

The provisions on company receivership have two aims: primarily to improve receivership as a business rescue mechanism by adding to the administrative receiver's powers, and to improve the administrative receiver's accountability as well as to clarify the extent of his powers and duties.

Finally, the Bill implements a substantial number of the review committee's recommendations in relation to the detailed procedure of insolvency law. Secondary legislation, which will appear in due course, will be a more suitable vehicle for such matters. That will do even more in that direction. Procedures common to both winding up and bankruptcy have been harmonised wherever the intrinsic nature of the codes does not make this impossible to achieve. More than anything else in this context the Bill provides a complete up-to-date legal framework for bankruptcy expressed in modern language which is capable of being understood by the lay person as well as the expert.

I want now to touch on some of the main points of comment this afternoon. The noble Lord, Lord Bruce, spoke about failure to provide a 10 per cent. fund for unsecured creditors. My understanding is that Sir Kenneth Cork commented on his committee's recommendation that he saw that 10 per cent. fund as being more of a fighting fund for the benefit of unsecured creditors rather than a fund for distribution, because if it went in that way there would be little to stop those who can secure their indebtedness from so doing by a fixed charge. So we did not think that idea was so good.

The noble Lord, Lord Taylor of Gryfe, and also the noble Lord, Lord Bruce, spoke about the consumer creditors—the pre-payments. The Government are aware of the concern felt by many people about the treatment, following insolvencies, of these kind of payments. The review committee consider that the provision of credit in this way was not appreciably different from other forms of credit. We agreed with their conclusion that there should be no difference in the position of those making advance payments and other unsecured creditors. The introduction of a much tougher régime of disqualification for delinquent directors, together with greater responsibility for making them personally liable for their companies' debts (particularly through the wrongful trading provisions) will reduce the likelihood that consumers will lose their money in future. Our view that the remedy does not lie in specific legislation is supported by the Director-General of Fair Trading. In his recent discussion paper on the subject he suggested that the answer lies probably more in increased public awareness of the risk and wider adoption of voluntary schemes such as that operated by ABTA.

The noble Lord, Lord Aylestone, and other speakers referred to disqualification and relief particularly for what he described as protection for the company doctor—the expert who has gone in to help. I think that there is a misconception here. We shall obviously return to it in Committee. But the relief provisions outlined recognise that there may well be situations when a director is unable to prevent a company going into compulsory liquidation particularly where he has only recently joined the board and the information given to him initially has proved to be inaccurate. The Bill therefore grants relief to those joining the board within three months before the relevant day. It may be argued that to grant relief to those joining the board only three months before that date does not give a person adequate or reasonable time to acquaint himself properly with the company's financial position. But I am sure that this will be dealt with when we discuss the matter in Committee.

It would be wrong to be over-generous and to allow people to take on directorships without having to consider carefully beforehand whether the company's activities are and will continue to be viable. After all, if these people are so-called company doctors, so-called experts, it does not take them very many days of investigation before they join the board to appreciate whether there is an opportunity of rescue or not. They can then make their choice. I do not believe that this will inhibit those who really want to help a company, whether it is in difficulty or not.

I felt that I would leave the remarks of the noble Lord, Lord Taylor of Gryfe, and my noble friend Lord Buckinghamshire with regard to the provision in Scotland, to my noble and learned friend to deal with when we reach that stage during the Committee proceedings. I also add my thanks to the extremely interesting—and I do not wish to be flippant to the noble and learned Lord, Lord Denning—and humorous way in which he gave us his views of the Bill. I was glad to have his endorsement. I took the point of Crown preference made by himself, the noble Lord, Lord Milne, and others. I feel that it would be perhaps better if we left that to the more detailed discussion which will undoubtedly occur.

The noble Lords, Lord Hutchinson and Lord Bruce, raised the subject of what are called the rules. There was some small misconception here on the noble Lord's part. The Insolvency Rules Advisory Committee, which was set up under the Insolvency Act 1976, has recently completed a comprehensive review of the present rules and the new rules using the results of that review as a working base. These will now be produced and duly vetted by the advisory committee to complement the contents of the Bill. The general power of review which is removed from the Committee by Clause 194 of this Bill is therefore now superfluous as, once the new rules are produced via the committee, they are expected to stand without substantial amendment for many years to come. In addition, when those rules are made, they will, in accordance with Clause 87(3) and Clause 184(3), be subject to the scrutiny of Parliament. That is not the case under the present arrangements.

The noble Lord, Lord Hutchinson, and others also suggested on the point of automatic disqualification and wrongful trading that this was far more likely to push companies into early liquidation. I do not believe that this is so because one of the Government's major objectives in the Bill is to encourage the company director to take a closer interest in the company's affairs and to identify and tackle problems at a much earlier stage. The board which does this will be able to examine a number of options: the very last option would be that of liquidation. I do not think that there would necessarily be the question of pushing them into it.

Perhaps I should conclude by reminding the House that the intention of the Government is to strengthen the body of insolvency law so that insolvency is handled by properly qualified and experienced people. Those who abuse the valuable privilege of limited liability will be detected and will receive their just deserts there. A further aim is to bring this legislation up to date to simplify the associated procedures. Finally, we propose to modify the statutory provisions regarding receivership. We also intend to establish a new insolvency mechanism, company administration, specifically designed to prevent unnecessary loss of viable businesses in whole and in part. Everybody who has spoken has given a welcome to the Bill and it would seem only necessary for me formally to ask that your Lordships give this Bill a second reading.

On Question, Bill read a second time, and committed to a Committee of the Whole House.