HL Deb 23 October 1985 vol 467 cc1164-8

72E Leave out paragraph (b) of subsection (4) and insert— ("(b) the funds resulting from book or other debts become the property of the company subject to such a floating charge").

72F Line 74, at end insert— ("(9A) Where any goods in the possession of the company under a hire-purchase agreement are disposed of under this section in its application to Scotland, the disposal shall have the effect of extinguishing, as against the disponee, all rights of the owner of the goods under the hire-purchase agreement.")

The purpose of these amendments is to enable the administrator as well as the court to permit the enforcement of security or re-possession of goods if he does not require the assets for trading on. It also repairs defects in the clause dealing with the power of the administrator to deal with charged property. The principal difficulty with Clause 20, as introduced, is that although it was intended that the administrator would be entitled to deal with and dispose of the property of the company which was subject to a floating charge, a floating charge which entitled the holder to appoint an administrative receiver, or to a fixed charge held by that debenture holder, the clause did not enable him to do so.

Our intention was to reproduce what we understood was the practice in receiverships and so to entitle administrators to make use of the assets, subject to those charges, to finance his continued trading. The fact of the crystalisation of the floating charge would have led to every item of the company's property subject to that charge becoming subject to a charge of a fixed nature which could have defeated the administrator's efforts to deal with that property.

The remedy proposed is contained in subsection (1) of the new clause introduced by Amendment No. 72 which, taken with subsection (3), provides that the administrator is entitled to exercise his powers in relation to property covered by debenture creating a floating charge which entitles the holder to appoint an administrative receiver, together with any fixed charges held by that debenture holder. This ability to exercise these powers would not be affected by the existence of charges postponed to the floating and fixed-charge debentures; and the administrator would also be entitled to dispose of book debts owed to the company but subject to a fixed charge.

However, we have received strong representations from financial institutions and practitioners and the Government are persuaded that it would be unjust for fixed charges held by a floating-charge holder and those over booked debts to be dealt with differently from those held by other fixed-charge holders. Amendment 72A therefore removes from subsection (1) property subject to fixed charges held by a floating-charge holder and fixed charges over book debts.

The administrator must therefore apply to the court for authorisation to dispose of property subject to such charges in accordance with these provisions of the new clause which I shall shortly describe. He will remain entitled to dispose of assets subject to floating charges. We now understand those to be the category of property that a debenture holder sometimes allows receivers to use as a source of working capital. The effect of Amendment No. 72A, if approved by your Lordships, will remove the provision which Amendment 72B (proposed by the noble Lord, Lord Bruce) and Amendment 72BA (proposed by the noble Lords, Lord Morton of Shuna and Lord Carmichael of Kelvingrove) seek to amend.

Similarly, Amendment 72E tabled by Lord Bruce of Donington will no longer be necessary. All book debts subject to fixed charges will only be capable of disposal by the administrator with the consent of the court. In other words, they will be treated in the same manner as any other property subject to a fixed charge. 1 trust this will meet the concerns which lie behind the amendments tabled by the noble Lords.

Turning to Amendment 72C, our intention was that the charges over the property which was at the administrator's disposal should not be destroyed or removed but preserved. This effect was sought by Amendment 72(4) but further consideration of how that amendment would operate, particularly in relation to property subject to Scottish charges, led to the view that it was not a practical solution. That is the reason for my noble friend's Amendment No. 72C to Commons Amendment No. 72. The new subsection (4) has the effect of transferring the security holder's priority to any property representing the charge property to be disposed of.

It may assist your Lordships if I give an example of how the new provision will operate and, in particular, explain to the noble Lord, Lord Bruce of Donington, the necessity of the words "directly or indirectly" which Amendment 72D (tabled by him) would seek to remove. Thus, for example, if the administrator sells charged plant and machinery, the charge holder's security would attach to moneys obtained from the sale and then to any assets that these moneys might be converted into. Your Lordships will appreciate that successful trading by the administrator will usually bring new assets within the floating charge by the normal operation of business and thus increase the value of the floating charge. In the light of this, I trust the noble Lord will not press his amendment.

7 p.m.

I make no apology for emphasising the Amendment No. 72S and the clause as it stands so amended effects a substantial change in the manner in which an administrator will conduct the business of the company. We have accepted the strong presentations of the financial institutions and the insolvency practitioners that in its unamended state the clause put the interests of the secured financial creditors at very great risk by enabling the administrator to use their secured assets for trading funds. They saw themselves being compelled to make forced loans to someone over whom they had no control. In such circumstances, where possible, they would always appoint an administrative receiver to obtain control of the secured assets even though this might destroy the company's chances of rehabilitation. The widespread adoption by banks of this attitude would, as has been said, make the administration procedure unworkable and we have sought to meet the fears expressed by the amendment.

We accept that in practice the administrator will in most cases need to obtain finance for trading from a company's bankers, but we anticipate that the institutions, having supported or consented to the appointment of the administrator, will play an important role in the achievement of the purposes of the administration and provide on sensible terms the finance required. We trust that the changes in the procedure will increase its acceptability on the present structure of financing business in this country and provide a useful additional means of rehabilitating enterprises which would otherwise be destroyed.

I turn now to the remaining subsections of the new clause which restate and expand what was already contained in Clause 20 of the Bill. Assets of the company or in the possession of the company with which the administrator is not empowered to deal will comprise property covered by fixed charges, including those over book debts and goods subject to hire purchase and other agreements listed in subsection(9) of the new clause. The moratorium, however, bites on such property and goods and so they may not be taken away from the administrator unless, under Amendment No. 66, he consents to enforcement of the security or repossession of the goods.

In most cases it will be for the parties to negotiate sensible terms between themselves for the continued use or disposal of the property. In the event of failure to agree terms, the adminstrator is entitled to seek an order of the court for the sale of the goods so long as a net amount equivalent to the open market value is paid to the other party towards discharge of the debts owed to them.

Subsections (6) to (11) and the new subsection (9A) proposed by my noble friend's amendment extend the procedural provisions of the existing Clause 20 to require notification of orders to the Companies Registrar and impose a penalty for failure to do so. They also enable the adminstrator to give good title to property disposed of and make clear that the power given to the court by the clause does not prejudice applications to the court under Clause 30.

The new subsection (9A) makes it clear that, in Scotland, where any hire purchase goods are disposed of by the administrator, the disposal has the effect of extinguishing any of the rights of the hire purchase owner in the goods. The hire purchase owner would, of course, still have rights to the net value of the goods in terms of subsection (5) of the new clause inserted by Amendment No. 72. My Lords, I beg to move.

Moved, that this House do agree with the Commons in their Amendment No. 66.—(Lord Cameron of Lochbroom.)

Lord Bruce of Donington moved, as an amendment to Amendment No. 66, Amendment No. 66A:

[Printed above.]

The noble Lord said: My Lords, this amendment extends the provisions of the existing amendment by the addition of the words,

"or to recover debts assigned by the company to a third party unless notice of such assignment was given to the debtor prior to the presentation of a petition under section 28".

This is designed to deal with the situation arising on factoring and I hope it is self-explanatory. I beg to move.

Lord Cameron of Lochbroom

My Lords, I regret I cannot accept this amendment but would simply advise your Lordships on the matter. The sale or factoring of debts by companies is of course a well-known and long-established feature of financial life. Factoring agreements may or may not provide for notice of the assignment of the debts to be given to the debtors. They may also provide for the company to continue to collect the debts on behalf of the purchasers.

The effect of the amendment proposed would be that where notice of the assignment of a debt was not given to the debtor before the administrator petitioned and the debtor therefore paid the company in satisfaction of the debt, the assignee or factor of the debt would not be able to recover from the company monies properly due to him. Where the company has sold a debt outright we can see no justification for allowing the company to retain the benefit of property which in fact no longer belongs to it.

If the assignment of a debt does not constitute an outright sale but is instead a form of security—and that of course would depend on the terms of the agreement—then the party secured would not be able to enforce his security because of the terms of Amendment No. 66. In such a case he will not be able to recover debts paid to the company while the moratorium is in force. Perhaps in the light of what I have said the noble Lord, Lord Bruce, will feel able to withdraw his amendment.

Lord Bruce of Donington

My Lords, I am greatly obliged to the noble and learned Lord for his explanation. The amendment was put down precisely to seek that explanation. I am happy to accept it and to ask the leave of the House to withdraw the amendment.

Amendment, by leave, withdrawn.

On Question, Motion agreed to.