COMMONS AMENDMENT (Hansard, 23 October 1985)

§ Lord Lucas of Chilworth
My Lords, I beg to move that this House do agree with the Commons in their Amendment No. 33, and I should at the same time like to speak to Amendments Nos. 445 and 528:

Lord Bruce of Donington
My Lords, discussion of this amendment affords me an opportunity of expressing certain misgivings with regard to the responsibilities of liquidators in respect of the reports they are required to make upon directors who are thought to be delinquent. For convenience I am referring now to Bill 240, at pages 8 and 9.
One observes in Clause 12(1) that if it appears to the liquidator, that the director is or has been a director of a company which has at any time become insolvent, and that his conduct as a director of the company, either taken alone or together with his conduct as a director of any other company or companies makes him unfit to be concerned, then the liquidator is required to report the matter to the Secretary of State.
That is a very useful provision and I make no complaint about it. Section 12(6) of Bill 240, to which I am referring for convenience because it presumes that all the various amendments have been passed, states that the Secretary of State may require the former liquidator, administrator or administrative receiver to furnish him with information. That responsibility must not be taken lightly.
Speaking from my own practical experience in the course of investigations into matters which liquidators have entrusted me to investigate, I have found that such is rather a long process. It is all very well to put into a Bill that it is a liquidator's responsibility to report to the Secretary of State—and in certain cases he may have to make virtually a nil return. However, that is not an activity which can be embarked upon lightly.
I speak from personal experience. In some cases it has needed some three to four weeks' investigation of a company's books and accounts and interrogation of individuals and staff to ascertain whether a director has been culpable. In 50 per cent. of the cases the directors have been culpable. In the other 50 per cent. they probably have not been. But that is a very responsible process.
Not only does that process have to be undertaken very thoroughly in justice to the persons concerned but it is also very time consuming. Unhappily, the Bill makes no provision for the costs involved in such operations. I invite the attention of the noble Lord to this point because it is one thing to legislate but I am sure he will agree with me that a director should not escape the consequences of his actions purely because the assets of the company remaining over are insufficient to pay the costs of the investigation of his conduct. That cannot be the intention.
Again, this is one of the questions to which I referred in my opening remarks prior to our consideration of the Bill, when much more mature consideration could probably have produced a more constructive answer. I am making that point now prior to moving my own amendment to the next clause with a view to ascertaining whether the noble Lord has given consideration to 1128 this point. I can assure the House that members of the accounting and legal profession have certainly given very great thought to it.

§ Lord Lucas of Chilworth
My Lords, the provisions in this Bill will give every liquidator—indeed administrator and administrative receiver—a duty to report to the Secretary of State when it appears to him that the conduct of a director makes him unfit. Schedule 2, as I have explained, provides the guidelines on matters to be taken into account.
Two types of report arise from this requirement. The first type will be the positive report as to unfitness which the practitioner is required to report. The second is the requirement identified and provided for in another place that the reports to be provided by practitioners should include nil reports where no evidence as to unfitness has come to light. This will be achieved by using the rule-making power which Amendment No. 440 provides to require the practitioner to provide a return after a period on the conduct, as it then appears, of the directors. Such periodic returns would include the nil reports to which I have referred.
These requirements will impose different burdens on the insolvency service. Where the official receiver himself is charged with the duty to provide such reports, the additional work should not be great since he is already charged with investigatory duties. The reporting requirement will not add to these but will merely require him to report where evidence of unfitness comes to light; again, having regard to the guidelines. It is of course a major purpose of the Bill to free the official receiver to concentrate on the investigatory duties.
As regards handling the reports, there will obviously be an additional task to be formed by the insolvency service for which the Government will make appropriate resources available. Perhaps it might be as well if I drew your Lordships' attention to our original estimate of a staff saving of 60 which would have resulted from the streamlining and simplification provided by the Bill. That has now been scaled down to 40 to reflect changes which we have made.
We anticipate that the new alternative procedure which the provisions for corporate voluntary arrangements will afford and the improved standards of company management which the Bill disqualification and personal liability provisions will bring about will have a beneficial impact on both the number of insolvencies and of course on the instances of unfit conduct.
I think that I should, in response to the point raised by the noble Lord, Lord Bruce of Donington, about the burden on liquidators, emphasise the last line of Clause 12(6), on page 9, line 24 of the 31st July print, which I feel puts the matter into proper perspective. On the matter of costs I should, of course, say that any additional work performed by the insolvency service as a result of the reporting requirement will fall to be met, as with other costs, out of the fee income of the insolvency service itself.

Lord Bruce of Donington
My Lords, I do not know whether I heard the noble Lord aright on that. I do not 1129 see any powers taken in the Bill for the Secretary of State to be provided with funds to enable him to reimburse liquidators in respect of their reporting responsibilities and requirements as laid down in subsection (6). I do not see it at all. If it be the case that, as a result of the very detailed investigations that have to be made in response to the Secretary of State's request for a report, the work can, in fact, be paid for on a time-charge basis at a pre-determined fee then I am quite sure the profession generally will be reassured to learn that.
I remind your Lordships that in 1984, according to the House of Lords Hansard of 16th January, col. 1066, in response to a Question of mine, there were some 8,461 voluntary liquidations in 1984 and 5,226 compulsory liquidations. That is an awful lot of liquidations. I am quite sure that the noble Lord will be aware that the trouble is that in many cases where there has been a delinquency by directors—I use the term loosely—it is precisely in those cases where there are insufficient assets to pay the liquidator. That is the problem. Nevertheless, the liquidator, a qualified insolvency practitioner from the time the Bill comes into operation, is statutorily bound to carry out these various matters.
I must assure the noble Lord that in many cases these investigations enabling, first, a decision to be made as to whether or not a director has been at fault and, secondly, the detailed investigation justifying a proper report to be made to the Secretary of State, are very time-consuming matters. It is very easy to trip them off the tongue and say there will be very little extra work involved, possibly half an hour or so, but from practical experience I can tell the noble Lord that they are often very time-consuming; if only in justice for those who are suspected or accused. It would be a pity if the whole Bill were to fail by reason of there being unsufficient funds to make available to the liquidators to carry out duties imposed on them by statute.

§ Lord Lucas of Chilworth
My Lords, let me say that we would regard the cost of preparing the statutory report, including the cost of providing such further information as may be required, as part of the cost of the insolvency procedure. As such therefore those costs would fall to be met out of the funds in the estate.
It is not necessary at this stage for the duty to include further investigation. It is on the basis of the report that the Secretary of State would proceed with an investigation. It would therefore fall to the insolvency service, in carrying out such an investigation, to meet such costs. Under Clause 12(5), in the 31st July print of the Bill, the duty of an insolvency practitioner is not to investigate but only to report. That would come about by virtue of his normal functions. If he finds an element of unfitness, that is reported but not necessarily investigated. Therefore, the cost to which the noble Lord, Lord Bruce of Donington, refers does not at that time arise.

Lord Bruce of Donington
My Lords, will the noble Lord say quickly and succinctly how the insolvency practitioner can report without ascertaining the facts first? Ascertaining the facts of course means, in 1130 ordinary parlance, investigation. One must investigate before reporting otherwise one has no facts on which to report.