HL Deb 11 July 2000 vol 615 cc196-218

6.47 p.m.

Report received.

Clause 4 [Qualification or authorisation of nominees and supervisors]:

Baroness Buscombe moved Amendment No. 1: Page 2, line 17, leave out subsection (3).

The noble Baroness said: My Lords, in moving Amendment No. 1, I should like to speak also to Amendments Nos. 2, 13, 14, 17, 23, 25, 26, 29, 30, 32, 34, 34A and 37. In proposing these amendments in Committee we made the point that an authorised person created by subsections (3) and (4) of Clause 4 should not be a licensed insolvency practitioner and should be able to act only as a nominee or supervisor. He would be likely, therefore, to recommend a voluntary arrangement rather than some other insolvency procedure. The Minister attempted to answer that point, but, with great respect, I fear that he missed our point. A debtor, be it a company or an individual, in financial difficulties, will usually seek the advice of some professional person.

In many instances he will seek the advice of a mere authorised person. That advice will probably be given free, just as at the moment similar advice is given free by licensed insolvency practitioners. That advice is given free in the hope and expectation that the person giving that advice will be appointed as nominee, supervisor, administrator or liquidator in due course and will be remunerated for doing so. That remuneration will more than make up for the free advice given earlier. That is how the system works today with licensed insolvency practitioners and we can think of no reason why that will not be how the system works with authorised persons in the future if these provisions are enacted.

A number of these authorised persons will be tempted by the hope and expectation of earning remuneration as nominee or supervisor in due course. We believe that they will want to recommend a moratorium and a voluntary arrangement because they will then get paid. If they recommend some other insolvency procedure, such as bankruptcy, administration or liquidation, they will probably not be paid. The temptation is therefore very great.

Some of these authorised persons will succumb to that temptation. That is an inevitable consequence of human nature. We believe that in a considerable number of cases an authorised person will wrongly advise the debtor to propose a voluntary arrangement because that is the only way the authorised person will be paid. Indeed, it happens now with licensed insolvency practitioners, who may recommend one insolvency procedure instead of another because they are more likely to be paid in due course. It is more likely to happen with authorised practitioners, who will certainly not be paid at all if they recommend insolvency procedures for which they are not qualified.

I am not saying that this will happen in every case. Indeed, it may happen in only a few cases. But we must stop even that, because debtors are particularly vulnerable. These are people or companies who are in financial difficulties and are clutching at any straws. We must therefore ensure that the risk of that happening is minimised. The amendments will do that. If the professional who can act as nominee and supervisor is also able to act in other insolvency procedures, he is less likely to advise a voluntary arrangement where other insolvency procedures are more appropriate. I beg to move.

Lord McIntosh of Haringey

My Lords, we have listened carefully to what has been said in debate about Clause 4 of the Bill. We have listened at Second Reading, in Committee and again today. We have struggled—we still do struggle—to understand why there is such strong opposition to the proposals in the clause.

There seems to be a suggestion behind all this opposition that there is a hidden agenda. There is no hidden agenda. Clause 4 introduces new Section 389A in the Insolvency Act. It enables the Secretary of State, if certain conditions are met, to recognise bodies whose members will be able to act as nominees or supervisors in relation to voluntary arrangements under the Insolvency Act. I realise that my comments during the Committee stage on that point were not as clear as they might have been. As a result, I wrote on 21st June to the noble Baroness, Lady Buscombe, to make it plain that nominees and supervisors authorised under new Section 389A will be able to act in relation to voluntary arrangements generally and not just in moratorium cases.

The conditions under which a body can be recognised are that it, it maintains and enforces rules for securing that its members—

  1. (a) are fit and proper persons to act as nominees or supervisors, and
    2. 198
  2. (b) meet acceptable requirements as to education and practical training and experience".
Those are important conditions. It would be strange to suggest that the Secretary of State would regard this measure as a means of "dumbing down" on standards. If an authorised body does not perform to acceptable standards, the Secretary of State can revoke its recognition.

The noble Baroness, Lady Buscombe, has today taken a slightly different tack. She has suggested that persons authorised pursuant to the power in new Section 389A would be likely to advise a voluntary arrangement as the most appropriate course because they could act only in that area. I hope I have made it abundantly clear that a nominee or supervisor does not have an advisory role. If I have not made it clear, I do so now. The nominee's and supervisor's duties are set out in the legislation and it is those duties—and only those duties—that they are authorised to perform.

The proposition that only a licensed insolvency practitioner will ever have the skills necessary to act as a nominee or supervisor is untenable. There are areas of, say, a supervisor's role, such as collecting in regular payments and distributing them in accordance with the terms of an agreed voluntary arrangement, where it would be rather absurd to claim that the particular skills of an insolvency practitioner are always needed. As I have said before, membership of the insolvency profession's trade association—formerly the Society of Practitioners of Insolvency and now the Association of Business Recovery Professionals: is there not here a message for those who oppose Clause 4?—is now open to those with expertise in financial rescues who are not licensed insolvency practitioners.

The skills—we are in no doubt that they are substantial skills—those people have may prove very useful in achieving rescues by way of voluntary arrangements under the Insolvency Act. So, if an organisation exists, or comes into being, which satisfies the requirements of the new Section 389A, we see no good reason why its members should be prevented from playing a part in the rescue process by effectively maintaining an unjustifiable monopoly.

The Government are in the business of promoting rescues—not protecting vested interests. But I cannot overemphasise that the only reason for taking this power is to ensure that we can harness skills—regulated and professional skills—which, but for Clause 4, would not be available to those attempting a rescue.

Baroness Buscombe

My Lords, I thank the Minister for his response. There was certainly no suggestion on our part of a hidden agenda. We are seeking clarification. It has been our understanding from the outset that an authorised person would not be able to carry out other insolvency procedures. I do not refer to giving advice. We believe that anyone can advise. We have never strayed from that point. Advice can be given by any professional at any stage. However, in terms of acting, we are seeking confirmation, given the Minister's response, that an authorised person will be able to recommend some other insolvency procedure, or w ill be likely to recommend it where it makes sense, such as bankruptcy, administration or liquidation. They will be able to act in those procedures. If that is the case, we shall be content. Our concern has been that the new animal—the authorised person—will be able to act only in cases where there is a voluntary arrangement but will not be able to act where it would make sense, say, to recommend instead bankruptcy, administration or liquidation. The authorised person would not be able to be involved in those processes as supervisor.

Lord McIntosh of Haringey

My Lords, if anything, the boot is on the other foot. The present situation is that all kinds of people may advise a company in difficulties. There have been accusations—they have been made known to the Insolvency Service—that if insolvency practitioners provide the advice as authorised persons, they are more likely to recommend insolvency procedures where they can make money. What is sauce for the goose is sauce for the gander. It is the responsibility of those companies that are in difficulties to seek objective advice. They must take into account the possibility that those who are advising them might receive fees through one course of action rather than through another course of action. I am sure that they will.

It is rather similar to the position of those making investments. It is the responsibility of those making investments to be informed about—that, in turn, is government's responsibility—the reasons why investment advisers might give particular advice rather than other advice. If that reason is that the commission is better, someone ought to know about it. But I do not think that the Bill introduces anything new that might give rise to the danger feared by the noble Baroness, Lady Buscombe.

Baroness Buscombe

My Lords, I thank the Minister, but I should tell him that we have considered this point carefully. Having read through the debates held in Grand Committee, where we felt that we perceived this matter in a different light was on the question of advice as opposed to action. We hold to the view that anyone can offer advice, but that people are less likely to suggest a certain course of action if they personally will not be able to be involved in that course of action and thus subsequently be paid. That is the point which I am trying to emphasise. I may not have stressed it clearly enough in Grand Committee.

We are concerned that the proposed "authorised persons" will choose a course of action with which they can then become actively involved and therefore receive payment. If the Minister is now reassuring me that those persons will be able to act in ways other than in a voluntary arrangement—namely, they will be able to act as the supervisor in a bankruptcy, or in administration or liquidation, in which case they would be paid for the job they undertake—then I am satisfied.

Lord McIntosh of Haringey

My Lords, with the leave of the House, I am saying something much simpler here. I simply wish to state that the Bill does not seek to regulate the provision of advice. That applies whether or not the "authorised persons" are insolvency practitioners.

Baroness Buscombe

My Lords, I thank the Minister for that explanation. However, the principal point that I wish to make concerns the services people are able and qualified to offer as "authorised persons" rather than advice. If they can offer services, they can then charge a fee for supervising a particular course of action. It is on that point where differences he between us.

In any event, I shall read with care what the Minister has said and, on that basis, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 2 not moved.]

7 p.m.

Schedule 1 [Moratorium where directors propose voluntary arrangement]:

Lord Kingsland moved Amendment No 3: Page 12, line 16, after ("arrangement") insert ("(with or without modifications)").

The noble Lord said: My Lords, the noble Lord has already conceded that the Bill makes provision for the nominee to consider the proposed voluntary arrangement as amended by any modification notified to him by the directors. However, the noble Lord rejected proposals to notify amendments from other sources because of the unreasonable burden which would be placed on nominees to take into account other modifications.

Therefore, the position is that a nominee, in considering a proposed voluntary arrangement, can take into account any modification noted to him by the directors. However, he cannot take into account any other modifications. Accordingly, if the nominee finds the proposed voluntary arrangement acceptable, except in one or two minor respects, he must nevertheless reject it, even if he is convinced that one of the creditors will propose a modification which will subsequently be acceptable to and capable of approval by the meetings of members and creditors. In those circumstances, even though the nominee is entirely satisfied that the proposed voluntary arrangement has a reasonable prospect of being approved and implemented if a minor modification is considered by the members and creditors, a moratorium will still never come into existence.

In Committee, the Minister said that the directors might never be prepared to agree to further modifications, in which case the meetings would be unlikely to approve and implement the voluntary arrangement. However, it does not follow at all that, merely because the directors might not agree to further modifications, the meetings would be unlikely to approve and implement the voluntary arrangement. It is the meetings themselves which would propose the modifications. If they proposed them, they would be likely to approve and implement the voluntary arrangement as modified. I beg to move.

Lord McIntosh of Haringey

My Lords, I hope very much that we are not talking at cross-purposes here. As I said during our debates in Committee, we consider that nominees should look at the proposed individual or proposed company voluntary arrangement as he understands it will be put to the creditors and, if applicable, to the shareholders. As drafted, the Bill already makes provision for the nominee to consider the proposal as amended by any modification notified to him by the directors. We would not want him to consider it as it might conceivably be modified, either in his own mind or on the basis of one or more—possibly conflicting—proposed modifications by creditors.

As I understand them, the amendments could mean that we would encounter a situation where the nominee has to speculate on all conceivable permutations of possible modifications (proposed or not) and decide whether a voluntary arrangement is likely to be approved and implemented on the basis of those possibilities. The noble Lord, Lord Kingsland, suggested the position where a nominee might think that the proposed moratorium would have a reasonable chance of success—I am not using quite the right words in terms of the Bill. However, unless the directors were prepared to agree the modifications, they would not put them to the meeting and the moratorium would not come into being. In that case, the voluntary arrangement is unlikely to be approved and implemented.

We would not want the company to be able to obtain a moratorium, or for it to continue. In such circumstances it would be entirely inappropriate because no approved voluntary arrangement would be likely to ensue. The amendments would also place an unreasonable burden on the nominees. They should not be obliged to make decisions on the basis of conjecture. Nominees need certainty in these circumstances and that can be provided only if they are required to consider the proposal as the directors intend it to be put to the meetings.

We therefore consider it essential that the nominee is required to form a view only in relation to the voluntary arrangement proposal at the various points in time that he is actually considering it for one or other of the various purposes he is required so to do under the Bill, such as considering whether the proposed arrangement has a reasonable prospect of being approved and implemented prior to the directors obtaining a moratorium, or for the purposes of monitoring and considering whether he should withdraw his consent to act during the moratorium.

I should also say that the nominee would have to withdraw his consent to act if it became apparent to him that valid concerns about the proposal were being raised by creditors which the directors were not prepared to accommodate by way of modifications to their proposal and it appeared to him, in the light of those concerns, that the proposal no longer had a reasonable prospect of being approved or implemented.

As I said earlier, I hope that we are not talking at cross-purposes and that I have not completely misunderstood what the noble Lord, Lord Kingsland, has been saying. However, I think it is important to stress that the nominee should be required to consider only realistic proposals.

Lord Kingsland

My Lords, I am grateful to the Minister for his reply. The concern we are seeking to meet here is a situation in which the directors have proposed certain modifications which would not be acceptable to the creditors and the members. In those circumstances, the members and creditors might be able to suggest to the nominee certain solutions which the nominee could then put to the directors in order to achieve a proposal which would ultimately be acceptable. That is the issue that we are seeking to confront in our amendments.

I can see a look of astonishment passing across the face of the Minister. Perhaps he would like to articulate his response.

Lord McIntosh of Haringey

My Lords, I still remain a little puzzled here. If all that the noble Lord, Lord Kingsland, seeks to achieve with his amendments is to say that the nominee is a channel of communication between the creditors and the directors and that if a matter arises from the creditors that he should suggest to the directors, nothing in the Bill would create any difficulty in that capacity. The difficulty lies in the range of modifications proposed in the amendments.

Lord Kingsland

My Lords, the amendments seek to do formally what the Minister says there is no difficulty in doing informally. We believe that it is important that this opportunity for the members and creditors appears on the face of the Bill. The Minister does not agree—hence his opposition to the amendment. I beg leave to withdraw it.

Amendment, by leave, withdrawn.

[Amendment No. 4 not moved.]

Baroness Buscombe moved Amendment No. 5: Page 13, line 12, leave out ("either of those meetings") and insert ("the meeting of creditors").

The noble Baroness said: My Lords, in Committee we proposed the need for this amendment carefully, in terms which we felt were clearly understood by the Minister. The Minister appeared to be entirely happy with the idea of the moratorium coming to an end simply because the members of the company did not bother turning up to their meeting.

However, it is equally clear that the Minister was perhaps under the impression that the directors would all be members of the company; or, dare I say it, that all the members of the company were directors. He went on to say that the nominee could not continue with the moratorium or have any confidence that it had a reasonable prospect of success if the directors of the company had not had a meeting and responded. That possibly indicates a misapprehension of what a director is and what a member or shareholder is. The Minister will know that, quite often, directors are not members and that not all members are directors.

It may well be that all the directors are keen that the voluntary arrangements should be approved and implemented and that the moratorium should continue. Indeed, it is inherently likely that they will be, because the structure of the Bill involves their active participation. On the other hand, the company is insolvent and there is little or no prospect of any money going to the members of the company. They are unlikely to have any incentive to turn up to the meeting of members because there is nothing in it for them. It is worse than that; it may well be the case that the creditors and directors are extremely keen for the moratorium to continue and that the members appreciate that, if they do not turn up to the meeting, the moratorium will come to an end. An astute member will extract a price for turning up at the meeting. Is that what the Minister intends? If so, it seems to us that the procedure here is fundamentally flawed.

Again, I believe that the Minister's comments are based on a false premise. He said in Committee that if the extension of the moratorium was not agreed by the company, for whatever reason—either by it not having a meeting or not turning up to one—it should not be extended. He said it should not be continued on the opinion only of the creditors, because that would make no sense. He went on to say that the nominee could not continue with the moratorium or have any confidence that it had a reasonable prospect of success if the directors of the company had not had a meeting and responded. With respect, that premise is misconceived. Why on earth would it make no sense that the moratorium should not continue on the opinion only of the creditors? That statement is plainly wrong. One can test it by asking the question: should the moratorium come to an end merely because the members have no interest whatever in turning up?

As I said, the Minister seems to be confusing directors with members. The directors of the company do not have a meeting; it is the members of the company who have a meeting—and they may not be directors. The members are in a very different position from that of the directors and the creditors. When a company is insolvent, the members have no interest in the company. The directors may have an interest and the creditors may have an interest. Why should someone with no interest be able to prevent the creditors extending the moratorium when it is their sole interest to do so? That makes no sense. I beg to move.

7.15 p.m.

Lord McIntosh of Haringey

My Lords, I think I owe the noble Baroness an apology. I thought—and she has quoted my words in Committee—that what she sought to do was to disenfranchise the shareholders. I have thought again about what she said and have concluded that that was not her purpose. Indeed, she has confirmed that today—although it could be the effect of the amendment.

We can now see that the Bill as drafted could lead to a curious outcome. If the creditors' meeting met and decided to extend the moratorium and the company meeting met but decided not to, the result would be that the moratorium would be extended—that is, against the express wish of the shareholders (the members), unless, of course, the court ordered otherwise under paragraph 35.

But if, instead, the company meeting had not met, the result would be that the moratorium would come to an end. In other words, the creditors would not have their wish, even though no one had even turned up for the company meeting. That is clearly a perverse outcome. We shall therefore bring forward amendments to address the issue raised by the noble Baroness, taking into account, although not necessarily following, the arguments that she has used today. She has raised some new points which we shall have to consider. We shall not be able to do this in time for Third Reading, but we shall do it when the Bill goes to the House of Commons. I hope that on that basis the noble Baroness will feel able to withdraw the amendment.

Baroness Buscombe

My Lords, I thank the Minister for his apology. I am pleased to learn that he will be bringing forward amendments. I am sorry that our amendments do not fit the bill. On that basis, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Kingsland moved Amendment No. 6: Page 14, leave out line 19.

The noble Lord said: My Lords, we on this side of the House are still very troubled by the provisions in the Bill which will prevent a debenture holder from appointing an administrative receiver when entitled to do so. We debated this point at some length in Committee and, although the noble Lord, Lord McIntosh of Haringey, appeared to grasp thoroughly the points that I made, he indicated that the proposed amendments were not acceptable to the Government. However, I urge him to reconsider his position. I do not propose to repeat all the arguments—indeed, any of the arguments—that I made in Committee. The noble Lord understood them and rejected them. Therefore, I shall approach the issue in a different way.

The Bill, when enacted, will affect the rights of debenture holders even where the debenture has been granted before the Act comes into force. Existing rights will be changed without any agreement with the party prejudiced. All debenture holders will be deprived of the opportunity of appointing an administrative receiver as provided in the debenture when an authorised person says so. In other words, the Government are re-writing the bargain between the debenture holder and the company. In so doing they are depriving themselves of the services of an individual who can manage the company's business and sell it as a going concern. Businesses will be preserved, along with all the jobs necessary to run them. That is good for the economy and, therefore, good for the country.

In responding to my criticisms in Committee, the Minister was concerned that the appointment of an administrative receiver during the moratorium would almost certainly be disastrous for any rescue attempt. With great respect, I suggest that the noble Lord is mistaken. The appointment of an administrative receiver would not be disastrous for any rescue attempt. Indeed, the contrary is the case because administrative receivers are appointed with a view to receiving the company's assets and administering them in order to realise the company's assets and its business for the best possible price. The receiver's role usually involves preserving both the business and jobs. With the greatest possible respect, the Minister's approach is misconceived.

If the Bill as drafted is enacted, the decision of an insolvency practitioner will prevent a debenture holder appointing an administrative receiver who may preserve the business and jobs in seeking to realise a company's assets. Instead, the directors of the company, who quite freely accepted the debenture holder's money and may well be responsible for the company's poor trading, will be left in control until the moratorium comes to an end.

If past performance is any indication of future performance, the company's financial position will probably deteriorate further and the debenture holder will lose more money. He will still be able to appoint an administrative receiver but only after the moratorium has come to an end. It is quite possible that, in those circumstances, there will be little left for the administrative receiver either to administer or to receive. Debenture holders will therefore be severely prejudiced if these amendments tabled by the Opposition are not accepted. And for what benefit? To gain a short breathing space. The company will not be able to prevent the debenture holder subsequently appointing an administrative receiver. The benefit is insignificant in comparison to the prejudice.

The noble Lord the Minister did not express much concern for the rights of existing debenture holders. What about future debenture holders? They are plainly going to be deterred from lending money to companies which qualify for this new procedure. These are often small companies, and from small companies great businesses grow. Without these companies we would not be the economic power that we are today. We must encourage small companies and encourage debenture holders to lend money to them.

However, with these new procedures which prevent a debenture holder from appointing an administrative receiver when it is considered appropriate to do so, lenders will think very carefully about the terms of any loan and, in many instances, about whether to lend any money at all. A serious economic effect will flow from these new provisions. Small companies will find it harder to borrow money and that will inevitably have an effect on the future prosperity of this country. I beg to move.

Lord McIntosh of Haringey

My Lords, I am grateful to the noble Lord, Lord Kingsland, for not repeating what he said in Committee but I am going to have to repeat something of what I said then, because it is still true. These are wrecking amendments. I am serious: if they were carried there would be no point in our proceeding with the Bill at all.

The first two amendments would mean that there would be nothing to stop a floating charge holder—which is what the noble Lord, Lord Kingsland, calls a debenture holder—from appointing an administrative receiver during the moratorium. In our view, the appointment of an administrative receiver would probably be disastrous for any rescue attempt, as in most cases—and the noble Lord, Lord Kingsland, recognised this—it is likely that the receiver would assume control of all the company's assets. He would then proceed to dispose of them with a view to repaying the moneys due to the floating charge holder. The primary purpose of receivership is to recover the money for the charge holder and not to achieve a rescue.

Of course we accept that receivership can result in rescues, but it is not usually the company which is rescued. The directors lose control and the whole purpose of the moratorium that we are looking to is not the replacement of an administrative receivership—that can still carry on—but an alternative to administrative receivership for a very short period, initially 28 days, in which the directors retain control and it is thought there is a possibility of preserving the company. So administrative receivership during a moratorium simply kills the moratorium and makes it impossible to sustain.

The third amendment would mean that during a moratorium a floating charge could crystallise or restrictions could be imposed on the disposal of the company's assets. Either way, that would result in virtual paralysis for the company and it would make any rescue attempt very difficult, if not impossible, to achieve.

We simply do not see any reason why a floating charge holder should be the only creditor whose action should not be stayed by the moratorium. If we are serious about giving the directors the necessary short breathing space to put in place a rescue plan for all their company's creditors, these amendments must be rejected. If not, we would be legislating for a dead letter.

The noble Lord, Lord Kingsland, made much of the floating charge holder's ability effectively to veto an administration order, but if he looks back at the history he will see that the Court Committee, whose review of insolvency law preceded the Insolvency Act 1985, recognised that the process of receivership could rescue businesses. However, it also saw that possible business rescues were lost when there was no floating charge holder to appoint a receiver to effect the rescue.

So the Government then brought into place the administration procedure, but left in place the right to appoint a receiver wherever possible. Recent research has shown that in some 50 per cent of administrations a floating charge was in existence; yet the administration was agreed to, or not vetoed, by the floating charge holder. That suggests that what in the past appeared to he an automatic preference of secured creditors for an administrative receivership over administration has diminished.

What we must not lose sight of is that both these procedures, while offering the potential for a rescue of the business, means that the directors lose control and the company itself is rarely saved. As a consequence, directors may be reluctant to let their company enter either procedure. The prospect of being able to remain in control of a company while a rescue goes ahead, we think, will mean that directors are more willing to attempt a rescue, and perhaps at an earlier stage. And of course the earlier a rescue is attempted, the more likely it is to succeed.

We think that there are enough safeguards in place to protect the position of a floating charge holder during the moratorium. After all, his existing rights are not being changed; they are only being stayed for the rather short period of the moratorium itself. We have provided that the company is only able to obtain a moratorium if the nominee is of the view, among other things, that the directors' proposal for a voluntary arrangement has a reasonable prospect of being approved and implemented.

Any company which obtains a moratorium should stand a reasonable prospect of being able to agree and implement a rescue plan with its creditors. In any case the moratorium is only initially for a maximum period of 28 days, which is a much shorter period than most administrations. We intend to allow secured creditors, including the floating charge holder, to vote for the full amount of the claims on any proposal for an extension of the moratorium beyond the initial period and so they will be able to have a say on whether or not the moratorium should be extended by up to a further two months.

I would say that if any creditor—that includes a creditor who holds a floating charge—felt that a rescue by moratorium would not work for some reason, it would be open to him to express his concern to the nominee. The purpose of that would be to persuade the nominee that he must withdraw his consent to act and bring the moratorium to an end. A floating charge holder may perhaps make it plain that he fully intends to appoint an administrative receiver the moment the moratorium comes to an end. That act itself may have an impact on the viability of the voluntary arrangement, which may in turn cause the nominee to conclude that he should withdraw his consent to act. That would end the moratorium.

We would expect any floating charge holder who viewed a moratorium as pointless, because he fully intends to appoint an administrative receiver, to approach the nominee to make that point and because of the floating charge holder's potential ability to wreck the implementation of an approved voluntary arrangement it may well be that the nominee will feel the need to approach the charge holders at an early stage to sound out their views on a proposed rescue attempt.

So plenty of defences for floating charge holders are provided in the Bill, but to allow them to appoint an administrative receiver during the moratorium period would simply mean that the moratorium could not work, and the Bill would have no point.

Lord Kingsland

My Lords, I am shocked by the Minister's suggestion that this is a wrecking amendment. It is nothing of the kind. As the noble Lord well recalls, at Committee stage I carefully explained why the Opposition believed that a debenture holder was a proper exception to the general rule as to the options available to creditors during a moratorium. I accept that there is a clear difference of approach between us. I shall reflect carefully upon this matter between now and Third Reading before deciding whether it is appropriate to re-table this amendment and perhaps press it to a vote. Meanwhile, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 7 and 8 not moved.]

7.30 p.m.

Lord Kingsland moved Amendment No. 9: Page 15, leave out lines 23 to 25 and insert— ("14.—(1) Any security granted by the company at a time when a moratorium is in force in relation to the company is invalid except for the extent of the aggregate of—

  1. (a) the amount of any money paid, or the value of goods or services supplied, to the company at the same time as, or after, the security is granted and which is, and is intended to be, secured by the security, and
  2. (b) the amount of such interest (if any) as is payable on the amount falling within paragraph (a) in pursuance of any agreement under which the money was so paid or the goods or services were so supplied.
(2) For the purposes of sub-paragraph (1)(a) the value of any goods or services supplied is the amount in money which at the time they were supplied could reasonably have been expected to be obtained for supplying the goods or services in the ordinary course of business and on the same terms (apart from the consideration) as those on which they were supplied to the company.").

The noble Lord said: My Lords, in Committee the Minister made it clear that the intended effect of what is now paragraph 14 of Schedule A1 was to place the onus on the creditor to satisfy himself, before taking security, that he would be able to enforce it if it became necessary to do so. That was to ensure that no one would lend on the basis of security unless there was a clear benefit to the company. Implicit in that statement was that the onus was on the creditor to satisfy himself that the security would benefit the company.

The Opposition still believe that this approach is unacceptable. It is not for a creditor to satisfy himself that security is for the benefit of the debtor. Why should the creditor concern himself with the benefit to the debtor when there is a nominee acting who should be as experienced and knowledgeable in moratoria as a licensed insolvency practitioner? In the case of a company, there are directors whose duty it is to ensure that that is the case. It is not clear what duties the nominee will perform during the moratorium; but if it is thought that the directors are incapable of ensuring that their acts are for the benefit of the company, surely that would be a useful task for the nominee. To give that task to the creditor who will act in his own best interests is quite wrong. The creditor is the last candidate for this task; indeed, his interests are in direct conflict with it.

We are also puzzled as to what the creditor must do to discharge this onus. Simply to ask the directors is not sufficient. If he is told a pack of lies by the directors his security may be unenforceable. Any creditor must, therefore, go further and make independent inquiries to ensure that the security is for the benefit of the company. I remind the Minister that, in response to another amendment tabled at Committee stage, he said that a nominee should be entitled to rely on information given to him by the directors and not be obliged to establish or verify the information for himself because of the cost of so doing. If a nominee is entitled to rely on information given to him by the directors, why should a lender not be entitled to rely on such information but, instead, be put to the expense of making independent inquiries to make certain that the security is for the benefit of the company?

The cost of any investigation may be prohibitive. If that cost is recoverable from the company, as it inevitably will be, almost certainly it will mean that the security is not for the benefit of the company. The cost will be prohibitive, particularly when the company is in financial difficulties. Instead, any potential lender will simply not bother to lend money. It will be difficult enough for a company in financial difficulties to borrow money; but to impose this extra burden will deter all but the most foolhardy lenders. The inevitable result is that it will prove to be extremely difficult to fund the continued trading of the company.

Instead, the Opposition propose a provision based in part on Section 245 of the Insolvency Act 1986. That section is workable in practice. The enforceability of any security will be a simple matter of mathematics that is easily within the capability of the new type of insolvency practitioner envisaged elsewhere in the Bill. The company, its directors, the nominee and the creditor can all see at once the extent to which the security is enforceable. As your Lordship would expect, the amendment is simple, straightforward and workable and is based on a previous provision in the legislation which has stood the test of time. I beg to move.

Lord McIntosh of Haringey

My Lords, perhaps the most significant facet of this amendment is not what it inserts into the Bill but what it removes from it. The amendment deletes paragraph 14 of Schedule A1. The key point about that provision is that, Security granted by a company at a time when a moratorium is in force … may only be enforced if, at that time, there were reasonable grounds for believing that it would benefit the company". That benefit test is removed by the amendment and is not replaced by the proposed wording.

We do not believe that this will happen in most cases because before entering the moratorium the nominee must give his opinion that the company is likely to have sufficient funds to enable it to carry on its business during the moratorium. However, it is possible that to secure future essential supplies during the moratorium the giving of security for an existing debt is necessary. This would not be covered by the amendment, but it would be for the benefit of the company.

The amendment would also not ensure that the security could be enforceable only if there were reasonable grounds for believing at the time the security was taken that it would benefit the company. The position of the company's other creditors should not be prejudiced by the company giving new security over its assets to a supplier of new credit where no benefit will flow, as it is likely to reduce the amount of money available for all of them. If that was not the case the company's "free" assets which would otherwise be available to pay its unsecured creditors might be depleted to no advantage. That is why we have provided that security can be enforced only if when it was granted there were reasonable grounds for believing that it would benefit the company.

We appreciate that this throws the onus onto the creditor to satisfy himself, before taking security, that he will be able to enforce it if it is necessary to do so—we understand the thrust of the noble Lord's speech—but this should ensure the desired effect, as no one is likely to lend on the basis of security unless there is a clear benefit to the company. This is a matter of business judgment. Decisions of this kind are taken all the time in business. Creditors must act as business people, and that is what they are being asked to do here.

We can see how the amendment may enable the company to obtain funding during a moratorium, but in certain circumstances we do not consider that what is proposed is appropriate for the reasons already given. We believe it is vital that security should be enforceable only where a benefit will flow to the company. We remain of the view that we need to consult fully on the issue of funding before we can find an effective solution to this complex and difficult problem. Where security is unenforceable the lender will be an unsecured creditor. We cannot accept this amendment.

Lord Kingsland

My Lords, I am most grateful to the Minister for his full reply, upon which I shall reflect carefully before Third Reading. If these particular provisions in the Bill are to be effective this is an important matter to consider. Meanwhile, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Baroness Buscombe moved Amendment No. 10: Page 16, line 35, at end insert— ("(4) A disposal of the company's property to any person other than a person who is connected with the company shall not be avoided only on the ground that sub-paragraph (1) was not satisfied.").

The noble Baroness said: My Lords, in Committee we proposed a similar amendment with slightly different wording which brought rare praise from the Minister. However, that praise was qualified by one or two criticisms. We have considered those criticisms with care, and the result is an amendment with slightly different wording which we believe should now merit unqualified praise from the Minister. We were concerned that it was not clear whether a disposal by the company would be avoided if it should turn out that the grounds for believing the disposal would benefit the company were not reasonable. The Minister agreed that the position was doubtful and should be clarified.

This amendment makes it clear that such a disposal will not be avoided, nor will there be any cause of action against the other party, if it should turn out that the grounds for believing the disposal would benefit the company were not reasonable or if a disposal was made not in the ordinary way of the company's business. Those are matters which are best decided upon by the directors and the nominee, if he is to have any duties, rather than the third party dealing with the company, who may not have sufficient knowledge to form any view about those two matters. We hope that the amendment will meet with the Minister's approval. I beg to move.

7.45 p.m.

Lord McIntosh of Haringey

The noble Baroness is right. We recognised that similar amendments proposed in Committee had a valid point. We can see that it would be damaging to rescue attempts if third parties were reluctant to deal with a company which is in a moratorium because of doubts about whether the contracts would be enforceable against the company. We agree that this issue must be addressed in the Bill. However, I am sorry to say that the amendment does not fully achieve what is required.

The amendment would still leave a third party needing to satisfy himself as to whether the proposed transaction is in the ordinary course of the company's business; and, if not, whether the appropriate consent has been obtained from the nominee or committee under paragraph 18(1)(b). These difficulties may still make third parties wary of dealing with the company. In my view, this proposed amendment would not fully deal with the issue which concerns us all regarding the effect of paragraph 18 on third parties. However, we shall bring forward amendments as soon as we can—I am afraid that again that means in the Commons and not at Third Reading—to make it clear that contracts entered into in breach of paragraph 18 will be enforceable by third parties against the company.

While on the subject of proposed government amendments, I should like to say what else will or may be needed by way of amendment to the Bill during its passage through Parliament. A number of points arose at Second Reading or in Committee. Both the noble Lords, Lord Razzall and Lord Sharman, expressed concern about the possible effect of Clause 11 which relates to deceased insolvents. As I indicated in Committee, we recognise those concerns and will be bringing forward amendments to address them. We would not want an arm's length disposal of a property by a surviving partner to be made unnecessarily difficult because prospective purchasers are concerned that they might find they do not have good title because a deceased's estate is insolvent.

The noble Lord, Lord Kingsland, made the point in Committee that he thought there should be a time limit on the ability of the member of a company to go to the court if the decision of a creditors' meeting which takes effect under paragraph 35 of Schedule Al differs from that made by the company meeting. We think that the issue will be largely self-regulating. However, we can see that there is an advantage in having a cut-off point beyond which such applications cannot be made and we shall amend the Bill for that purpose.

We have also concluded that the offence in paragraph 22 of Schedule Al (disposal of charged property contrary to paragraph 20) needs amendment to set out in clearer terms that the offence in paragraph 22 is committed where a company makes a disposal which it has no power to make, and so we shall bring forward an amendment to do that.

The current legislation governing companies and the financial markets provides for authorities to take regulatory action, for instance to protect investors' funds and investigate companies. It is possible that in certain instances the moratorium would prevent such action unless leave of the court was obtained first. Clearly that would be inappropriate. We are considering this further and, if this is the case, we shall bring forward amendments to make it clear that such action is not to be stayed by the moratorium provided in Schedule Al.

There have been many changes and concessions. We have also concluded that the conflict between Section 347 and Section 252(2)(b) of the Insolvency Act in the way we intend it to be amended by way of Schedule 3 paragraph 2 of the Bill needs to be dealt with by express provision in the Bill. We shall bring forward an amendment to deal with that.

The period of consultation on whether landlords should be able to exercise the right of peaceable reentry during a statutory moratorium has literally just finished and clearly we must consider the responses before we do anything. But we intend that the issue will be determined in the context of the passage of this Bill through Parliament.

Finally, following the successful passage of the Financial Services and Markets Act through Parliament, we shall need to consider whether that has any implications for this Bill. I hope that the noble Baroness, Lady Buscombe, will not pursue her amendment.

Baroness Buscombe

My Lords, I thank the Minister for his response. I am sorry that he does not find it acceptable in its current form. However, I am pleased to note that the Government intend to bring forward during the Bill's passage through Parliament a similar, although slightly different, amendment.

I am also pleased that the Minister has been able to tell us of a number of additional changes and concessions. We note that there has been consultation in relation to forfeiture of leases. We look forward to hearing the results of that consultation process.

I thank the Minister. I am glad that we have made progress. On that basis, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 11 to 14 not moved.]

Lord Kingsland moved Amendment No. 15: Page 23, leave out line 10 and insert— ("(ii) could have been so entitled (but was not present or represented at it) but did not have notice of it.").

The noble Lord said: My Lords, in Committee we were concerned about what is now paragraph 36 of the new Schedule Al which deals with the effect of the approval of a voluntary arrangement. Sub-paragraph (2) provides that a voluntary arrangement binds those who are entitled to vote at the creditors' meetings and those who would have been so entitled if they had had notice of it. I made the point that a creditor would still be entitled to vote at a creditors' meeting even if he had not had notice of it. Sub-paragraph (2)(b)(ii) has no effect because no creditor would have been entitled to vote if he had had notice of the creditors' meeting. Notice is irrelevant for the purposes of entitlement to vote.

The Minister took me somewhat to task and referred me to Rule 1.17, which provides that every creditor who was given notice of the creditors' meeting is entitled to vote at that meeting. That rule does not say that a creditor who was not given notice of the creditors' meeting is not entitled to vote at that meeting. Indeed a creditor who was not given notice of the creditors' meeting is entitled to vote at that meeting, and I refer the Minister to the case of Re Debtors. The noble Lord's criticism of my comments is, therefore, if I may say so with all due respect, misconceived. I assert that my original comments stand. I beg to move.

Lord McIntosh of Haringey

My Lords, I hope that I can give the noble Lord some comfort, although not in the context of this Bill but of the insolvency rules.

The noble Lord's amendments still have the unfortunate effect of an unknown creditor—one who had not had notice of the meeting to consider the voluntary arrangement proposal—being bound by the arrangement when he should not be. We want a voluntary arrangement to bind only those who would have been entitled to vote at a meeting if they had had notice of it. We do not want a creditor who could have been entitled to vote to be bound by a voluntary arrangement in the event that he would not have been so entitled had he been present at the meeting and the chairman had determined his vote.

We intend to make provision in the insolvency rules to define the circumstances in which an unknown creditor would have been entitled to vote at the creditors' meeting if he had had notice of it. I believe that that is the crux of the point addressed by the noble Lord, Lord Kingsland. That will make it possible to say with certainty whether an unknown creditor would have been entitled to vote and therefore whether or not he is bound by the arrangement.

Without such a provision, those concerned would be left trying to second guess how the chairman of the meeting would have dealt with the claim of an unknown creditor under Rule 1.17 if he had had that claim before him at the time of the meeting. That would be an unsatisfactory state of affairs. Therefore, we propose to amend the Insolvency Rules 1986 to make clear the circumstances in which an unknown creditor would have been entitled to vote at the creditors' meeting if he had received notice of it.

In relation to company voluntary arrangements in England and Wales, Rule 1.17(3) of the insolvency rules currently provides that: A creditor shall not vote in respect of a debt for an unliquidated amount, or any debt whose value is not ascertained, except where the chairman agrees to put upon the debt an estimated minimum value for the purpose of entitlement to vote". Such a creditor whose debt is unliquidated or not ascertained could therefore be entitled to vote, but only if the chairman of the meeting first agreed to put a value on the debt. Where he did not do so, that creditor would not be able to vote and would not be bound by the voluntary agreement.

In addition, any creditor can appeal to the court under Rule 1.17(5) in relation to the chairman's decision on a creditor's entitlement to vote. Where the chairman has allowed or refused a creditor the right to vote, that decision could be reversed by the court. That, too, introduces an element of doubt in that it may transpire that some creditors who possibly would be allowed to vote in the event cannot in fact do so. The point is that a creditor with a claim could vote if the chairman of the meeting agreed but would not be able to vote if the chairman did not agree the claim. We consider that only those who would be entitled to vote should be bound by a voluntary arrangement; hence, the proposed change to the rules.

We do not believe that the proposed amendments would address this issue and they could mean that an unknown creditor would be bound by a voluntary arrangement when he would not have been entitled to vote. I do not know whether the noble Lord ever studied symbolic logic as part of philosophy, but this is one of the most severe tests of syllogistic thinking to which I have ever been subjected. I am not certain that I have passed the test, but I believe that fundamentally the amendments are misconceived. However, we do have a solution for the problem which lies behind the amendments.

Lord Kingsland

My Lords, I found the Minister's reply both courteous and comprehensive. I should like time to reflect on whether or not I am pleased with what he said. Meanwhile, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 16 and 17 not moved.]

Baroness Buscombe moved Amendment No. 18: Page 26, line 36, leave out ("(c), (d) and (e)") and insert ("(a) to (f)").

The noble Baroness said: My Lords, paragraph 40 of Schedule 1 does not prevent an officer of a company or a debtor being privy to another person concealing, fraudulently removing or pawning any of the company's or the debtor's property. When we moved this amendment in Grand Committee, the Minister justified the paragraph by relying on its long history dating back to the Debtors Act 1869. With great respect, we feel that that is not good enough.

The provisions of the Bill give a company or a debtor the right to obtain a moratorium on the say-so of a mere authorised person. During that moratorium, all the rights of all the creditors are suspended and the directors have an almost entirely free hand as to their conduct of the company's business. The nominee has no real duties to perform and will be totally powerless to prevent anyone concealing, fraudulently removing or pawning any of the company's or the debtor's property.

That was not the position when the Debtors Act 1869 was enacted. It was not the position when the Bankruptcy Act 1914 was enacted. It was not the position when the Companies Act 1929 was enacted. It was also not the position when the Companies Act 1948 was enacted and it was not the position when the Companies Act 1985 was enacted. It will be the position if this Bill is enacted.

The company's or the debtor's property will be totally unprotected. The creditors will be powerless. They will have to rely on the directors or the debtor to ensure that no one can conceal, fraudulently remove or pawn any of the company's or the debtor's property. If the directors or the debtor are privy to anyone doing that, it must be clear that they run the risk of being prosecuted. There is no other protection. I beg to move.

Lord McIntosh of Haringey

My Lords, I congratulate the noble Baroness, Lady Buscombe, on climbing painfully up the reverse history tree which I gave to her in Committee. She found her way back from 1869 to 1985 with consummate skill. However, I believe that she is exaggerating the risks which are involved in the Bill as it is at present proposed.

As currently drafted, among other things, subparagraph (3) provides that during a moratorium an officer of the company is guilty of an offence if he was privy to another doing any of the following: concealing, destroying, mutilating or falsifying any book or paper affecting to relate to the company's property or affairs; making a false entry in any book or paper affecting or relating to the company's property or affairs; or fraudulently parting with, altering or making an omission in any document relating to the company's affairs. The amendment would add to the list of offences: concealing a part of the company's property to the value of £500 or more; fraudulently removing any part of the company's property; or pawning, pledging or disposing of the property.

All the above apply now and have applied throughout the complicated history of these provisions. None of the other sections provides for an officer or a debtor to be guilty of an offence if they are privy to another concealing, fraudulently removing or pawning any of the company's or debtor's property. This does not present a difficulty because existing legislation allows for the prosecution of directors who are privy to others dealing with the company's property in a way which causes an offence under Section 206 and paragraph 40 of Schedule A1. Officers might be prosecuted under, for example, the Accessories and Abetters Act 1861 in England and Wales and under equivalent laws in Scotland.

I believe that our difficulty comes hack to the issue which did not convince the noble Baroness, Lady Buscombe. I said in Committee—and this is a real concern—that if the paragraph was to be amended as proposed, it could cast doubt on the meaning of the existing provisions on which it was modelled and also on the use of other legislation to prosecute those officers who are privy to offences by others in relation to company assets. That is why we cannot accept the amendment.

Baroness Buscombe

My Lords, I have listened with care to what the Minister has said and I am sorry that he cannot accept the amendment. I believe that there clearly remains a difference of opinion in relation to the interpretation of the Bill. We believe that the nominee has no real duties to perform and, as I have already said, will be totally powerless to prevent anyone concealing, fraudulently removing or pawning any of the company's or the debtor's property.

We feel that the position is different from those Acts which I mentioned. I believe that we should consider with care the Minister's response. However, this is something about which we feel quite strongly and therefore we may be pressed to divide upon it at Third Reading. On that basis, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

8 p.m.

Baroness Buscombe moved Amendment No. 19: Page 26, line 39, leave out ("to the value of £500 or more").

The noble Baroness said: My Lords, I shall speak also to Amendments Nos. 20, 21 and 22. The same arguments apply to these amendments as applied to the previous amendments to which I have just spoken. I entirely accept, as the Minister said in Grand Committee, that there have been minimum limits at least since the Bankruptcy Act 1914. Those minimum limits may have been appropriate in the past, when an independent insolvency practitioner had been appointed and the directors were no longer running the company, but they will not be appropriate if the Bill is enacted in its present form.

There will be no licensed insolvency practitioner managing the company. The directors will be managing the company and all the rights of the creditors will be suspended. In those circumstances, the previous financial limits are unacceptable. Surely it must be a criminal offence for an officer of the company to conceal any part of the company's property, conceal any debt due to or from the company or remove fraudulently any part of the company's property during the moratorium, regardless of value. I beg to move.

Lord McIntosh of Haringey

My Lords, I do not have much to add to what I said in Committee. The provisions have existed in legislation since the Bankruptcy Act 1914, when the figure involved was £10. I said in Committee that if it ain't broke, don't fix it. The response of the noble Baroness, Lady Buscombe, was that it is broke, but she has not shown us how. I have not heard any evidence that this provision—which already exists and is not being introduced for the first time by the Bill—has caused any of the difficulties that she fears since it was first enacted.

If the £500 minimum is a problem and we find that we cannot prosecute individuals in cases when we think that we should, we shall review it. Schedule 1(10) gives the Secretary of State the power to do that. We would have no hesitation in reviewing the level if we thought that it would be appropriate to do so. However, experience in relation to Sections 206 and 354 suggests that £500 is the right cut-off and it seems reasonable to assume that it will be appropriate in this case.

On Amendment No. 22, the removal of the power to amend or repeal the provisions of the Insolvency Act 1986 could frustrate the ability to extend the scope of the moratorium to different categories of company, such as large companies or banks. We might wish to amend Schedule Al to allow the use of the new regime by large companies, but if we did that we might also wish to amend the Act to extend the period of the moratorium for large companies only. Without this provision, we would be unable to do that. As a consequence, we would be faced with the prospect of either keeping the moratorium short, which could restrict the ability of large companies to use it, or lengthening the period for all companies when we would not want smaller companies to have such a long moratorium. Neither outcome would be desirable, so I oppose Amendment No. 22 as well.

Baroness Buscombe

My Lords, I thank the Minister for his response. In summing up, I shall repeat what I have already said. The minimum limits may have been appropriate in the past—although not entirely moral from a criminal standpoint—because in the past an independent insolvency practitioner would have been appointed and the directors would no longer be running the company. However, those limits will not be appropriate if the Bill is enacted in its present form, because there will be no licensed insolvency practitioner running the company. The directors will be managing the company and all the rights of the creditors will be suspended. Also, as I think that I said in Grand Committee, theft is theft, whatever the price and we have an opportunity to change the law.

We have pressed the point. I shall read the Minister's response with great care. We feel strongly on this point from a moral standpoint and because we feel that the Bill has changed the circumstances, so we may feel pressed to move the amendment on Third Reading. On that basis, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 20 to 22 not moved.]

Schedule 2 [Company voluntary arrangements]:

[Amendments Nos. 23 to 29 not moved.]

Schedule 3 [Individual voluntary arrangements]:

[Amendments Nos. 30 to 37 not moved.]