COMMONS AMENDMENT (Hansard, 29 November 2000)

§ Lord McIntosh of Haringey
My Lords, I beg to move that the House do agree with the Commons in their Amendment No. 2. In moving this amendment I should like to speak also to Amendment No. 3. These amendments effectively introduce a completely new Clause 11. This arises because, if the clause had remained unamended, what would have been new subsection (5) of Section 421 of the Insolvency Act 1986 could have had an unfortunate and unintended effect. There was a risk that it could have prejudiced the marketability of property where on, and as a result of, his death the deceased person's interest in jointly-owned property had passed to the survivor, irrespective of whether he was solvent or insolvent. It was that particular point which was raised by noble Lords opposite, notably by the noble Lords, Lord Sharman and Lord Razzall. I note, however, that the noble Baroness, Lady Buscombe, was also concerned about this matter.
In Grand Committee the noble Lord, Lord Sharman, said: It is necessary that there should be no retrospective effect on any third party who might have acquired property in good faith".—[Official Report, 15/6/00, col. CWH 56.] 1346 I responded at col. CWH 57: We understand the concern of the noble Lord, Lord Sharman, which he also raised at Second Reading. We agree that left as it is, this clause could prejudice the marketability of property where the deceased's interest in jointly-owned property has passed to the survivor on death, irrespective of whether the deceased is solvent or not. We would not wish an arm's length disposal of a property by a surviving partner to be made unnecessarily difficult because prospective purchasers were concerned that they might find they did not have good title if the deceased's estate became insolvent". These two amendments address just that point. In doing so, they will also ensure that the value of any interest in jointly-owned property, lost by the operation of the survivorship rules, is recoverable for the benefit of the insolvent estate and, therefore, for the creditors of the deceased insolvent.
Clause 11, as amended by Amendment No. 3, which is the substantive amendment in this group, will enable the trustee of the insolvent estate to make application to the court for a monetary order against the survivor in such cases. The order would be for a sum to cover the debts and other liabilities of the deceased insolvent's estate. This sum could be smaller than the value of the former joint interest, but could not be greater. That approach would avoid the difficulties of the original clause which would have had the effect of treating the deceased insolvent as if he had been adjudged bankrupt on the day before he died and, by that route, making his interest in jointly-owned property part of his estate. Not only would that have overridden survivorship rules, but it would have taken effect without regard to the position of other joint-owners or any subsequent purchasers.
Clause 11, as amended, will address the consequences of the decision of the Court of Appeal in Re Palmer (deceased) in a balanced and measured way which will allow the courts to have regard to all the competing interests in such cases. Although we have adopted a different way to achieve that aim, it will mean, so far as is reasonably possible, that the creditors of an insolvent will not be in a significantly worse position in a case where he has died than if he were living. I urge noble Lords to accept the amendments. I shall say something about Amendment No. 3A when it has been moved.
Moved, That the House do agree with the Commons in their Amendment No. 2.—(Lord McIntosh of Haringey.)

§ Lord Kingsland
My Lords, as our amendment is part of this group I should like to speak to it at this stage. The Minister explained that new Clause 11 will apply if an insolvent person dies in circumstances where, immediately before his death, he was a joint tenant. As your Lordships are aware, on the death of a joint tenant his interest automatically vests in the other joint tenant and does not become part of the deceased's estate. In particular, it is frequently the case that husband and wife are joint tenants of the matrimonial home; so, on the death of the husband, his interest passes automatically to his widow.
The new provision does not prevent that happening but imposes a liability on the surviving spouse to pay to the deceased's creditors an amount up to the value 1347 of the deceased's previous interest in the property. In principle, that seems to be right. However, Clause 11 has been given retrospective effect. For example, it will apply to widows whose husbands have died insolvent before the new measure comes into force. That is bound to affect, adversely, many widows who have already organised their financial affairs in the knowledge that, at that time, they had at their disposal a certain sum of money.
That problem has not only troubled your Lordships but Members of another place. Until Third Reading in another place, we thought it was agreed that the clause would not have a retrospective effect. We were reinforced in that view by paragraph 20 of the Government's response to the report of the Trade and Industry Select Committee, which stated that it would be made clear that provisions would not have a retrospective effect. Yet the new clause now states that, unless the circumstances are exceptional, the court must assume that the interests of the deceased's creditors outweigh all other considerations.
But, for most widows the circumstances will not be exceptional. Indeed, their circumstances will normally be commonplace and what one would expect after a husband died insolvent. The automatic assumption in subsection (3) will apply. The widow will have to pay a substantial sum for the benefit of the creditors.
There is a further objection to be found in the same section which provides that it only applies if the petition for the order was presented after the commencement of the section. That seems to us to be very odd—because the benefits of the section will be denied to the diligent creditor who obtains an insolvency administration order as soon as he can but before the commencement of the section, but will not apply to the idle creditor who does not apply for such an order until after the commencement of the section. Where is the sense in that? Why should the indolent be treated better than the vigilant?
Therefore, we believe that the new section is fundamentally flawed. I make no apology whatever for pressing the amendment at this late stage. The noble Lords, Lord Sharman and Lord Razzall, both expressed their concerns as regards the retrospective effect of Clause 11 at Second Reading. Moreover, in another place, the amendment did not appear until the end of October, leaving little or no time for the serious defects in its drafting to be corrected.

§ Lord Sharman
My Lords, Amendment No. 3 responds to a number of issues raised by my noble friend Lord Razzall and myself during the passage of the Bill. There is an element of retrospection included in the clause as it stands, which the amendment proposed by the noble Lord seeks to address. However, that element of retrospection is at the margin. Therefore, I cannot support the amendment proposed by the noble Lord.
1348 I thank the Minister for bringing forward these amendments in another place.

§ Lord McIntosh of Haringey
My Lords, on behalf of my right honourable and honourable friends, I am grateful. The House of Commons started to debate the matter at the end of October. It was debated both in Committee and on Report. It would be desirable if a Bill is perfect when it comes before Parliament. But that is not the case. Doubts and worries were expressed in this House. They were given effect to by amendments in another place. We are rather pleased with ourselves about those kinds of matters.
I know that the noble Lord, Lord Kingsland, thinks that the provision should apply only when a person dies after the new section has come into force. But we listened to the responses of those who were consulted on the draft clauses and to the concerns expressed in this House.
Both on Second Reading and in Grand Committee, the point put to me was that the clause could prejudice the marketability of property because it revested the deceased insolvent's interest in former jointly owned property in his estate. As was correctly pointed out, that could have left those who wanted or needed to deal with such a property in some difficulty. There might be problems about giving good title. That is why Amendments Nos. 2 and 3 were made in the other place. As a consequence, the revised clause does not act to revest the property and does not have that retrospective effect.
The noble Lord, Lord Kingsland, said that the clause imposes a liability on the survivor. The clause does not impose a liability. Where an insolvency administration order is made it allows the trustee to seek an order for a monetary sum. Only if such a monetary order is made will a liability be imposed. I would also point out that I did say quite clearly in Grand Committee that we intended the provision to apply to any case where the petition for the bankruptcy was presented after the new clause came into effect. The provision will not apply to what I shall call the "bankruptcy" of a deceased insolvent if the bankruptcy was started before the new provision comes into force. That is a very important condition.
The clause, as amended, makes it clear that it will apply only to those bankruptcies which are started after the new clause has come into effect. The existing law will continue to apply in cases which are started before the new provision comes into effect. We said in response to the Commons Trade and Industry Select Committee that the provision did not have a retrospective effect. But the provision we were talking about was the original Clause 11 rather than the new Clause 11 which has replaced it.
The new provision will allow the value lost to the estate as a result of the operation of the survivorship rules to be recovered by way of a monetary order. That is subject to an important limitation. Only as much as is needed to pay off the creditors and the costs of the proceedings can be recovered. A deceased insolvent's estate may contain other assets which can and should 1349 be applied to that purpose before interfering with the operation of survivorship rules. We believe that this amendment adopts the right approach. I repeat that the revised clause makes it clear whether the new provision will apply to a bankruptcy or not before that bankruptcy starts.
We have to look at the issue in practical terms. Those who suggest that the clause should not apply unless the debtor dies after it has come into effect are not paying sufficient attention to the position of the creditors. The position of the survivor appears to have been considered, but it is assumed in every case that the interests of the survivor should be paramount. We believe that a balance needs to be struck.
Let me give an example. Before his death a person may have had a substantial amount of building work on, say, the jointly owned matrimonial home. But he dies before paying the builder or at least leaving a hefty balance outstanding. Under survivorship rules, the deceased's interest in the property passes to his survivor. The builder has effectively contributed to the value of the property, but nothing may remain to pay him as the law stands. The likelihood is that the builder advanced the credit because he thought the debtor was creditworthy on account of his interest in the property. The consequence for the builder may be his own insolvency, with all that that means for him, his family, his employees and his creditors. His failure may even cause others to fail. That is one example of how a creditor might be affected. But I am sure the noble Lord. Lord Kingsland, with his fertile imagination, can think of many more. Surely we have the balance right: that the limited degree of retrospectivity provided for under these new provisions and Clause 11 as rewritten is the best way to approach the matter.

§ Lord Kingsland
My Lords, before the noble Lord sits down, he referred to the question of balance. In looking at the proposed new Section 421A(3), if the subsection stopped at the semi-colon I would wholeheartedly agree with the noble Lord's analysis of the balanced approach of the Bill. However, after the semi-colon there is the following expression: but, unless the circumstances are exceptional, the court must assume that the interests of the deceased's creditors outweigh all other considerations". That vastly skews, in a way which is wholly unfair to the survivor, the balance to which the noble Lord referred.

§ Lord McIntosh of Haringey
My Lords, it does skew the balance but in the end it is left to the courts to decide on a case-by-case basis. That is surely the right way for these matters to be dealt with. We have provided for a balance. We have provided for an assumption which makes it easier for the courts to consider the matter. But, in the end, we have provided through the exceptional cases provision that the courts can make a decision which is fair in the circumstances of an individual case.
On Question, Motion agreed to.