HL Deb 24 July 2002 vol 638 cc508-10

11.16 p.m.

Lord McIntosh of Haringey rose to move, That the draft regulations laid before the House on 26th June be approved [34th Report from the Joint Committee].

The noble Lord said: My Lords, the Insolvency Act 2000 provides small viable companies in financial trouble with a better chance of survival. It does that by allowing the company a short moratorium while a rescue proposal, in the form of a company voluntary arrangement, is put to its creditors.

However, it is clear that, as the provisions in the Insolvency Act 2000 are expressed, some companies that noble Lords and I would not think of as small would also qualify to use the new procedure by virtue of what might be termed a "technicality". Those companies are often involved in particular types of specialist transaction involving very large amounts of money.

That possibility has caused some consternation in the City where these types of deal are done. The last thing that the City wants is for those types of company to be eligible for a CVA moratorium. If they were, this valuable market would be seriously damaged and that would be to no one's benefit. Therefore, we have considered the matter very carefully and have concluded that we should bring forward these regulations to ensure that they cannot.

In recent years, a significant market and expertise has developed in the City of London for securitisation and related bond issues. That demand is dependent on the fact that UK law, unlike that of much of the rest of the world, allows a lender or funder to take a floating charge over the assets of the borrowing company. That charge allows the lender to appoint an administrative receiver, more or less immediately, if things go wrong. His job is to get the lender's money back by realising the charged assets.

Although we think it most unlikely that a company involved in such a transaction would be able to obtain a moratorium, if it did, the right to appoint an administrative receiver would be stayed for as long as the moratorium lasted. It has been impressed on us that that possibility would be likely to damage the attractiveness of the UK as a base for doing these types of deal, and that would have obvious unwelcome consequences for the City.

The right to appoint an administrative receiver is also important in the structured finance market—again, because of the level of control that it brings.

As a consequence of the Public Finance Initiative and public/private finance partnerships, large amounts of private money are now being made available to fund public projects. The availability of funds in that market is dependent on the financier having the right to step in and take over the contract if the borrower fails to deliver. That could not happen sufficiently quickly if the moratorium was in place. Clearly, we could not contemplate the idea of essential public services being interrupted in that way.

Under the eligibility criteria, the holding company of a large group of companies might also qualify for a moratorium, particularly if all the group's trading is done by its subsidiaries. For such a company to qualify for the moratorium when it is worth millions of pounds runs counter to our policy. It would also be bizarre if a company with a liability of £10 million or more could qualify for a small company moratorium simply because it otherwise satisfied the eligibility criteria set out in the Act.

Your Lordships will appreciate from what I have said that we obviously need to make sure that those particular kinds of larger company do not qualify for a company voluntary arrangement moratorium intended only for the genuinely smaller company. They are clearly not the kinds of company that we were aiming to help or that should be able to avail themselves of a CVA moratorium.

I am sure that on all sides we shall be able to see the sense of excluding them and agree that no harm whatever will be done to our principal aim of giving the smaller company a short breathing space in which to mount a rescue attempt. Once these regulations are made, we shall be able to make the company voluntary arrangement moratorium available to those who really need it—small companies in need of a breathing space.

It is normal practice for a Minister inviting Parliament to approve a draft statutory instrument to volunteer a view on its compatibility with the convention rights as defined in Section 1 of the Human Rights Act 1998. I confirm that in my view the provisions of the draft order are compatible. I beg to move.

Moved, That the draft regulations laid before the House on 26th June be approved [34th Report from the Joint Committed].—(Lord McIntosh of Haringey.)

Lord Rotherwick

My Lords, we are happy to support the aims of these regulations but are less happy with the tight criteria defining the firms that qualify for a short moratorium while a rescue proposal is produced. Why have these regulations not been encompassed in the Enterprise Bill now being considered in Committee by this House?

Lord Roper

My Lords, we on these Benches also welcome the proposed regulations. Those of my noble friends who know more about these matters than I have told me of their considerable importance and use for the purposes to which the Minister has drawn attention so far as the City of London is concerned. We therefore hope that the regulations will come speedily into effect.

Lord McIntosh of Haringey

My Lords, I am grateful to both noble Lords for their responses to these regulations. I could have been asked more legitimately by the noble Lord, Lord Rotherwick, why it has taken us so long, rather than why we are not delaying it a little further. The truth is that we discovered from the high powered lawyers in the City only at a very late stage of the passage of the Insolvency Bill 2000 that there were potential problems with companies which theoretically met the definition of a small company, and therefore were eligible for a moratorium, but in fact had a very much greater importance than a similarity with larger companies.

It has taken us this length of time to negotiate with those in the City who are adept in producing new financial vehicles, including those that I have described, and it is a matter of regret that we have taken so long to do that. The Enterprise Bill will not become law until later this year. For the sake of these simple regulations, it seemed preferable to enact these measures now, in July, rather than suffer a further delay. I beg to move.

On Question, Motion agreed to.