Enterprise Bill (Hansard, 30 July 2002)

HL Deb 30 July 2002 vol 638 cc821-52 821

§ 11.45 a.m.

§ Lord Sainsbury of Turville
My Lords, I beg to move that the House do now again resolve itself into Committee on this Bill.

§ Moved, That the House do now again resolve itself into Committee.—(Lord Sainsbury of Turville.)

§ On Question, Motion agreed to.

§ House in Committee accordingly.

§ [The CHAIRMAN OF COMMITTEES (Lord Tordoff) in the Chair.]

§ Clauses 249 and 250 agreed to.

§ Clause 251 [Application of law about company arrangement or administration to non-company]:

§ Lord McIntosh of Haringey moved Amendment No. 361: Page 177, line 26, at end insert— () An order under this section may not provide for a company arrangement or administration provision to apply in relation to a society which is registered as a social landlord under Part I of the Housing Act 1996 (c. 52) or under Part 3 of the Housing (Scotland) Act 2001 (asp 10).

§ The noble Lord said: I have already spoken to this amendment. I beg to move.

§ On Question, amendment agreed to.

§ Clause 251, as amended, agreed to.

§ Clause 252 [Duration of bankruptcy]:

The Chairman of Committees
I have to advise the Committee that there is a mistake in the printing of Amendment No. 362. It should read, "Page 178, line 3" and not "line 2". I should also point out that, were Amendment No. 364, which is grouped with Amendment No. 362, to be agreed to, I should not be able to call Amendment No. 365 because of pre-emption.

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§ Lord Kingsland moved Amendment No. 362: Page 178, line 2, leave out "one year" and insert—"

"(a) one year in the case of a business bankrupt;
(b) two years where a certificate for the summary administration of the bankrupt's estate has been issued and is not revoked before the bankrupt's discharge; or
(c) three years in any other case"

§ The noble Lord said: As currently drafted, there would be an automatic right to discharge and release on or within 12 months, as compared with the current period of three years; that is, the period would be 12 months unless a notice was filed by the official receiver under this clause to discharge the bankrupt at an earlier date. Therefore, there is no minimum period. A bankrupt could be discharged within a few months or even a few weeks.

§ The reduced period is intended to make bankruptcy a more attractive option for entrepreneurs. But it will, of course, also make it a more attractive option for consumers. Yet it is hard to see how an increase in consumer bankruptcies can be good for business. Business will be damaged if more consumers fail to pay.

§ Evidence from other jurisdictions suggests that relaxing bankruptcy laws prompts a significant rise in the number of consumer bankrupts. For example, in the United States more than 97 per cent of the 1.5 million bankruptcies in 2001 were consumer bankruptcies. Also, in Hong Kong in 1997, the year before its insolvency law changed, there were 639 bankruptcy orders, 33 initiated by the debtor and 606 by the creditor. By contrast, in the year 2001 there were 9,151 orders, 7,389 being initiated by the debtor and 1,762 by the creditor. There are similar examples in Scotland.

§ As the numbers rise, so the pressure on the system rises. As demand outstrips resource, rubber-stamping creeps in and the system begins to spiral out of control. That is the risk that we face if the discharge period for consumers becomes so short that it loses all deterrent effect. And that is what lies behind the amendments that we have tabled in this group.

§ Amendment No. 362 confines the reduced bankruptcy period and the early discharge provision to business bankrupts alone. It does so by introducing a simple self-certification test for business bankrupts based on the following model. First, the debtor states on the bankruptcy application form whether he is in business; and making a false or misleading statement in that context would be an offence.

§ Secondly, creditors have a right to challenge the debtor's statement. Most would be able to do so on the basis of information on their own customer databases. Thirdly, if so challenged, the debtor must produce evidence that he was in business. Even those who have not kept formal accounts should be able to do so by producing, for example, an appointment book or purchase receipts or a tax return.

§ On that basis, there is no need to disentangle the individual debts. Anyone would benefit from the shorter discharge period whether or not they had consumer debts; but the credit industry would have the 823 important safeguard of being able to challenge those applicants whom it believes are not genuinely running a business. In that way, those seeking to abuse the system to the detriment of industry and other consumers could be deterred. I beg to move.

§ Lord Freeman
I support my noble friend's amendment and I shall speak to Amendment No. 364 standing in my name. The principle of a national set period appears desirable as long as it is not oppressive because it would set national standards and would avoid the problem of local variations. I do not believe that it would be in the public interest for those seeking discharge from a bankruptcy order to be aware that some seeking discharge were, because of constraints of resource or different procedures or different practices in different parts of the country, favoured compared with those in other parts of the country. That is not good administrative procedure and it would not encourage the efforts of those who get into financial difficulties to avoid the ultimate which is a bankruptcy order.
My amendment sets a one-year period, which I do not believe to be unreasonable, bearing in mind the procedures that have to be gone through, including the amount of extra work that will be necessary to seek a discharge earlier than 12 months. That issue strongly concerned the CBI and in the other place a comparable amendment was tabled at Committee stage. I hope that the Minister has had a chance to reflect on the debate in the House of Commons and that he will be able to balance the argument for a shorter set period, which is proposed under the Bill—one year as opposed to three—but will agree to remove that part of the Bill that provides for an even earlier discharge than 12 months.

§ Noon

§ Lord Sainsbury of Turville
Amendments Nos. 362, 365 and 366 seek to create a separate discharge period for those bankrupts who have been carrying on a business. In answer to the point made by the noble Lord, Lord Kingsland, this part of the Bill is intended not to make life easier for bankrupts, whether consumers or businesses, but to make it easier for those who have not behaved recklessly or dishonestly to make a fresh start. That is an important point.
Amendment No. 362 was debated at length in Committee and at Report stage in the other place. It seeks to introduce a distinction for discharge purposes between what have been termed "business" and "consumer" bankrupts. I remain unconvinced of the case for drawing such a distinction. It has been suggested that such a distinction is needed because if it is not introduced there is likely to be an increase in consumer bankrupts who will seek to take advantage of what they perceive to be an easy ride.
I find it hard to believe that consumers would react in that way. Bankruptcy is not an easy option, and in some respects our proposals make it more, not less severe. The proposals make no change to the assets that will be available to creditors on the making of the bankruptcy order nor do they shorten the period over 824 which the bankrupt is liable to make payments out of surplus income. The proposals will make it easier for the trustee to ensure that the bankrupt makes such payments by introducing income payments agreements. Consumers who have behaved recklessly or dishonestly (including incurring debts that they knew they would be unable to pay off) would run the risk of being subject to a bankruptcy restrictions order for up to 15 years; they would suffer damage to their credit rating and have great trouble in getting credit, including mortgages in the future. I do not believe that the majority of consumers are blinkered to those very real effects as some might suggest.
The individual insolvency proposals seek to encourage more entrepreneurs either to start up or to restart in business. However, the aim of reducing stigma should apply to the majority of bankrupts, whether in business or not, where no misconduct or criminal behaviour has been identified. People can be subject to bad luck in their personal lives. An unexpected loss of a job or the breakdown in a personal relationship often leads to financial problems. Those individuals are as entitled to a fresh start just as much as a business person. It would not be fair or equitable to subject them to a tougher regime. The thinking behind this part of the Bill is that people should not incur any less financial penalties from going bankrupt but should, where they have not behaved recklessly or dishonestly, have the opportunity more easily to make a fresh start and rebuild their lives quickly.
The distinction suggested in the amendment is entirely artificial and in practice would be unworkable. The experience of the Official Receiver shows that those who are self-employed do not operate their personal and business affairs in conveniently separate compartments; they are often inextricably interlinked.
The current bankruptcy regime is the same whether a bankrupt was a consumer, in business, or a mix of the two. The system that the amendment would lead to would be a radical change in a basic principle of our insolvency law, and none of the arguments produced in Committee or at Report stage in the other place supports that. I would also point out that all of the various consultations have shown a majority being in favour of a reduction in the discharge period for all bankrupts and that the proposals advocated in the amendment, which, as I have already said, would be a massive change in the way we approach individual insolvency, have not been consulted upon at all.
The noble Lord mentioned three areas where there have been changes: Scotland, the United States and Hong Kong. There are special conditions that relate to all those cases, particularly in the case of Hong Kong where there was a change in the bankruptcy law—the first for over a century. I do not believe that one can make easy transfers from that situation to what would happen in this country. In that case the discharge procedure was so difficult and cumbersome that in the period from 1983 to 1992, while there were about 2,600 bankruptcies, only 25 bankrupts were discharged. The circumstances are quite different.
825 Amendment No. 365 is, by its nature, consequential to Amendment No. 362 as it seeks to apply early discharge provisions solely to business bankrupts.
Amendment No. 366 seeks to define a business bankrupt as someone who files a statement in court to that effect prior to being made bankrupt, and would make it a criminal offence to do so falsely. The motivation for doing so would, presumably, be to secure a shorter period of bankruptcy, because the set of amendments dealing with this issue require that discharge for non-business debtors be either two or three years, depending on the size of the debts incurred. The practical difficulties involved in making such a distinction between business and non-business bankrupts have already been rehearsed, both here and in the other place. If Amendments Nos. 362 and 365 were not accepted the amendment would fall as a matter of course.
A system as envisaged by these amendments would be ripe for abuse. It would seem to be enough for an individual to carry on business for one day prior to the petition. That cannot be right. It is not clear who, other than the courts, would act as arbiter in the many cases of dispute that would undoubtedly arise. This would therefore lead to further costs in the bankruptcy process, unnecessary delays and could potentially have a huge impact on the workload of the courts.
Amendment No. 363 seeks to replace the proposed one-year discharge period with one of two years. As I said earlier, the aims of the one-year discharge period are to reduce the stigma of bankruptcy, to enable those who have failed through no fault of their own to get a fresh start and to encourage entrepreneurs to start up, or restart, in business.
There was wide support for the one-year discharge period in responses to the White Paper Insolvency: A Second Chance. This period was arrived at after reacting to concerns raised as a response to the proposals in the Bankruptcy—A Fresh Start consultation that the then proposed six-month discharge period was too short. A widespread view taken by the respondents to the earlier consultation was that a one-year period for all bankrupts was acceptable.
Concerns have been raised that a year will not give the Official Receiver sufficient time to investigate cases. I think that that was the point being made by the noble Lord, Lord Freeman. Those concerns are ill-founded. All bankrupts will be interviewed. In the vast majority of cases the administrative work involved in a bankruptcy will have been completed well within the 12-month period being proposed, with most assets being identified within the first month or so. The realisation of those assets is not affected by discharge, whatever the discharge period. If a bankrupt does not co-operate, then a suspension of the bankrupt's discharge can be applied for. In fact, the proposals make it easier to apply for the suspension of discharge by allowing the trustee to make an application direct rather than having to ask the Official Receiver to do so.
826 Some are concerned that in reducing the discharge period, bankruptcy becomes a soft option. I fail to see how that conclusion can be drawn. I shall reiterate what I said earlier. Bankruptcy is, and will remain, the last option for those in financial trouble. To enter bankruptcy risks the loss of the bankrupt's home, the loss of virtually all his assets, substantial payments from future income for up to three years and real disadvantage in his financial affairs in the future, such as damage to credit ratings and problems in obtaining mortgages.
We recognise that there will be a minority who seek to abuse the system. The Bill puts in place bankruptcy restrictions orders to deal with those cases. Bankruptcy restrictions orders will have the effect of extending the period for which bankruptcy restrictions apply for up to 15 years. Criminal sanctions will also be available for the most serious cases.
The new proposals will not make bankruptcy an easier option. Reduction of the discharge period to one year will not reduce the assets that will vest in the estate or change the responsibility of bankrupts to provide information about their affairs and to give up their assets for the benefit of creditors.
I shall now turn to Amendment No. 364, which seeks to ensure that all bankrupts will remain undischarged for a minimum of one year with no facility for early discharge. It has been suggested that all bankrupts, regardless of their conduct, should have this minimum period imposed upon them and that to reduce that period would make bankruptcy too easy an option. We do not subscribe to that view. I will not repeat again the effects of being made bankrupt, but it is clear that under our proposals bankruptcy will not be painfree, and nor should it be. Our policy is to have a regime in which the period that bankrupts are subject to restrictions reflects the circumstances of the case, and to move away from the current "one size fits all" regime.
We are not expecting all bankrupts to be discharged before the automatic 12-month period. Discharge in less than one year will only happen in straightforward cases where the bankrupt was not at fault and poses no risk to the public or commercial community, where all investigative and administrative matters have been dealt with and where he or she has co-operated fully with the Official Receiver. Prior to filing any notice for early discharge at court, the Official Receiver will notify all creditors, and any other trustee, of the intention to do so. If the creditors raise any significant matters they will be investigated to the satisfaction of the Insolvency Service, and while they are being looked at no notice will be filed.
There is no obvious benefit in stopping those who have failed through no fault of their own getting through the process as quickly as possible. Such an approach will encourage prompt financial rehabilitation and furthermore will encourage potential entrepreneurs to restart or start up in business.
An important point that we should not forget is that nearly all assets or potential assets are identified in the first few months of a case and that the realisation of 827 those assets is not affected by discharge. Where people have not behaved recklessly or dishonestly, we want people to have the opportunity as soon as possible to rebuild their lives. On that basis, I ask the noble Lords and the noble Baroness to withdraw their amendment.

§ Lord Kingsland
I thank the noble Lord for his full reply to this line of amendments. The Minister appears to repose great confidence in the fact of the initial interview and also in the availability of a bankruptcy restrictions order.
Under the clause, as drafted, there is little time in practice to come to a conclusion about culpability prior to filing a notice to discharge, since the Official Receiver is likely to make the decision quickly after simply one interview with the bankrupt. In fact, there is no provision in the clause for any co-operation between the Official Receiver and the trustee on the filing for the notice, even though the trustee is likely to hold information relevant to the decision-making process.
In those circumstances, I suggest, there is no real basis on which a bankruptcy restrictions order application can be made; and, if information subsequently emerges, the bankrupt is likely to have already received his discharge. So, even though the Minister feels strongly that the Government's approach is right—even if I were to accept that—I hope that he will admit that there are some very important ingredients of detail to put into the clause to make sure that the problems that I have described are properly met.
The noble Lord was also somewhat scornful of the statistics that I quoted. I do not know how intimately his department is in touch with events as they are unfolding in this sphere in the United States, but the impression I have is that the direction upon which the United States authorities are now launched is, if not the opposite, certainly a very different direction to the one that we are now facing. I hope that the Minister will be able to tell me that the Government are in close touch with the United States on their own changes and developments and will keep an open mind about the reactions of consumers and businessmen across the Atlantic. Meanwhile, I beg leave to withdraw the amendment.

§ Amendment, by leave, withdrawn.

§ [Amendments Nos. 363 to 366 not moved.]

§ Clause 252 agreed to.

§ Schedule 19 agreed to.

§ Clause 253 agreed to.

§ Schedule 20 [Schedule 4A to Insolvency Act 1986]:

§ [Amendments Nos. 366A and 366B not moved.]

§ Schedule 20 agreed to.

§ Schedule 21 agreed to.

§ Clause 254 [Investigation by official receiver]:

§ Lord Hunt of Wirral moved Amendment No. 367: Page 179, leave out lines 8 and 9.

828

§ The noble Lord said: We are dealing with some significant changes to bankruptcy law. The Cork report was the last major review of bankruptcy law. To quote from that report: It is a basic objective of the law to support the maintenance of commercial morality and encourage the fulfilment of financial obligations. Insolvency must not be an easy solution for those who can bear with equanimity the stigma of their own failure or their responsibility for the failure of a company under their management". In that report, Cork described insolvency as a compact between the debtor, his creditors and society. The debtor obtains relief and is allowed to make a fresh start. In return, society expects him to account for his failure by submitting to investigation and to contribute both from assets and from future income.

§ The amendment would leave out lines 8 and 9 of page 179 and would require the official receiver to investigate the conduct and affairs of all bankrupts. As drafted, the proposed new Section 289 subjects the official receiver to a duty to investigate the conduct and affairs of all bankrupts, but then, in the subsection that the amendment would remove, permits the official receiver to dispense with an investigation without any fear of challenge.

§ I do not believe that those bound by a duty should have a unfettered power to release themselves from that duty. More to the point, investigation is an important part of the bankruptcy process. It serves to achieve the essential balance between the interests of the bankrupt, his creditors and society. The amendment would preserve the statutory duty to investigate.

§ I reiterate the strong views advanced by my noble friend Lord Kingsland about the extent to which the Government have not thought through these substantial changes. Together with other noble Lords, my noble friend and I have met a range of organisations that have expressed serious concern about those changes—in general terms, not just about investigation but about the extent to which they will release present restrictions on personal consumer bankruptcy.

§ Several points were made to us by an organisation that knows a considerable amount about this area of law—namely, MBNA Europe. I know the Maryland Bank of North America well, because I was involved in seeking to persuade the company to make a substantial investment in the United Kingdom. I was delighted when it decided to come to Chester to set up a substantial operation based there. I recall that it did so because it was enormously impressed by the talent—especially the young talent—available in and around the Chester area and in North Wales, as it sought to recruit up to 2,000 people to work for the bank. I therefore greatly respect the views that it expresses, because they are based on that range of talent advising them on issues such as this.

§ MBNA posed me several questions on which I should like the Minister's assistance. The answers may be forthcoming during the recess, but they go to the heart of many of the changes proposed.

829

§ First, have the Government estimated the expected increase in the number of personal bankruptcies as a result of the Bill's reforms? Secondly, what level of additional resources will be made available to the official receiver to cope with the reformed system? Thirdly, will the Insolvency Service's internal guidance to the official receiver's staff on the revisions to personal insolvency contained in the Bill be public and open to consultation?

§ What discussions were held with the consumer credit industry in drawing up the regulatory impact assessment for the Bill, which concluded that the proposed reforms would have no cost implications for the industry? Finally, what evidence was considered from other jurisdictions when formulating the personal insolvency reforms?

§ I recognise that I have strayed wide in moving the amendment, but it goes to the heart of the reforms. At present, as with compulsory liquidation, the official receiver has an obligation to investigate the conduct of the bankrupt. The contention behind the amendment is that this should continue to be mandatory in all cases. Why? Because an investigation should be conducted to justify a decision to make an application for a bankruptcy restrictions order. The report should be filed with the Secretary of State, as well as with the court, to enable a decision to be made whether to bring such an application. Without that, it is difficult—indeed, impossible—to see on what basis a proper decision can be made; nor will creditors have any confidence that their interests are being protected.

§ If the number of bankruptcies significantly increases under the new system, as many believe it will, the importance of investigating each case to prevent abuse of the system is increased. That should be addressed by the provision of appropriate levels of training and resource, rather than by removing the obligation to investigate.

§ I do not expect an immediate response from the Minister to my various questions—nor, indeed, to some of my more general points. Perhaps he will write to me and other noble Lords during the recess. But the whole question concerns investigation and the opt-out presently contained in lines 8 and 9 should be removed. Therefore, I beg to move.

§ 12.15 p.m.

§ Lord Sainsbury of Turville
The amendment would remove the official receiver's discretion whether to investigate cases where he or she sees fit not to do so. We are not working on the basis that the provisions should lead to any significant increase in consumer bankruptcies. I have given a series of reasons why that is the case. The noble Lord asked some specific questions. There will be additional resources to deal with those issues, but I shall write in detail to the noble Lord on the specific question of whom we consulted 830 and so on. The key thing is that we are not assuming that there will be a significant increase, for the reasons that I gave.

§ Lord Hunt of Wirral
We should bear in mind the latest figures for consumer credit. I saw that the Consumer Credit Counselling Service now estimates that the total debt due to credit card and loan companies has risen to the record level of £140,000 million. Has the Minister considered whether, in present market conditions, there will be an increase? He says that there will not be a significant increase: what increase does he anticipate? Is he willing to make public the advice that he has received on that subject?

§ Lord Sainsbury of Turville
I should deal with the issue now. The noble Lord has the wrong view of where, as a whole, consumer bankruptcies come from. They do not tend to stem from the availability of easy credit; they stem from situations of relationship breakdown, reduced income, unemployment or ill health. If we examine the mortgage figures, we can see that financial mismanagement accounts for 23 per cent, but over-indebtedness itself was only 6 or 7 per cent. The assumption that consumer bankruptcies happen because people get heavily in debt through frivolous consumer purchases is a misunderstanding of the situation. In my letter to the noble Lord, I will include the information that we have on that matter.
The concept of giving the official receiver discretion to investigate is not new. It has been with us since the Insolvency Act 1986. That Act gives the official receiver discretion to investigate cases in which the unsecured liabilities are less than £20,000. Such cases are known as summary bankruptcies. That accounts for a large proportion of cases—about 25 per cent for the year ended 31st May 2002—but leaves a mandatory duty of investigation for all others not falling within that category. The exercise of that discretion has not, as far as I am aware, caused any great consternation in the past 16 years among creditors or other interest groups.
The Bill will remove the provisions relating to summary bankruptcy and introduce instead a general discretion to investigate, so that resources can be used more effectively. Each case will be considered on its merits and on the basis of the facts, rather than being subject to the application of some arbitrary financial criterion, such as the level of unsecured debt. Just as there are some large cases that do not merit investigation, there are some small ones that do.
The amendment would require the official receiver to conduct a full investigation into all cases, without regard to the facts and circumstances of individual cases. That would go further than the current situation. There may be concerns that, if we make the duty to investigate discretionary, some misconduct or criminal offences will slip through the net. In fact, there will be little change to the way in which bankruptcies are dealt with. Although the official receiver will interview all bankrupts, only then will he or she decide whether further investigation is appropriate. Furthermore, creditors will continue to 831 be given a report of the case after a few months, when they will be asked to bring to the official receiver's attention any matters that, in their view, warrant further investigation.
The Bill will allow for the proper targeting of investigative resources on cases that warrant it, whereas the amendment would remove the limited flexibility currently available to the official receiver. In the light of that explanation, I ask the noble Lord to withdraw the amendment.

§ Lord Hunt of Wirral
The Minister must be aware, from my initial remarks, that I still have considerable concerns about the reforms. I am grateful to him for kindly agreeing to let me have the further information that I requested. I shall reflect on what he said and on what he writes to me and consider whether we should return to the subject. In the meantime, I beg leave to withdraw the amendment.

§ Amendment, by leave, withdrawn.

§ Clause 254 agreed to.

§ Clause 255 [Income payments order]:

§ Lord Hunt of Wirral moved Amendment No. 368: Page 179, line 25, after "trustee" insert "or by a creditor

§ The noble Lord said: The amendment would add words that would mean that subsection (1A) of Section 310 of the Insolvency Act 1986 would read as follows: An income payments order may be made only on an application instituted—

(a) by the trustee or by a creditor, and
(b) before the discharge of the bankrupt".

The amendment would enable a creditor to apply for an income payments order. As drafted, the Bill allows only the trustee so to apply; creditors have no say in the matter.

§ The Minister should consider a situation in which an order would be appropriate but the trustee decided not to apply, perhaps because he lacked the necessary time or funding. Creditors would be unable to challenge that decision, and the bankrupt would avoid his liability to make a proper contribution towards paying off his debts. The amendment would allow creditors to protect their position by making an application for an income payments order.

§ Amendment No. 369 is also in this group, and my noble friend Lord Freeman will speak to it in a moment. It relates to the period for which income payments orders should last. It is felt that there should be no limit to the length of time for which an income payments order or agreement may last. I welcome the fact that my noble friend seeks to amend the Bill in the way suggested.

§ Amendments Nos. 371, 372 and 372A are also in the group. They would ensure that the court or the trustee, with the agreement of the bankrupt, would be in the best position to consider on a case-by-case basis whether the period should be more or less than three years. I hope that the Minister will accept that this is particularly pertinent to cases in which the debtor is 832 considered culpable for the bankruptcy and has sufficient ongoing income to make a more significant contribution to the bankruptcy fund.

§ I hope that the Minister will accept the amendments. I beg to move.

§ Lord Freeman
I shall speak to Amendment No. 369 and support the amendments tabled by my noble friend Lord Hunt of Wirral.
In the minority of cases of bankruptcy in which a trustee is acting, he is permitted by the Bill—and by present law—to apply for an income payments order that can last for up to three years, but only before the discharge of the bankrupt. The Minister referred to the fact that the three-year period was a valuable source of protection for creditors and could run beyond the point at which the bankrupt was discharged. The Minister is right about that.
We have now moved on through the Bill, and I have withdrawn the amendment that would have deleted the ability to discharge a bankrupt earlier than the 12-month minimum period, if it had been judged that that was appropriate. There is, therefore, a limitation on the trustee. He might have to get his skates on, to ensure that creditors are protected. The amendment would mean that the three-year period in which the income payments order will apply would run from a point no later than 12 months after the commencement of the bankruptcy, irrespective of whether the bankrupt had been discharged before 12 months. The trustee would be able to apply for the order during that period. That seems a modest minor addition in terms of protecting the creditors. It does not drive a coach and horses through the Minister's argument, which is that some flexibility is required and where it is appropriate to discharge bankruptcy earlier than 12 months, we should be as fair, reasonable and encouraging as possible.

§ 12.30 p.m.

§ Lord Sainsbury of Turville
Amendment No. 368 would enable creditors to make an application to the court for an income payments order in addition to the trustee. The amendment needs to be considered carefully; it is rather dangerous. The whole point of bankruptcy is that a trustee is appointed to investigate and take control of a bankrupt's affairs on behalf of the creditors. The trustee has a duty to act in the best interests of the creditors at all times.
I can understand that a creditor may wish to ensure that a bankrupt pays what he can out of surplus income, but it is not clear how such unilateral action would be of benefit. Indeed it is likely that costs will increase if the trustee or bankrupt defends the application. The Official Receiver or trustee will be in the best position to assess the bankrupt's ability to make contributions, as they will have an overview of the bankrupt's circumstances. If creditors are in possession of information that indicates that the bankrupt is underpaying, the proper action is for the creditor to inform the trustee who can then utilise 833 the proposals that allow for the variation of an existing income payments order or income payments agreement.
Creditors are able to exercise control over the trustee's actions in two ways. First, a creditors' committee can be appointed under Section 301 of the Insolvency Act 1986 to supervise the trustee. Secondly, if a creditor is unhappy about any act or omission of the trustee, an application can be made under Section 303 of the Insolvency Act for the court to review those acts or omissions. That would include the failure to apply for or vary an income payments order or agreement.
Allowing a creditor to apply independently will be bound to increase costs through fruitless court hearings, because it is unlikely that the creditor will have all the facts at his disposal; the effect of which may be to reduce money available for distribution. It should also be remembered that the income payments agreement regime has been introduced to avoid unnecessary applications to the court, and that generally both income payments orders and agreements will run beyond discharge and for a full three years, in most cases leading to improved returns to creditors.
Amendment No. 369 is similar to one tabled in Committee in the other place. It seeks to extend the period in which an income payments order application can be made to applications made within 12 months of the bankruptcy order even if the bankrupt has been discharged in the meantime. The administration of a bankruptcy case by the Official Receiver usually enables a case to be assessed for a possible income payments order at an early stage. The provisions introducing income payments agreements will speed up the process still further by avoiding the need for a court application.
Where information has not been made available to the Official Receiver through non-cooperation by the bankrupt, it is possible to suspend discharge until the necessary information has been delivered. That means that, effectively, the time in which an income payments order or agreement can be entered into is also extended and the situation that the amendment seeks to address will not arise.
The Government said in Committee in the other place that there was no need to extend the time available for income payments order applications except where absolutely necessary. As I said earlier, in the vast majority of cases bankrupts will inform the Official Receiver or trustee of their surplus income at an early stage. That will allow ample time to enter into an income payments agreement or obtain an income payments order.
The amendment is aimed at those cases where the bankrupt receives the benefit of early discharge. Such cases are likely to be in the minority and will arise only where all administrative matters, including income payments order decisions, are fully dealt with. If creditors have proof that the bankrupt has misled the Official Receiver about his level of surplus income, 834 then upon receiving notification that the Official Receiver intends to file an early discharge notice, that proof should be communicated to the Official Receiver to allow the matter to be investigated prior to any early discharge notice being filed. We are of the view that there are adequate safeguards within the proposed system and that the amendment is unnecessary.
Amendments Nos. 370 and 372 would remove the three-year limit on income payments orders and agreements. By placing a three-year limit on their duration the proposals provide a fair balance between the interests of creditors and the rehabilitation of the individual concerned. We fully recognise that it must be right that those bankrupts who can make contributions from their income should be required to do so. Indeed we wish to make it easier to achieve that aim by introducing an out of court alternative in the form of income payments agreements.
To make the maximum period for which income payments orders and agreements could be made open-ended, as would happen if the amendments were accepted, would impose a more stringent system than already exists. That would not, in our view, be either fair or consistent with the overall thrust of the proposals in the Bill.
Amendment No. 371 seeks to ensure that the same terms are used in referring to the contributions from a bankrupt's income made under an income payments agreement irrespective of whether they are made direct by the bankrupt, or from a third party, such as the bankrupt's employer. While that has attractions at first sight, it would be wrong to do so. Clause 256 introduces new Section 310A into the Insolvency Act 1986 dealing with income payments agreements. Paragraph (1)(a) says that an income payments agreement might provide for a proportion or part of the bankrupt's income to be paid to the trustee or Official Receiver, whereas paragraph (1)(b) provides only that a proportion of a money due to the bankrupt by way of income be paid to the trustee or Official Receiver by a third party.
The reason for the distinction in the current drafting is that paragraph (1)(a) deals with the whole of the bankrupt's income from whatever source and allows the bankrupt to agree to designate either a proportion of his income or a specific part of it. Paragraph (1)(b) deals only with money due to the bankrupt from a third party; for example, salary from employment. In that instance it is enough to allow the agreement to specify a proportion of it. On the basis of that explanation I ask the noble Lord to withdraw his amendment.

§ Lord Hunt of Wirral
I am disappointed by certain aspects of the Minister's response, but I recognise that he has given a full answer to each of the amendments. I would like to take time to consider his response. I beg leave to withdraw the amendment.

§ Amendment, by leave, withdrawn.

§ [Amendments Nos. 369 and 370 not moved.]

§ Clause 255 agreed to.

835

§ Clause 256 [Income payments agreement]:

§ [Amendments Nos. 371 to 372A not moved.]

§ Clause 256 agreed to.

§ Clause 257 [Bankrupt's home]:

§ Lord Freeman moved Amendment No. 373: Page 181, line 4, leave out "bankrupt's

§ The noble Lord said: In moving the amendment I shall speak also to Amendments Nos. 374 to 378. In shorthand, this is the deserted spouse's protection charter—to give it some kind of headline and feeling. It deals with joint homes. Perhaps I may refresh the Committee's memory. If the bankrupt at the point of discharge was living in the joint home with his spouse, the Bill contains a provision whereby the trustee has a period limited to three years to deal with the sale of the property.

§ The Minister will recall that in the early 1990s there was a period of negative equity. In such circumstances, without the three-year rule there has been a temptation on the trustee's part to defer dealing with the matter until the negative equity has been erased and there is some value in selling the home.

§ I commend the protection in the Bill—it must be right—but there is a lacuna. It is that if at the time of discharge the bankrupt had left, leaving, as I will call him or her, the "deserted spouse", the three-year protection period does not apply. It is a small point, but it is wrong to leave a sword of Damocles over the head of, say, a deserted wife in a house not knowing what the position may be. Unfortunately, no one is offering complete protection about the sale of the house, but if after three years the trustee has not taken action the matter will be resolved. I beg to move.

§ Lord Kingsland
Our Amendment No. 379 is part of this group and I shall speak to it briefly. Clause 57 inserts a new Section 283A into the Insolvency Act 1986, which provides for a bankrupt's interest in a dwelling house, his sole or principal residence, to vest automatically in the bankrupt after three years beginning with the date of his bankruptcy.
There are a number of exceptions to the automatic vesting, one of which is that the period of three years does not begin if the bankrupt fails to inform the trustee or the official receiver of his interest in the property before the end of the period of three months, beginning with the date of bankruptcy. If he fails to so inform, the period of three years begins with the date on which the trustee or the official receiver becomes aware of the bankrupt's interests. We believe that that is an important exception because it will discourage bankrupts from concealing any interest in their sole or principal residence.

§ Lord Sainsbury of Turville
I shall first address Amendments Nos. 373 to 378. Taken together, they would extend the effect of the new provisions for dealing with the family home to include any interest that the bankrupt has in the sole or principal residence of his or her spouse or former spouse.
836 Section 313 of the Insolvency Act 1986 deals with the trustee's right to apply for a charge on the bankrupt's interest in a dwelling house occupied by the bankrupt, or his or her spouse or former spouse. That section is intended to ensure that a spouse or former spouse and the children are afforded protection from the disposal of a property by the trustee in bankruptcy without also considering the welfare of the bankrupt's family.
The amendment seeks to secure in what is likely to be a small number of cases similar protection to spouses and former spouses. Section 336 of the Insolvency Act 1986 effectively gives a spouse or former spouse the right to occupy the former family home for a minimum of one year after it is vested in the trustee in bankruptcy. It sets out that for the period of one year after vesting the interest of the spouse or former spouse takes precedence over the interests of the creditors and during that period the trustees cannot take steps to realise the bankrupt's interest in that home. After one year, the creditor's interest is deemed to outweigh that of the spouse or former spouse and the bankrupt's interests can be realised. I have listened to the comments made and should like to consider this matter further with a view to tabling a suitable amendment at Report stage.
I now speak to Amendment No. 379, which seeks to mirror the safeguard against a bankrupt's non-disclosure of interest in a property currently provided for in subsection (5) of new Section 283A. Generally, the trustee will have three years from the date of bankruptcy to deal with a bankrupt's interest in the family home. If a bankrupt fails to disclose that interest and it did not come to light until more than three years after bankruptcy, without the safeguard a potential asset would be lost to the estate. The safeguard makes it clear that in case of non-disclosure the three-year period does not start running until the trustee becomes aware of the bankrupt's interest.
The amendment seeks to insert a similar safeguard against non-disclosure in the transitional provisions for pre-commencement bankrupts. The amendment clearly has merit and I am grateful that it has been tabled. I should like time to consider it further to ensure that it does what it sets out to do, with a view to bringing a government amendment at the Report stage. I hope that on that basis the noble Lord will withdraw his amendment.

§ Lord Kingsland
Before my noble friend Lord Freeman speaks, I should like to thank the noble Lord for his response to my amendment.

§ Lord Freeman
I share my noble friend's view and I thank the Minister for accepting the principle of Amendment No. 373. That is much appreciated. I beg leave to withdraw the amendment.

§ Amendment, by leave, withdrawn.

§ [Amendments Nos. 374 to 379 not moved.]

§ Clause 257 agreed to.

§ Clauses 258 to 260 agreed to.

837

§ 12.45 p.m.

§ Schedule 22 [Individual voluntary arrangement]:

§ Lord Kingsland moved Amendment No. 380: Page 314, leave out lines 25 to 29 and insert—

"(1) This section applies where the creditors meeting summoned under section 257 approves the proposed voluntary arrangement (with or without modifications) whether or not the bankrupt is discharged."

§ The noble Lord said: Under Section 261 of the Insolvency Act 1986, the court can annul a bankruptcy order if a voluntary arrangement is approved. However, the court has jurisdiction to do so only in those circumstances if the debtor is an undischarged bankrupt. Curiously, it has no jurisdiction to annul the bankruptcy after the bankruptcy order is discharged.

§ In practice, this causes problems because many bankrupts, particularly professionals, are interested only in an annulment rather than a discharge. There is therefore less incentive for those bankrupts to oppose a voluntary arrangement. The problem will become more acute after the Bill comes into force because there will be an automatic discharge after a year. A bankrupt will have only a year to obtain the approval of the voluntary arrangement, and that is far too short a period. We feel that a bankrupt, even though the bankruptcy order has been discharged, should be entitled to have the order annulled if his creditors approve a voluntary arrangement. I beg to move.

§ Lord Freeman
I want to speak to Amendments Nos. 382 and 383 and to support my noble friend's Amendments Nos. 380 and 381. The purpose of Amendment No. 382 is to give the creditors a say in whatever is proposed for the voluntary arrangement. Voluntary arrangements are to be welcomed because they provide an earlier opportunity to conclude what can be an unfortunate period for someone who has suffered financial difficulty. Each year there are about 22,000 to 23,000 bankruptcies and about 6,000 to 7,000 voluntary arrangements. Therefore, voluntary arrangements are important and I believe that the creditors should be given a chance to comment on and approve what is proposed for that arrangement.

§ Lord Sainsbury of Turville
Amendment No. 380 seeks to amend the new version of Section 261 of the Insolvency Act 1986 introduced by the Bill.
The issue at stake is whether or not bankrupts who have been discharged should be able to obtain an individual voluntary arrangement. Currently, undischarged bankrupts generally have three years to make an application for an individual voluntary arrangement. The Bill will reduce the automatic discharge period to one year. Consequently, there may be a small number of cases where a bankrupt reaches a position where he or she is financially able to enter into an individual voluntary arrangement but is unable to do so because he or she is discharged from bankruptcy. Section 281 of the Insolvency Act sets out that the effect of discharge is that bankrupts are released from their debts.
838 Since the Insolvency Act was introduced in 1986, discharged bankrupts have not been able to enter an individual voluntary arrangement and we have no wish to modify that position just because the discharge date will now be earlier than it is at present.
I accept that there may be a very small number of discharged bankrupts who might wish to enter into an individual voluntary arrangement because that would lead to an annulment. However, most who wish to do so will be able to go down that route prior to discharge since the reasons for entering the individual voluntary arrangement would most likely be in existence at the time of the bankruptcy order. In addition—I stress this point—it should be remembered that a court can, and will remain able to, annul a bankruptcy order at any time, including after discharge, on the ground that the bankruptcy order should never have been made or where the bankrupt has paid his bankruptcy debts in full. I should add that the amendment is technically deficient without a number of consequential amendments to other sections of the Insolvency Act.
Amendment No. 381 is similar to one put down in Committee in the other place and seeks to change those who are eligible to vote on a new fast-track proposal for an individual voluntary arrangement. It does this by including creditors whose debts were incurred after the bankruptcy order but before the date that the Official Receiver makes the decision whether a bankrupt's individual voluntary arrangement proposal has a reasonable chance of success.
Currently, the clause sets out that only those who have a bankruptcy debt can vote. If debts are incurred after the date of the bankruptcy order, the creditors concerned can petition for a further bankruptcy order to be made in respect of them. Our approach is consistent with the rules on existing individual voluntary arrangements which clearly set out that there are currently two types of individual voluntary arrangement cases.
Rule 5.1 of the Insolvency Rules 1986 sets out that "Case 1" applies where the debtor is an undischarged bankrupt and "Case 2" where he is not. Rule 5.13, which deals with the summoning of creditors' meetings, sets out that all those who are listed by the bankrupt in his or her statement of affairs, and any other creditors of whom the nominee is aware, are entitled to notice of the meeting. Rule 5.17 sets out that the creditors in Case 1-type individual voluntary arrangements—post bankruptcy—can only vote for amounts that are due up to the date of bankruptcy. In Case 2-types, the debts can be calculated up to the date of the creditors' meeting.
That clear delineation between the treatment of pre-bankruptcy and post-bankruptcy debts for Case 1 individual voluntary arrangements has worked successfully since the Insolvency Act 1986 introduced them. We see no justification for change. It is also worth bearing in mind that the bankruptcy order will be annulled after the agreement to the fast-track individual voluntary arrangements.
Amendments Nos. 382, 383 and 384 seek to change the proposed new regime for fast-track individual voluntary arrangements by allowing creditors to 839 suggest modifications to the proposal, such modifications not being adopted unless the debtor and the Official Receiver consent to them.
The amendments would increase significantly the complexity and, therefore, the costs of the process and make post-bankruptcy individual voluntary arrangements less accessible. That goes against the intention behind the fast-track proposals which are intended to apply in straightforward, income-based cases and aim to increase the number of such cases. Currently, under 2 per cent of individual voluntary arrangements are entered into after bankruptcy. Generally speaking, returns to creditors are higher in individual voluntary agreements than in bankruptcy. It is therefore in the interests of both debtors and creditors to seek to increase their use.
Amendment No. 385 is similar to one tabled in Committee in the other place. It seeks to place on the face of the Bill a requirement that the Official Receiver, as well as notifying the court of the result of the creditors' decision on whether to accept or to reject the debtor's proposal for an individual voluntary arrangement, should at the same time notify the creditors of that result.
We feel that the amendment is unnecessary and that it is more appropriate to include such matters in rules where the mechanics of the process can be considered in their entirety. The Bill provides that the result of the creditors' vote on the new fast-track individual voluntary arrangement is reported to the court. That report will trigger an application for the annulment of the bankruptcy where the individual voluntary arrangement has been approved. While the Bill does not provide for a similar notification of creditors, we agree that it is appropriate and will place that requirement in the rules for the new fast-track individual voluntary arrangements.
That would mirror the current individual voluntary arrangement provisions in Section 259 of the Insolvency Act, where obligations to report to the court are dealt with in primary legislation while persons who are to be notified of the results of a creditors' meeting, other than the court, are currently prescribed in Rule 5.22.
Amendments Nos. 383 and 384 seek to omit references to Section 257, thereby removing references to the section through which the meeting is called. The remaining subsections of Section 258 make numerous references to "a meeting", as does new subsection (c) in the amendment of the proposed new subsection to Schedule 22 which, as I have already established, could not be held as the vehicle to consider modifications.
Amendment No. 386 is similar to one tabled in Committee in the other place. It seeks to restrict the possible extension by order of the new fast-track Official Receiver individual voluntary arrangement regime to cases where the debtor concerned is not an undischarged bankrupt. While we have no present plans to use the power, insolvency is a rapidly evolving area.
840 If the fast-track individual voluntary arrangement regime proves effective, we should be able to consider extending that regime to those who are not bankrupt. This power would allow us to react to any demand that may arise to extend fast-track individual voluntary arrangements to all debtors without the need for primary legislation, which may cause delay in satisfying that demand. Exercise of the power is subject to affirmative resolution, so it will be fully considered by both Houses. The new post-bankruptcy individual voluntary arrangement regime aims to get more people out of bankruptcy by putting in place a more streamlined process in straightforward cases and providing a more transparent fee regime. Currently, that transparency does not always exist. If the new regime results in fees being reduced and becoming more transparent, we see that as a good thing.
I hope that, with those explanations, the noble Lord will feel able to withdraw his amendment.

§ Lord Kingsland
The proceedings so far this morning have flowed—dare I say it?—mellifluously, with an agreeable measure of pragmatism and flexibility being demonstrated on both sides of the Committee. However, I am bound to say that I find the Minister's reaction to Amendment No. 380 in sharp distinction to what has taken place so far. He is of course right to say that circumstances can arise when, after a bankruptcy order has been discharged, it can nevertheless go on to be annulled where either an order was not an order in the first place or where the bankrupt had fully discharged all the debts that he owed.
However, the more likely set of circumstances are those that I put to the Minister in my opening speech. The noble Lord made it absolutely clear that he cannot accept them. In those circumstances, I feel compelled to test the opinion of the Committee.

§ 12.58 p.m.

§ On Question, Whether the said amendment (No. 380) shall be agreed to?

§ Their Lordships divided: Contents, 53; Not-Contents, 102.

841

Division No. 1
CONTENTS
Anelay of St Johns, B.	Geddes, L.
Astor of Hever, L.	Glenarthur, L.
Attlee, E.	Glentoran, L.
Blatch, B.	Hayhoe, L.
Brabazon of Tara, L.	Howe of Aberavon, L.
Brooke of Sutton Mandeville, L.	Howe of Idlicote, B.
Brougham and Vaux, L.	Howell of Guildford, L.
Campbell of Alloway, L.	Hunt of Wirral, L.
Carnegy of Lour, B.	Kingsland, L.
Chalfont, L.	Lawson of Blaby, L.
Colwyn, L.	Luke, L.
Cope of Berkeley, L. [Teller]	Marlesford, L.
Craigavon, V.	Miller of Hendon, B.
Crathorne, L.	Molyneaux of Killead, L.
Elton, L.	Monson, L.
Fookes, B.	Montagu of Beaulieu, L.
Forsyth of Drumlean, L.	Montrose, D.
Freeman,L	Murton of Lindisfarne, L.

841

Newton of Braintree, L.	St John of Fawsley, L.
Noakes, B.	Seccombe, B. [Teller]
Norton of Louth, L.	Sharples, B.
Palmer, L.	Skelmersdale, L.
Park of Monmouth, B.	Tebbit, L.
Pearson of Rannoch, L.	Trumpington, B.
Perry of Southwark, B.	Vivian, L.
Renton, L.	Wilcox, B.
	Windlesham, L.
NOT-CONTENTS
Acton, L.	Howie of Troon, L.
Addington, L.	Hoyle, L.
Ahmed, L.	Hughes of Woodside, L.
Andrews, B.	Irvine of Lairg, L. (Lord Chancellor)
Bach, L.
Barnett, L.	King of West Bromwich, L.
Bassam of Brighton, L.	Lester of Herne Hill, L.
Bernstein of Craigweil, L.	Lipsey, L.
Blackstone, B.	Lockwood, B.
Borrie, L.	McIntosh of Haringey, L. [Teller]
Brett, L.
Brookman, L.	McIntosh of Hudnall, B.
Burlison, L.	MacKenzie of Culkein, L.
Campbell-Savours, L.	Mackie of Benshie, L.
Carter, L.	Maclennan of Rogart, L.
Christopher, L.	McNally, L.
Clark of Windermere, L.	Merlyn-Rees, L.
Clarke of Hampstead, L.	Morgan, L.
Clinton-Davis, L.	Morris of Manchester, L.
Corbett of Castle Vale, L.	Nicol, B.
Crawley, B.	Patel of Blackburn, L.
David, B.	Pendry, L.
Davies of Oldham, L.	Pitkeathley, B.
Dean of Thornton-le-Fylde, B.	Plant of Highfield, L.
Dholakia, L.	Ponsonby of Shulbrede, L.
Dormand of Easington, L.	Radice, L.
Dubs, L.	Ramsay of Cartvale, B.
Elder, L.	Rea, L.
Elis-Thomas, L.	Rennard, L.
Evans of Temple Guiting, L.	Richard, L.
Evans of Watford, L.	Roper, L.
Ezra, L.	Russell, E.
Farrington of Ribbleton, B.	Sainsbury of Turville, L.
Faulkner of Worcester, L.	Sandberg, L.
Filkin, L.	Scotland of Asthal, B.
Fitt, L.	Sharp of Guildford, B.
Geraint, L.	Simon, V.
Goldsmith, L.	Stone of Blackheath, L.
Gordon of Strathblane, L.	Strabolgi, L.
Goudie, B.	Symons of Vernham Dean, B.
Gould of Potternewton, B.	Taylor of Blackburn, L.
Graham of Edmonton, L.	Temple-Morris, L.
Grenfell, L.	Thomas of Walliswood, B.
Grocott, L. [Teller]	Tope, L.
Hardy of Wath, L.	Turner of Camden, B.
Harrison, L.	Walker of Doncaster, L.
Haskel, L.	Walmsley, B.
Hayman, B.	Warwick of Undercliffe, B.
Hilton of Eggardon, B.	Whitaker, B.
Hollis of Heigham, B.	Whitty, L.
Hooson, L.	Williams of Mostyn, L. (Lord Privy Seal)
Howells of St. Davids, B.
	Woolmer of Leeds, L.