House of Commons - Explanatory Note
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Clauses 253, 254, 255 and 256: Disqualification from office: Justice of the Peace, Parliament, Local government & General

721.     Currently bankrupts are subject to a wide range of statutory restrictions, prohibitions or disqualifications irrespective of the level of their assets and liabilities, or culpability. These restrictions prevent the bankrupt from being elected to or holding specified positions or offices, or becoming or remaining a member of specified bodies or groups. Generally, these restrictions are in place for the duration of the bankruptcy (currently three years in most cases). While in some cases these restrictions can be justified in the public interest, there is little justification for others (e.g. serving as a Justice of the Peace or member of a Local Authority).

Clause 254: Disqualification from office: Parliament

722.     Section 427 of the Insolvency Act 1986 imposes a number of restrictions on a member of either House at Westminster if he or she is adjudged bankrupt (or sequestrated in Scotland). In the House of Lords, a member is not allowed to sit or vote in either the House or Committee. In the Commons, a member cannot be elected to, sit or vote in the House (or the devolved equivalent) or on Committee. The restrictions on being elected to and sitting and voting in the devolved assemblies on the ground of bankruptcy feed through from section 427 by virtue of the Government of Wales Act 1998, the Scotland Act 1998 and the Northern Ireland Act 1998.

723.     With the exception of a peer in Westminster, in all legislatures a bankrupt is given six months in order to have their bankruptcy order annulled or their bankruptcy discharged. If this has not happened by the end of that period, then their seat is vacated.

724.     Clause 254 inserts a new section into the Insolvency Act 1986 to deal with disqualification from Parliament, the Scottish Parliament, the Northern Ireland Assembly or the National Assembly for Wales where a BRO is made against a member of any of those Assemblies. It also amends section 427 Insolvency Act 1986 to remove references to England and Wales from that section and to change its title.

England and Wales

725.     The new section 426A disqualifies an MP against whom a BRO is made from membership of the House of Commons. On disqualification under this section, an MP must immediately vacate her/his seat. This differs from the current position under section 427 Insolvency Act 1986, which disqualifies a person on the making of a bankruptcy order but then gives a period of six months for an MP to have the bankruptcy order annulled. Under the new section, an MP is no longer automatically disqualified on the making of a bankruptcy order. Those MPs where some form of culpability can be shown through the making of a BRO will be disqualified automatically and there will be no six months grace period.

726.     A member of the House of Lords subject to a BRO will be disqualified from sitting or voting in the House of Lords or from sitting or voting in a committee of the House of Lords or a joint committee of both Houses. No writ of summons can be issued to a lord of Parliament who is subject to a BRO. These are the same restrictions as are currently in place for a bankruptcy order but, again, by replacing bankruptcy with BRO as the trigger to disqualification, only culpable peers will be disqualified.

The Devolved Assemblies

727.     The new section 426A will feed through to the devolved Assemblies by virtue of the devolution legislation. A member of the Scottish Parliament against whom a BRO is made will be disqualified from the Scottish Parliament by virtue of section 15(1)(b) Scotland Act 1998 and will have to vacate his or her seat under sections 17(1) and (2) of that Act.

728.     The position is the same for a member of the National Assembly for Wales by virtue of sections 12(2) and 14(1) and (2) Government of Wales Act 1998 and for a member of the Northern Ireland Assembly by virtue of sections 36(4) and 37(1) Northern Ireland Act 1998 and Article 370 of the Insolvency (Northern Ireland) Order 1989.

MPs, Peers and Members of the Devolved Assemblies made bankrupt in Northern Ireland or sequestrated in Scotland

729.     There is no equivalent regime to BROs in either Scotland or Northern Ireland. Insolvency law in Wales is the same as in England and will be modified by this Bill.

730.     Therefore, the existing regime for disqualification where an MP, peer or a member of a devolved Assembly is made bankrupt in Northern Ireland or sequestrated in Scotland is being retained. However, section 427 is being amended by clause 254(1) and (2) so that it will then only cover those made bankrupt in Northern Ireland or sequestrated in Scotland.

731.      For example, an MSP who is sequestrated in Scotland will be disqualified and will have six months to have that order annulled before having to vacate his or her seat.

Two regimes

732.     Therefore, two different regimes will be in operation at the same time in Parliament and all the devolved Assemblies, depending on the jurisdiction in which the bankruptcy occurs:

  • where a member of Parliament or a member of the devolved Assemblies is made bankrupt in England and Wales, these persons will not be automatically disqualified. Disqualification will be triggered if a BRO is made against him or her and he or she will have to vacate their seat immediately. A peer will be disqualified on the making of a BRO order from sitting and voting in the House of Lords or in Committee;

  • where a member of Parliament or a member of the devolved Assemblies is made bankrupt in Northern Ireland or sequestrated in Scotland, they will be automatically disqualified on being made bankrupt or sequestrated and will have six months to have the order annulled. A peer who is a member of a devolved Assembly would be disqualified from the devolved Assembly and have six months to have the order annulled or his or her bankruptcy discharged and would be disqualified in Westminster from sitting and voting in the House of Lords or in Committee.

The order-making power

733.     Clause 254 provides for an order-making power to amend sections 426A and 426B, should equivalent regimes be introduced in Northern Ireland and Scotland. The order-making power would be subject to affirmative resolution.

734.     Clause 253 will remove the automatic disqualification on a bankrupt acting as a justice of the peace. The removal of bankrupt justices of the peace will be left to the Lord Chancellor's general power to appoint and remove justices of the peace where it is thought appropriate.

735.     Clause 255 will replace the automatic restriction on bankrupts serving as a member of a Local Authority with one disqualifying those subject to a BRO.

736.     Clause 256 will provide a wide order-making power for any Secretary of State or the National Assembly for Wales, to review legislation under his or her policy control and to maintain, repeal, amend or abolish such restrictions on bankrupts as they deem appropriate. Amendments can include reducing the class of bankrupts to whom a disqualification applies, applying the restrictions to those people who are subject to BROs or undertakings as well as bankrupts or providing that the disqualification is subject to the discretion of a specified person, body or group. Such orders will be subject to affirmative resolution.

Clause 257 & Schedule 23: Minor and consequential amendments

737.     Clause 257 gives effect to Schedule 23, which makes minor and consequential amendments to the Insolvency Act 1986 as a result of the changes being made in the Bill. Some of these amendments, such as those made because of the removal of summary bankruptcy, have been mentioned elsewhere. Paragraph 14 reflects the fact that the Official Receiver can act as a nominee and supervisor in an individual voluntary arrangement. Therefore the appointment provisions for Official Receivers in section 399 and the rules-making provisions in Schedule 23 have been amended accordingly.

738.     Paragraph 12 extends the offence of concealment of property to section 354 Insolvency Act 1986 to include any failure to account for the loss of any substantial property to the trustee. Currently, the provisions in section 354(3) set out the scope of the offence of a bankrupt failing - without reasonable excuse - either to account to the Official Receiver or the court for substantial losses or give satisfactory explanation for how such a loss came about. However, the realisation of assets is often administered by a trustee other than the Official Receiver.

739.     Paragraph 13 adds subsections (4) and (5) to section 355 (concealment and falsification of accounting records) Insolvency Act 1986. The current provisions of section 355(2) and (3) detail offences relating to bankrupts who destroy, conceal, alter or dispose of books, papers or records in the twelve months prior to a bankruptcy petition being presented, or between the petition and order. In the case of 'trading records', that period is extended to two years (section 361 of the Insolvency Act 1986). The Bill also repeals the current provisions of section 361, which will be dealt with by the new bankruptcy restrictions regime. As the availability of adequate records is crucial to the examination of the bankrupt's estates and enquiries into the bankrupt's affairs, subsection (4) extends the period from twelve months to two years. Subsection (5) provides a definition of the term 'trading record'.

740.     County Court Administration Orders ('CCAOs') are made in the county courts and fall outside the insolvency regime. They are mechanisms for dealing with individuals with multiple debts and give the debtor respite from enforcement proceedings while they pay off their debts. Only those who have a county court judgment against them, at least one other debt, and total debts of less than £5,000, can apply for a CCAO. Currently, section 429 Insolvency Act 1986 allows a court to make an order placing restrictions on acquiring credit and the use of a trading name for up to two years where a debtor has failed to pay under a CCAO. Paragraph 15 amends section 429 County Courts Act 1984 to reflect the fact that restrictions flowing from the making of a bankruptcy order will only be for one year following the change to the discharge period. Therefore restrictions flowing from a CCAO will be similarly limited.

Money

741.     The current financial regime of The Insolvency Service comprises numerous fees (see the Insolvency Fees Order 1986) covering case administration and a Secretary of State Fee, none of which achieves full cost recovery of activities undertaken by The Service. In addition, because of the low rate of interest set for estate balances invested in the Insolvency Services Investment Account, the amount returned to estates is considerably less than the level of investment income received by the account. The excess income is currently paid into the Consolidated Fund and amounted to some £43 million in 2000-01.

742.     The Government has announced its intention to reform the regime to make it simpler and more transparent. It is also proposed to make the regime fairer to creditors, for example by returning to insolvent estates those investment returns that currently flow into the Consolidated Fund. The majority of the changes necessary to achieve reform will be made by using existing powers and changes to secondary legislation and Rules. However, there are two specific areas that require primary legislation, and provisions for these are included in the Bill.

Clause 258: Fees

743.     Clause 258 subsection (1) inserts a new section 415A into the Insolvency Act 1986.

744.     The new section will enable the Secretary of State to charge a fee to bodies recognised under section 391 Insolvency Act 1986 as a professional body for the purposes of licensing insolvency practitioners (IPs). It is intended that fees prescribed under this provision not only cover the cost of recognition but also the cost of monitoring the bodies' activities, such as overseeing their procedures and ensuring that licensing is carried out properly. The fee will also cover the cost of more general regulatory functions carried out by The Insolvency Service, such as representation on the Joint Insolvency Council and keeping insolvency practitioners (IPs) informed of legislative and other developments through the issuing of newsletters and guidance. The cost of these regulatory functions is currently met by the DTI but the new policy is that they should fall to the profession. The fee, which will be set out in secondary legislation, will be charged to each body based on the number of IPs licensed by them.

745.     Subsection (2) of new section 415A provides for a fee to be charged to those IPs licensed by the Secretary of State under section 392, and will be based on the cost of granting and maintaining authorisation. The fee will also include the cost of monitoring the IP and the general regulatory functions undertaken by The Insolvency Service. As with the fee for the recognised bodies, the fee for IPs licensed by the Secretary of State will be set through secondary legislation. The level of the authorisation element of the fee will reflect more closely that charged by the recognised bodies to those IPs they license than the current authorisation fee of £100, which was set in 1986.

746.     Subsection (3) provides for payment of fees that relate to the operation of the Insolvency Services Account by The Insolvency Service and money paid into or out of the Account. The Insolvency Service will separate out the costs that relate to its operation of the Insolvency Service Account so that these costs are met by insolvent estates. This will allow for clear identification of those banking services that are carried out in respect of all cases, and that will be charged through an annual service fee, and those that relate to specific estates and transactions such as investment requests by IPs or the volume of payments out of the account through cheques or bank transfers. These changes will also enable the ending of the current arrangements whereby a number of different fees are used to meet these costs and to cross-subsidise other functions. Subsection (4) applies the conditions that apply to fees under section 414 to those introduced under 415A.

Clauses 259 and 260: Insolvency Services Account: interest & Insolvency Services Accounts

747.     Section 405 of the Insolvency Act 1986 requires that any excess in investment income from the Insolvency Service Investment Account after payments to insolvent estates and tax should be paid into the Consolidated Fund. Schedule 8 paragraph 16 and Schedule 9 paragraph 21 of the Insolvency Act 1986 enables the interest rate for the return of investment income to insolvent estates to be set through secondary legislation. The current rate of 3.5% has applied to companies since before the implementation of the 1986 Act. The Insolvency Act 2000 provided for payment of interest into bankruptcy estates.

748.     Clause 259 introduces additions to Schedules 8 and 9 to the Insolvency Act 1986 to allow the interest rate to be set by the Secretary of State by the issuing of a Notice, as opposed to through secondary legislation. This will enable the rate to be reviewed at regular intervals, probably annually, and allow changes in investment returns to the Account to flow through to insolvent estates without having to make regular amendments through statutory instruments.

749.     Clause 260 subsection (1) removes the requirement under section 405 Insolvency Act 1986 for excess income from the Insolvency Services Investment Account to be paid into the Consolidated Fund.

750.     Section 408 of the Insolvency Act 1986 provides for recourse to the Consolidated Fund where, after payments received from the Investment Account, the Insolvency Services Account has insufficient funds to meet its liabilities. Subsection (2) of clause 260 substitutes for the current section 408 a new section that incorporates the circumstances covered by the current section 408 and section 405 but provides wider powers that allow for adjustments to be made between the Insolvency Services Account or the Insolvency Services Investment Account and the Consolidated Fund. Adjustments may be necessary due to short-term fluctuations between the expected income, based on the level at which the interest rates are set and the actual investment return. This is because interest rates are set in advance, whereas the Investment Account is made up of investments purchased at different times, for different amounts, with differing returns and over different periods. New section 408 will enable the maintenance of a 'buffer' in the account to deal with such fluctuations and there may be occasions where adjustments need to be made between the account and the Consolidated Fund.

PART 11: SUPPLEMENTARY

Clause 262: Provision of financial assistance for consumer purposes

751.     This clause confirms the Secretary of State's powers to fund a wide range of activities that benefit consumers, including funding bodies such as the National Consumer Council and National Association of Citizens Advice Bureaux.

Clauses 263, 264, 265, 266, 267, 268 and 269: Financial provision, Transitional or transitory provision and savings, Minor and consequential amendments and repeals, Power to make consequential amendments etc., Commencement, Extent & Short title

752.     These clauses deal with the financial provision (clause 263), commencement (clause 267), territorial extent (clause 268) and short title of the Act (clause 269). Clause 265 gives the Secretary of State power to make by order consequential amendments to other Acts or subordinate legislation in connection with the coming into force of any provision of the Act. Clause 264 gives the Secretary of State power to introduce by order transitional or transitory provisions and savings as appropriate in connection with the coming into force of any provision in the Act. Clause 266 gives effect to Schedules 25 and 26, which contain minor and consequential amendments, repeals and revocations.

PUBLIC SECTOR FINANCIAL COST AND PUBLIC SECTOR MANPOWER EFFECTS

753.     The Government expects that most of the provisions in the Bill will give rise to either no or negligible additional costs. But certain measures in the Bill will involve some additional public expenditure. We anticipate that the CC would overall require an additional £16 million a year once the provisions in the Bill were operational. The consumer measures would involve costs of £10 million a year for local authorities for enforcement purposes resulting from reform of Part III of FTA 1973, and £20 million over four years for the OFT to implement and operate the full Codes of Practice regime. Costs of the insolvency reforms will mainly take the form of revenues that the Government will forgo: up to £110 million per annum through abolition of Crown preference and of payments to the Consolidated Fund of investment returns on insolvency funds. The Government expects that the overall effects of the Bill on public sector manpower will be negligible.

SUMMARY OF REGULATORY IMPACT ASSESSMENT

754.     The reforms in the Enterprise Bill generally reform existing regulatory frameworks (rather than establishing new ones).

755.     The competition reforms do not prohibit any behaviour that was not already illegal under CA 1998. They do not impose any direct costs on business.

756.     The consumer protection reforms will not involve any new prohibitions on business. Reform of Part III of FTA 1973 will revise the protection for consumers against businesses that do not comply with their legal obligations.

757.     The changes to the bankruptcy regime reduce the number of restrictions that are automatically imposed on undischarged bankrupts; provide for the automatic discharge of nearly all bankrupts after a maximum of twelve months; and introduce new Bankruptcy Restrictions Orders to protect the public and commercial community from bankrupts whose conduct before and during bankruptcy has been found to be culpable. The corporate insolvency reforms are intended to facilitate the rescue of viable companies, and, where this is not practicable, effect returns to creditors. Costs to business will fall mainly on insolvency practitioners, through the increase in fees for regulation of the profession to reflect full economic costs.

758.     A copy of the full Regulatory Impact Assessment can be obtained from the DTI's Enterprise Bill website at http://www.dti.gov.uk/enterprisebill.

759.     Copies can also be obtained from Patrick Barry, Enterprise Bill Team, Department of Trade and Industry, Room 651, 1 Victoria Street, London SW1H OET (Tel: 0207 215 6947, e-mail [email protected]).

COMMENCEMENT DATES

760.     All provisions of the Bill are to come into force by commencement orders.

EUROPEAN CONVENTION ON HUMAN RIGHTS

761.     Section 19 of the Human Rights Act 1998 requires the Minister in charge of a Bill in either House of Parliament to make a statement, before second reading, about the compatibility of the provisions of the Bill with the Convention rights (as defined by section 1 of that Act). The Secretary of State for Trade and Industry has made the following statement:

"In my view the provisions of the Enterprise Bill are compatible with the Convention rights."

762.     Remedies imposed in merger and market investigation inquiries may engage rights under Article 1 of Protocol 1 to the Convention. However, such remedies may only be imposed for legitimate reasons in the general interest, and the Bill provides for fair and transparent procedures to be followed in such inquiries and a right of review to the CAT. The Government is satisfied that this approach is compatible with the Convention.

763.     Clauses 183, 184, 185 and 190 provide the OFT with investigation powers and access to intrusive surveillance in relation to the new cartel offence in clause 179. To the extent that these may affect the right under Article 8 of the Convention to respect for private and family life, home and correspondence, the Government considers that they are necessary and pursue legitimate aims for the economic well-being of the country, the prevention of crime and the protection of the rights of others.

764.     Clause 246 and Schedules 20 and 21 make provision for Bankruptcy Restrictions Orders. Any such orders would be for the protection of the public, and their imposition would be a matter for the court to determine. The Government considers these provisions are compatible with Articles 6 and 8 of the Convention.

 
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Prepared: 26 March 2002