David
Howarth: I beg to move amendment No. 221, in clause 105,
page 47, line 9, at end
insert— ‘and, (d)
the consent is obtained of all the company's
creditors'.
The
Chairman: With this it will be convenient to discuss
amendment No. 205, in clause 106, page 47, line 27, at end
insert— ‘; (d)
a statement confirming that the company's creditors have given their
consent'.
David
Howarth: The subject of the clause sounds similar to the
issues just discussed, but in fact it is fundamentally different.
Clause 105 is about the re-registration of unlimited companies as
limited. The
clause changes the existing law, but only in respect of public
companies. The point that I wish to raise is more
fundamental. Unlimited
companies are not very common, but they do occur in the financial
services sector. The point of an unlimited company is that its
creditors have recourse to the private wealth of the shareholders in
the event that the company cannot meet its debts, so unlimited status
is a way of attracting customers to a business in certain
circumstances, because, in effect, the shareholders are underwriting
that business. Given equivalent circumstances it makes the company a
more attractive body to deal with than a limited company in the same
circumstances. Clause
105 allows unlimited companies to re-register as limited companies,
thereby reducing the liability of the shareholders—perhaps
dramatically—without any consent from the creditors. The
fundamental issue is the balance of interests between creditors and
shareholders, and that balance is very different in an unlimited
company compared with a limited company. The amendment is therefore
intended to test the proposition that creditors’ interests must
be taken into account when a company moves from unlimited to limited
status. I do not want
to give the impression that there is a lot of malpractice or fraud in
this area at the moment, but there is a risk. It might be argued that
the provision has been in place for a long time without any particular
problems. However, in Tuesday’s sitting I mentioned the case of
Equitable Life, which was an unlimited company. The circumstances of
that case were different in that Equitable Life did not have
shareholders in the same way, so the issues did not arise in precisely
the same manner as I am suggesting today. Nevertheless, that example
shows that there are large undertakings that are unlimited companies.
There is a serious potential problem, and it would be just as well for
us to consider it and try to provide for it before it turns into a
real-life case.
Mr.
Djanogly: I have some sympathy with the Liberal Democrat
amendments. People often deal with an unlimited company on the basis
that there is no limit to the members’ liability. If they
entered into the same transaction with a company that was limited, they
would want to see other elements in the transaction, such as security,
or a deposit, or a charge. If the company with which they have
transacted subsequently becomes limited it would be fair to take their
interests into
consideration.
Margaret
Hodge: I understand the point that is being raised by the
hon. Gentlemen, in that with an unlimited company liability is not
defined—although I do not entirely accept that that would give
the sort of comfort to which the hon. Member for Huntingdon
referred—whereas limited companies, by definition, have a limit
on their liability. I can understand, therefore, why the hon. Member
for Cambridge believes that there might be a role for creditors when an
unlimited company re-registers as an limited company. The amendment
would ensure that they are consulted and given a role. However, I am
informed that such issues are tackled in other ways, which we believe
to be sufficient. I hope that that argument will be accepted.
At the moment, the law provides
that when a company is wound up within three years of having been
re-registered as a limited company, having previously been unlimited,
the liability of its original members
remains.
Paul
Farrelly (Newcastle-under-Lyme) (Lab): We have seen such
situations, although more often in the US than here. Will my right hon.
Friend the Minister confirm that the amendments would allow a creditor
to blackmail a company and resist its move to limited status, even if
that was in the wider interests of the company and perhaps those of
other
creditors?
Margaret
Hodge: I entirely accept that that would also create
difficulties and I am grateful to my hon. Friend for raising that valid
point, which had not been brought to my attention.
Whether or not the company
changes status, liability remains on the original member of the
unlimited company, which remains unlimited in respect of any debts and
liabilities contracted up to the point of re-registration. That
provision is contained not in this complex bit of legislation, but in
section 77 of the Insolvency Act 1986. We have no plans to change it,
as it provides proper protection for creditors without the sort of
danger exposed by my hon. Friend. Arguably, it is also simpler. I hope
that, with that explanation, the hon. Member for Cambridge will
withdraw the
amendment. Mr.
Quentin Davies (Grantham and Stamford) (Con): I seek
clarification. I have been following the debate with much interest and
the Minister has made an interesting point. Is she saying that the
details of the insolvency law to which she referred provide that if an
unlimited company changes its status to limited, the existing
shareholders retain their unlimited liability for all that
company’s debts for three years?
The implication is that at the
end of those three years, unlimited liability would fall away. Let us
suppose that a company, when unlimited, had undertaken a loan agreement
that matured after more than three years—say, after five or ten
years—and had done so on the basis that it could look to the
private capital of shareholders, beyond the paid-up capital of the
company. The creditor would find that that assumption had been
invalidated retrospectively. If he had been well advised, he would be
covered by some kind of covenant and loan agreement. I accept that, and
we anticipate that response. However, in making the law, we try to
defend those who are not necessarily sophisticated or well
advised.
Margaret
Hodge: I accept the issues and complexities raised by the
hon. Gentleman. However, if a company changed from having unlimited
liability to limited liability, I would have thought that most of its
creditors would take appropriate advice to ensure that they secured
their interests over time, as the hon. Gentleman suggested. I accept
that the eventuality that he describes may arise, but that three-year
limitation runs through most of the
law.
Mr.
Davies: With respect, the Minister has not satisfied my
concern at all. She has simply confirmed
that in my example the regime would have been changed retrospectively to
the—perhaps significant—disfavour of the company
creditor, who would be able to do nothing about it.
If the creditor had been
sufficiently sophisticated and well advised in advance, he might well
have insisted on an appropriate covenant in the loan agreement.
However, if he had not, it would be too late for the creditor to
protect himself once the unlimited company had declared its intention
to go limited. The danger to which I have alluded is real and the law
should be designed to protect those who are not necessarily
sophisticated or properly and completely
advised.
Margaret
Hodge: I do not know whether this is helpful to the hon.
Gentleman, but if the loan was unlikely to be repaid, the company,
having become limited, would presumably become
insolvent.
Mr.
Davies indicated
dissent.
Margaret
Hodge: The hon. Gentleman is shaking his head, but as I
understand it, the three-year limitation runs through most legislation
and would have an impact. I accept that, in the situation that he
describes, he has a point, but I am not sure that, in framing the law,
we can do anything that would better protect the interests of the
individual beyond that limitation. I am not sure that the creditor
having the right of veto on the change of status would be the best way
forward. Presumably that is what the hon. Gentleman would suggest if he
supports the hon. Member for Cambridge’s
amendment.
Mr.
Davies: There is another way forward that the Minister
should consider. That is to stipulate that liabilities that are in
existence and have been contracted on the assumption that shareholders
are liable on an unlimited basis would remain indefinitely, or at least
until the term of those liabilities as established in the relevant loan
agreements or other contractual terms. That would mean that it would
not be possible for someone who had made a loan or supply of credit in
good faith to an unlimited liability company would subsequently find
that the regime had been turned against them retrospectively and the
quality of the asset in their hands had been degraded because the
company decided to change its status from unlimited to limited. That
would mean for existing liabilities that the regime that applied at the
time that they were contracted would remain until the term of that
liability. All new liabilities would be contracted with the company
under its new status. That is another way forward.
It often happens in Committee
that we come across problems that some of us had not anticipated. That
is a good thing. I have not had a chance to prepare an amendment on
this issue but, in light of the discussions taking place between the
hon. Member for Cambridge and the Minister, I think it is a point worth
pursuing. I have not just come forward with a problem; I have proposed
a possible solution.
Margaret
Hodge: I appreciate the hon. Gentleman’s comments.
This has been an interesting exchange. I am
happy to consider the idea further if that is helpful, but let me try to
reassure him. I am advised that if a creditor finds that the loan that
he made has not been repaid, that creditor could seek the winding up of
the limited company. In so doing, he would have priority over the
remaining assets to get repayment of the loan. In those circumstances,
there is a mechanism open to him.
If the hon. Gentleman is not
happy with that explanation, I will write to him and we can have an
exchange of correspondence on the issue and return on Report if
necessary. I will copy Front Bench spokespeople into that
correspondence. It strikes me that there are other provisions that
would deal with the situation. Perhaps I am not explaining very
well.
Mr.
Davies: I can see no provision in the text before us
providing for a creditor to seek the winding up of a company simply
because that company is proposing to change its status from unlimited
to limited. Nor should there be such a provision because it would open
up exactly the possibility of blackmail that has been raised. We do not
want that. We want merely to ensure that when a creditor and a debtor
contract with each other—when two firms come together under a
certain regime and, in good faith, draw up a contract that leads to an
asset on one side and a liability on the other—the quality of
that asset and liability should not be retrospectively changed in a way
that cannot be predicted by the parties to the initial contract. That
is why I suggest that the existing liabilities should continue to be
unlimited.
Margaret
Hodge: I think that the hon. Gentleman misunderstands. I
was not suggesting that the point of transfer of the company from an
unlimited status to a limited status would be the point at which the
creditor would attempt to exercise their rights under a contract that
they had entered into. I was suggesting—to go back to where we
were—that all creditors of companies that change from being
unlimited to limited are protected for three years under the
InsolvencyAct 1986. The issue that the hon. Gentleman raised
was what would happen if the loan that the creditor gave to the
originally unlimited company only required repayment in five years. I
was trying to say that, in those circumstances, the company would have
been established as a limited company and a creditor with a claim
against it could seek the winding up of the then limited company, if
that company refused to meet the
loan. 3
pm
Mr.
Davies: With respect, the Minister has not followed me.
Let me give a precise example. On day one, a creditor—for
instance, a bank or supplier— contracts with a company to lend
money or to deliver goods on credit. One year later, the company
decides to change its status, and three years after that, that change
of status is confirmed for all purposes, so that no liability can
return to the shareholders on an unlimited basis.
Let us suppose that the term of
the original liability is five years. In other words, the loan is not
callable
until one year after the end of the three-year grace period, which the
Minister has just explained. In those circumstances, at the end of the
three years, the creditor can do nothing. It cannot put the company
into insolvency because the loan has not matured. Nor can it demand the
prepayment of the loan. However, the credit status of the loan has been
degraded by virtue of the fact that the shareholders are no longer
liable for the loan on an unlimited basis. A year later, the loan duly
matures. The question then arises as to whether the company becomes
insolvent, but at that point the shareholders are no longer liable for
the loan on an unlimited basis. That is an enormous change and might
mean that what would have been a good asset in the hands of the
creditor has now become a bad asset, and what would have become a
liability to be fulfilled on an unlimited basis will not be fulfilled
on a limited basis a year after the end of the three-year grace
period.
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