Select Committee on Delegated Powers and Deregulation Sixth Report



ANNEX

Memorandum by The Insolvency Service

INTRODUCTION

1.  The Bill provides for: -

  • small companies in financial difficulty to make voluntary arrangements with their creditors by providing the option of a moratorium to give the firm's management time to put a rescue plan to creditors (Clause 1 and Schedule 1) and for minor modifications to be made to the provisions relating to the existing company and individual voluntary arrangement schemes (Clause 2 and Schedule 2 and Clause 3 and Schedule 3);
  • allowing the Secretary of State to recognise a body which can authorise individuals to specifically act as both nominee and supervisor in relation to voluntary arrangements (Clause 4);
  • changes to the procedure for disqualifying persons who are unfit to be company directors by allowing the Secretary of State to accept undertakings which would have the same legal effects as disqualification orders made by a court and for various technical amendments to be made to existing legislation in relation to disqualification (Clauses 5 - 8 and Schedule 4);
  • the procedure for reporting delinquent officers and members of a company with a view to prosecution to be changed (Clause 9);
  • the amendment of section 219 of the Insolvency Act 1986 to ensure it is compliant with the European Convention on Human Rights (Clause 10);
  • an order making power which would allow the property of a person who dies insolvent to be treated in the same way as that of a living insolvent person (England and Wales only) (Clause 11);
  • a power to make regulations concerning the investment of funds held in the Insolvency Services Account on behalf of bankruptcy estates, and the payment of interest on relevant funds (Clause 12); and
  • an order making power which would allow implementation (with modifications if required) of a Model Law on cross-border insolvency which has been drafted by the United Nations Commission on International Trade Law (UNCITRAL), and amendment of section 426 of the Insolvency Act 1986 (co-operation between courts exercising insolvency jurisdiction) (Clause 13).

2.  Only some of the above provisions confer powers to make delegated legislation. The powers in the Bill which enable regulations, rules or orders to be made by statutory instrument are to be found in the provisions made by Clauses 4(4), 7(2), 11, 12, 13 and 15, Schedule 1 paragraph 4 (see paragraphs 5, 7(4), 8(7), 16(4), 30(7), 39(9), and 42 of Schedule A1), paragraph 10 and Schedule 4 paragraph 13(5).

DETAIL

CLAUSE 4: AUTHORISATION OF NOMINEES AND SUPERVISORS

3.  Subsection (4) provides for a new section (section 389A) and subsection (4) of that new section enables the Secretary of State to recognise a body, by way of order, which appears to him to maintain and enforce rules for securing that its members are fit and proper persons to act as nominees or supervisors and they meet acceptable requirements as to education and practical training and experience. Members of such a recognised body may then act as nominees or supervisors in relation to voluntary arrangements.

4.  At present, only a person qualified to act as an insolvency practitioner under section 388 of the Insolvency Act 1986 may act as a supervisor. But a body whose members are not so qualified but who, nevertheless, have the appropriate skills to act as office holder in such cases, may emerge in the future. This power would allow the Secretary of State to recognise such a body and thereby allow those of its members, who qualify, to act as nominees or supervisors.

5.  This power is specific and constrains what the Secretary of State can do by way of delegated legislation. Therefore, the Insolvency Service considers it is appropriate for it to be subject to the negative resolution procedure. That is consistent with the existing order-making power in section 391 of the Act, which allows the Secretary of State to recognise the bodies which authorise their members to act as insolvency practitioners, and is similarly subject to the negative resolution procedure.

CLAUSE 7: EFFECT OF NORTHERN IRISH DISQUALIFICATION

6.  Subsection (1) provides for a disqualification order made in Northern Ireland to have the same effects in Great Britain as a disqualification order made under the Company Directors Disqualification Act 1986. If, in the future, Northern Ireland legislates to allow directors to give disqualification undertakings in a similar manner to that proposed for Great Britain by this Bill, it would seem sensible that they also be given similar effects in Great Britain as those undertakings given under the Bill. The order-making power, in sub section 2, would allow that to be done.

7.  Subsection (2) provides that if provision is made in relation to Northern Ireland for undertakings corresponding to the disqualification undertakings provided for in section 6 of the Bill, the Secretary of State may, by order made by statutory instrument, give those undertakings the same effects in Great Britain as if they had been given under the Company Directors Disqualification Act 1986.

8.  The scope of this power is specific and constrains what the Secretary of State can do. Therefore, the Insolvency Service considers it appropriate for it to be subject to the negative resolution procedure.

CLAUSE 11: INSOLVENT ESTATES OF DECEASED PERSONS

9.  This clause amends section 421 of the Insolvency Act 1986 (the existing power to apply provisions of that Act to insolvent estates of deceased persons by order) so that provisions of the Act can be applied, by way of order, to the administration of a deceased's estate. Where that is done and a deceased debtor was, immediately prior to his death, entitled to a share in property held jointly, the severable part of that property resulting from his entitlement is available to creditors in insolvency proceedings where the insolvency order is made after the debtor's death.

10.  As the existing power in section 421 is subject to the negative resolution procedure, the Insolvency Service considers it appropriate that any order made using the extension of that power should also be subject to that procedure.

CLAUSE 12: BANKRUPTCY: INTEREST ON SUMS HELD IN INSOLVENCY SERVICES ACCOUNT

11.  This clause extends the power of the Lord Chancellor, with the concurrence of the Secretary of State, to make rules under section 412 of the Insolvency Act 1986, which may contain any provision specified in Schedule 9 of that Act, as to the manner in which moneys received by the trustee of a bankrupt's estate in the course of carrying out his functions as such are to be handled. That provision is extended so that rules may be made with respect to the payment of interest on sums which have been paid into the Insolvency Services Account.

12.  As the existing rule-making power in section 412 is subject to the negative resolution procedure, the Insolvency Service considers it appropriate that any order made using the extension of that power, by way of this clause, should be similarly exercised. An analogous power to make such provision in respect of the funds held in the Insolvency Services Account in respect of companies already exists in section 411 of the Act is also exercised by way of the negative resolution procedure.

CLAUSE 13: MODEL LAW ON CROSS-BORDER INSOLVENCY

13.  Subsection (1) provides that the Secretary of State may by regulations, made with the agreement of the Lord Chancellor, make any provision which he considers necessary or expedient for the purpose of giving effect, with or without modifications, to the UNCITRAL Model Law on cross-border insolvency. UNCITRAL is an organisation within the United Nations of which the UK is a member. In particular, the regulations may apply any provision of insolvency law to foreign proceedings, modified as appropriate and amend any provision of section 426 of the Insolvency Act 1986, which presently makes provision for co-operation between courts exercising insolvency jurisdiction.

14.  By taking a power in primary legislation to implement the Model Law by enacting it through secondary legislation - rather than in the Bill itself - it will be possible for the precise form of that legislation to be settled following consultation with interested parties.

15.  Since the precise form in which the Model Law will be enacted and the required modifications of existing insolvency law are not yet settled, the Insolvency Service feels it appropriate that there should be an opportunity for Parliament to debate the contents any regulations made under this power. The Insolvency Service, therefore, considers that the regulations made under it should be subject to Parliamentary control by way of the affirmative resolution procedure.

CLAUSE 15: COMMENCEMENT

16.  Subsection (1) enables the Secretary of State to commence clauses 1 to 14 of the Bill and their related five Schedules) on such day or days as he may appoint by order.

17.  This will enable the Secretary of State to bring the various provisions of the Bill in to force as the secondary legislation necessary to give effect to those provisions is ready to be made.

18.  The Insolvency Service does not consider it appropriate that this power should be subject to any Parliamentary procedure.

SCHEDULE 1

19.  This Schedule, in its paragraph 4, inserts a new Schedule, Schedule A1, in the Insolvency Act 1986. Paragraph 5 of Schedule A1 enables the Secretary of State, by regulations, to modify the qualifications for eligibility of a company for a moratorium for which the Schedule provides.

20.  Experience of use of the new moratorium procedure may indicate that the eligibility criteria require amendment in the future. This power provides the flexibility to do that if it is considered necessary.

21.  This power is specific and constrains what the Secretary of State can do by way of delegated legislation. Therefore, the Insolvency Service considers it appropriate for it to be subject to the negative resolution procedure (see paragraph 35 of this memorandum).

22.  Paragraph 7 of Schedule A1 sets out the documents which must be filed at court for a company to obtain a moratorium.

23.  Sub-paragraph (4) of paragraph 7 allows the Secretary of State by regulations to modify the requirements of paragraph 7 as to the documents required to be filed at court in order to obtain a moratorium. Again, experience of use of the new procedure may indicate that the documents which must be filed to obtain a moratorium require amendment in the future. This power provides the flexibility to do that if it is considered necessary.

24.  This power is specific and constrains what the Secretary of State can do by way of delegated legislation. Therefore, the Insolvency Service considers it appropriate for it to be subject to the negative resolution procedure (see paragraph 35 of this memorandum).

25.  Paragraph 8 of Schedule A1 determines when a moratorium will start and how long it can last for. The moratorium comes into force automatically when the required documents are filed at court and it will automatically end after 28 days, unless the effect of the decisions of the meetings of the company and its creditors has extended the period.

26.  Sub-paragraph (7) of paragraph 8 enables the Secretary of State, by order, to increase or reduce the initial 28 day period of the moratorium, for which sub-paragraph (3) provides. Experience of use of the moratorium procedure may indicate in the future that a longer, or shorter, period is more appropriate and this power would give the flexibility to change the period.

27.  This power is specific and constrains what the Secretary of State can do by way of delegated legislation. Therefore, the Insolvency Service considers it appropriate for it to be subject to the negative resolution procedure (see paragraph 35 of this memorandum).

28.  Paragraph 16 of Schedule A1 provides that during a moratorium, a company may not obtain credit of £250 or more (the sum specified in paragraph 16(1)) from a person who has not been informed that a moratorium is in force in relation to the company.

29.  Sub-paragraph (4) of paragraph 16 gives the Secretary of State the power to increase or reduce the sum specified in paragraph 16(1) by an order under section 417A of the Act, as inserted by paragraph 10 of Schedule 1 (see paragraphs 36 - 39 of this memorandum).

30.  Paragraph 30 (sub-paragraph (2)) of Schedule A1 provides that where a meeting of the company or its creditors convened to consider the approval of a voluntary arrangement, is to be adjourned, or further adjourned, the meeting may also resolve to extend, or further extend, the moratorium period for up to a total of two months.

31.  Sub-paragraph (7) of paragraph 30 allows the Secretary of State, by order, to increase or reduce the period by which the moratorium may be extended. Experience of use of the moratorium procedure may indicate that that period by which the moratorium can be extended, or further extended, is too short or too long. This power would give the flexibility to vary that period of time if it is considered necessary.

32.  This power is specific and constrains what the Secretary of State can do by way of delegated legislation. Therefore, the Insolvency Service considers it is appropriate for it to be subject to the negative resolution procedure (see paragraph 35 of this memorandum).

33.  Paragraph 39 of Schedule A1 sets out (in sub-paragraph (4)) a series of actions which will amount to offences if committed by an officer of the company in the twelve months prior to the start of the moratorium. Two of these actions involve specific monetary limits; that is, concealment of the company's property to the value of £500 or more, and fraudulently removing any part of the company's property to the value of £500 or more.

34.  Sub-paragraph (9) of paragraph 39 gives the Secretary of State the power to increase or reduce the monetary limit specified in relation to these actions by an order under section 417A of the Act, as inserted by paragraph 10 of Schedule 1.

35.  Paragraph 42 of Schedule A1: As explained in the above paragraphs, several provisions in Schedule A1 permit the Secretary of State to make regulations or orders. This paragraph provides that such regulations and orders may make different provision for different cases and such consequential, incidental, supplemental and transitional provisions as the Secretary of State considers to be necessary or expedient. Such regulations or order may also amend or repeal any provision in the Insolvency Act 1986 or the Company Directors Disqualification Act 1986. Sub-paragraph (4) of paragraph 42 provides that such regulations and orders shall be subject to the negative resolution procedure. This is the procedure that the Insolvency Service considers appropriate for the reason set out in paragraphs 21, 24, 27 and 32 of this memorandum.

36.  Paragraph 10 of Schedule 1 inserts a new section, section 417A, into the Insolvency Act 1986 which gives a power to the Secretary of State to increase or reduce, by way of an order, the monetary limits referred to in:

  • paragraph 16(1) of Schedule A1 (maximum amount of credit which a company can obtain without disclosure of the moratorium); and
  • paragraph 39(4) of Schedule A1 (minimum value of company property concealed or fraudulently removed, affecting criminal liability of company's officers).

37.  Experience has shown that, with time, the value of such specified sums can become eroded by inflation. A period of deflation would have the opposite effect. Any significant changes, brought about by inflation or deflation, would mean that the provisions would no longer have the intended effect.

38.  Sub-paragraph (1) of section 417A will provide the flexibility to either increase or reduce these monetary sums to take into account any changing factors in future years which would indicate that these monetary limits are no longer set at the appropriate levels.

39.  The scope of this power is specific and constrains what the Secretary of State can do by way of delegated legislation. Therefore, the Insolvency Service considers it is appropriate for it to be subject to the negative resolution procedure.

SCHEDULE 4

40.  Paragraph 13 makes consequential amendments to section 18 of the Company Directors Disqualification Act 1986 which provides for the maintenance of a register of disqualification orders. The amendments have the effect that particulars of disqualification undertakings given under the Bill will be recorded in the register and available for inspection.

41.  Sub-paragraph (5) of paragraph 13 makes provision for the Secretary of State to have the power to make regulations for particulars of disqualification orders made in Northern Ireland also to be recorded and open to inspection.

42.  This power is specific and constrains what the Secretary of State can do by way of delegated legislation. Therefore, the Insolvency Service considers it is appropriate for it to be subject to of the negative resolution procedure.

EXISTING POWERS

43.  The Bill both adds new provisions to, and amends existing provisions in, the Insolvency Act 1986 and the Company Directors Disqualification Act 1986. Except where any of the new provisions themselves enable the making of subordinate legislation (as is the case in relation to Clause 13(5)) existing powers in both Acts will be used to make the necessary secondary legislation to give effect to new primary provisions.  

February 2000


 
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