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Standing Committee B
Thursday 9 May 2002
[Mr. Derek Conway in the Chair]
Replacement of Part II of Insolvency Act 1986
Question proposed, That the clause stand part of the Bill.
Mr. Nigel Waterson (Eastbourne): I want to speak briefly, largely to set the scene and to give some structure to our debates on part 10 of the Bill. In common with many outside organisations, we welcome some of the provisions intended to improve corporate insolvency. I find it remarkable that, despite what seems to have been fairly widespread consultation, I am being deluged with briefing papers and proposed amendments from a range of specialised organisations, which have a great deal to say on the subject. For example, major concerns, which we shall develop in depth in later debates, have been raised about the scrapping of administrative receivership in most instances. That is not necessarily helpful.
Perhaps the most dramatic problem that we will have to grapple with in our debates on part 10 is the fact that, broadly speaking, the rules in this country do not distinguish between corporate and personal insolvency. That creates a number of problems. Yet again, it seems that Government policy is driven by a rather superficial and partial understanding of what happens in the United States of America. When the right hon. Member for Hartlepool (Mr. Mandelson) visited the USA a few years ago, he came back with all sorts of ideas about encouraging enterprise and so on, and we are told that they are part of the main thrust of the reforms to be made under part 10.
Much of the reasoning behind part 10 is seriously flawed because it fails to distinguish between personal and business insolvency. Again, we shall develop that point when we debate the personal insolvency rules. It seems that the Government are in danger of changing the rules so dramatically that, far from encouraging enterprise, they will make borrowing more difficult and more expensive, encourage the feckless and even the dishonest to run up large amounts of credit, and leave creditors less able to recover assets from those who go into bankruptcy. At the end of the day, we may see here what happened in the USA, where there was an explosion in the number of personal insolvencies and a slight reduction in the number of corporate insolvencies. We shall go through the figures in the debate on a later clause.
Most people take the view that it would be wrong to remove all stigma from bankruptcy and all the difficulties associated with it because in a civilised
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society the rule has to be that, when possible, debts are paid. To remove all the inconvenience and stigma of insolvency, particularly for individuals, would send a dangerous signal. That is particularly so now, at a time when we are seeing an explosion in consumer credit. We hear that people are borrowing more than ever, particularly on credit cards, but with less and less certainty that they will be able to repay the debt. Much of that is fuelled by the boom in house prices, a worrying development on which we shall be putting forward evidence from lenders. For instance, people taking out mortgages are borrowing not only 90 per cent. of the value of their new property, but the deposit, too. That bodes extremely ill for the future, particularly if there is a downturn in property prices, as there surely will be.
Those are some of the themes that we want to develop. We have also been asked to raise a mass of technical, practical concerns about how part 10, and particularly its initial provisions, will work in practice, and we shall explore those concerns in our amendments. I thought, however, that it would helpful to set out some of our thinking at this stage, and a short clause stand part debate seemed to provide the best opportunity.
Dr. Vincent Cable (Twickenham): I should like to echo those remarks. We have a dense agenda, and the many technical amendments, particularly to schedule 16, will take up quite a bit of the morning.
It is useful for us to have a clause stand part debate, because the basic principle behind the proposals is not in great dispute. The Government are replacing receivership with an administration system that will attempt to enable going concerns to keep going, and we endorse that principle. For reasons that I do not fully understand, however, the consultation process did not work well. The feedback that we haveI am sure that the hon. Member for Eastbourne (Mr. Waterson) has the same sourcesis that the consultation was often highly perfunctory. There was a round of consultation, a lot of feedback, and a very different draft emerged, but there was little consultation on it. This is a very specialised area, and there is a feeling among specialists that the consultation was not satisfactory and that there was not enough feedback, which is why they have suggested reams of amendments.
Many of the amendments deal with two sorts of failings in the Bill, which relate specifically to the Government's attempt to produce a streamlined administration system. First, the Bill often misses opportunities to speed up the administration process. Secondly, insolvency practitioners have told us that the time scale set for administration is hopelessly unrealistic. Indeed, we currently have the test-tube example of the Government's attempt to manage the administration of Railtrack. As far as I can see, the time taken far exceeds what is allowed for in the Bill. I would have hoped that there would be consultation with the Department for Transport, Local Government and the Regions on the practical problems of running a complex administration. Many of the amendments to schedule 16 relate to the concern
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of professionalsthere is no ideology involvedto make the process expeditious, as the Government originally intended.
In conclusion, I have a couple of general points. As the hon. Gentleman said, there is a problem with treating personal and corporate bankruptcy in the same way and in the same spirit. Poor individuals often have a problem accessing bankruptcy, and some of the new clauses suggest that that should be made easier in some cases, although the same philosophy may not be required in the corporate sector. Similarly, the philosophy of distinguishing between good and bad bankrupts is fraught with problems, although we shall come to that later.
Mr. Ken Purchase (Wolverhampton, North-East): It is appropriate to raise a couple of points that insolvency practitioners have put to me. First, on individual insolvency, the 12-month bankruptcy term may make bankruptcy more attractive to some debtors. The problem, it is suggested, is that it may substantially increase the number of orders, and the pressure on the courts to deal with them will increase by the same proportion.
Mr. Waterson: I am sure that the hon. Gentleman is awareperhaps he was about to say thisthat the Bill envisages a time scale that is significantly shorter than 12 months in many cases. Will he comment on that?
Mr. Purchase: Yes, it makes worse the scenario that I am painting about the pressure on courts to determine those matters adequately and expeditiously. The Committee needs to hear, at an early point, what arrangements may be put in place to deal with those provisions in the Bill.
My second point is that it is now the official receiver who will determine whether the financial activity of a bankrupt was reckless. There is already considerable pressure on the Insolvency Service, so we need confirmation that it will be able to cope with an even greater work load. Will the Minister say what constitutes reckless financial activity, because understanding that would go a long way towards expediting what could otherwise be a messy process, resulting in a long queue of people waiting for their cases to be determined?
In general, we have imported into the provision ideas that stem principally from the American chapter 11 procedures, to prevent the unnecessary loss of residual business by precipitate action. I entirely support that, but if we follow that route, it is even more important that the safeguards that I mentioned should be in place.
Mr. Jonathan Djanogly (Huntingdon): On the general purpose behind the comparative systems of administrative receivership and administration, we currently have two complementary systems. On the face of it, in clause 239, we are being asked to get rid of one of those systems, administrative receivership, and to enforce the system of administration. However, the more I look at the provisions, the more I see that
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they would actually take something that is currently called administration and turn it into a new beast, which will be a combination of administration and receivership. Does that form the subject of a stand part debate on clause 239 or on clause 241, because the same issues arise in both clauses? It is important that we have a comparative debate, and to consider the question now, so I shall say a little more now and a little less in the debate on clause 241.
There are serious concerns for companies about the proposal to merge the two systems. The Government contended, in the White Paper and on Second Reading, that administrative receivership was somehow unfair to unsecured creditors, but there is a transparency in the current system that has often been missed. If someone wants to do business with a company, they can always do a quick check of the companies register to see whether a floating charge exists, and if it does, that usually dictates the terms on which trade is carried out. For example, order sizes may need to be restricted and payment terms made tighter than usual. For larger lenders, there is always the possibility of debt priority agreements, which are often used in practice.
The main point, however, concerns the cost of one system compared with the others. Receivership is relatively cheap and much quicker than administration, which tends to be court-intensive, slow and expensive.
It is important to appreciate that, under the present system, most companies that go into administration are eventually wound up. That is vastly more expensive, and so incurs a greater loss to creditors, than it would be to go into administrative receivership in the first place. That is why the process is not used so much at the moment for smaller companies, for which the costs of administration generally make it unrealistic. The Bill will mean more administrations, so more costs and possibly even less money for creditors.
The key to realising value to creditors in the majority of insolvencies, in which perhaps a voluntary arrangement or some other negotiation with creditors is not a possible alternative, will lie directly with the speed at which the underlying business of the company can be sold. Every hour of delay will increase the likelihood of selling the business as a going concern, which will reduce the value of goodwill and therefore the return to creditors.
By way of comparison between the two systems, it is vital that we understand the difference between a business and a company, which comes up throughout this part of the Bill. Many who have commented on the Bill have raised the subject. A company is the corporate body that owns the business. It can sell its business, become a shell with cash in it, and distribute that cash to its shareholders. If insolvency practitioners, whether administrators or administrative receivers, moved into a company, they could force it to sell assets or the whole or part of the company's business. In that case, the distribution would not be to shareholders, who would be bottom of
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the pile. Distribution would apply first to secured creditors and then to unsecured creditors. Shareholders often receive little or nothing.
Before the Bill was drafted, the basic presumption in insolvency law was that the priority was the continuation of the business, which contained the goodwill and the employees. Effectively, that took priority over the interests of the company.