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Seventh Standing Committee on Delegated Legislation
Tuesday 9 July 2002
[Mr. Peter Atkinson in the Chair]
Draft Insolvency Act 1986 (Amendment) (No. 3) Regulations 2002
The Chairman: Order. If there is a Division in the House during our proceedings I will suspend the Committee for 12 minutes.
The Minister for Industry and Energy (Mr. Brian Wilson): I beg to move,
That the Committee has considered the draft Insolvency Act 1986 (Amendment) (No. 3) Regulations 2002.
The Insolvency Act 2000 provides small, viable companies in financial trouble with a better chance of survival by allowing the company a short moratorium while a rescue proposal, in the form of a company voluntary arrangement, is put to its creditors. However, at present, other companies that you and I, Mr. Atkinson, would not think of as small would also qualify to use the new procedure by virtue of what might be termed a technicality. Those companies often take part in transactions that involve large amounts of money. It would not be appropriate for them to be able to use the procedure and the regulations ensure that they cannot do so.
One category of these types of company is often referred to as a special—
Mr. Nigel Waterson (Eastbourne): Before the Minister moves on to the new categories, will he comment on the existing categories in schedule A1 to the Insolvency Act 1986 which sets out the turnover, assets and number of employees as tests? Do the figures in that Act still apply or is it intended to update them or to increase the numbers involved?
Mr. Wilson: As I shall make clear, the terms of the proposal are narrow. The hon. Gentleman will see later the extent to which they impinge on these considerations.
One category of these types of company is often referred to as a ''special purpose vehicle'' or SPV. They are usually companies formed for the sole purpose of doing a single deal. Often they are used for securitisation and bond issues; they can also be used in the structured finance market and to deliver public-private projects. The nature of the transactions described will be obvious to hon. Members; the amounts of money involved are anything but small.
In recent years, a significant market and expertise has developed in the City of London for securitisation and related bond issues. That demand is dependent on the fact that United Kingdom law, unlike that of much of the rest of the world, allows a lender or funder to take a floating charge over the assets of the borrowing company. That charge allows the lender to appoint an administrative receiver more or less immediately if things go wrong. The administrative receiver's job is to
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get the lender's money back when realising the charged assets.
Mr. Waterson: Believe it or not, I am trying to save the Minister time by dealing with things that would otherwise need a lengthy debate. He mentioned securitisation; in the Enterprise Bill, which is passing through Parliament, the Government have made a welcome concession on securitisation which at least one member of the Committee will recall fondly. Have the Government had any further thoughts about the £50 million threshold of exemption from the changes to administration set out in the Enterprise Bill and its impact on the regulations?
Mr. Wilson: The sums to which the statutory instrument refers are entirely compatible with what we are trying to do. There are obvious similarities with the exemption provisions in the Enterprise Bill, but there are also differences; the Insolvency Act 2000 and the Enterprise Bill are different. The voluntary arrangement provisions in the 2000 Act are aimed at small companies; they provide an option for a small company to obtain a moratorium before putting a proposal for a voluntary arrangement to its creditors. The Enterprise Bill will prohibit the appointment of an administrative receiver—no matter what the size of the company—except in certain complex and highly specialised markets. I hope that that goes some way to answer the hon. Gentleman's question.
Mr. Mark Prisk (Hertford and Stortford): The Minister mentioned the moratorium. I am certainly not an expert, but what struck me when talking to representatives from R3—the leading trade body in this area—was that they claimed that the moratorium, which was at the heart of the Insolvency Act 2000, still has not been put into place. That surprised me. Apparently, the regulations that are necessary for the moratorium have not yet been put into place. I hope that the Minister can clarify whether that is the case. R3 said:
''Our view is it's nice to fine tune the procedure . . . but please can the Government find time to bring it into use, rather than leave it on the shelf.''
It said that several companies a week were seeing their chances of rescue prejudiced as a result of the delay.
Mr. Wilson: The hon. Gentleman is perfectly right: the moratorium provisions are not yet in force. Those concerned are aware of what we have been doing. I am advised that we expect to introduce the necessary secondary legislation shortly, but only once these regulations are made. To do otherwise would run the risk of damaging legitimate City interests. We must ensure that the chronology is correct. There was always going to be a delay between Royal Assent and bringing the moratorium into force, but it did take longer than anticipated. Lengthy and complicated discussions with City lawyers—I wonder whether there is any other kind of discussion with City lawyers—have been necessary to get the carve-outs right.
On securitisations, it is most unlikely that such an SPV would be able to obtain a moratorium. If it did, the right to appoint an administrative receiver would be stayed for as long as the moratorium lasted. That possibility would be likely to damage the attractiveness
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of the United Kingdom as a base for doing those types of deals and that, in turn, would have unwelcome consequences for the City. I hope that that reinforces my point about the chronology of the measures. In countries where the right to create floating charges does not exist, deals of this sort require more complicated legal structures in order to offer sufficient levels of comfort to make lenders willing to provide that sort of finance at an attractive price. The right to appoint an administrative receiver is also important in the structured finance market because of the level of control that that brings.
On public-private project finance, as a consequence of the private finance initiative—which was introduced under the previous Administration—and public-private partnerships, large amounts of private money are now being made available to fund public projects. The availability of funds is dependent on the financier having the right to step in and take over the contract if the borrower fails to deliver. That could not happen if a moratorium was in place. We could not contemplate disrupting an important plank of Government policy that leads to the provision of essential public services.
Under the existing qualification criteria, the holding company of a large group of companies might also qualify for a moratorium—particularly if all the group's trading is done by its subsidiaries. For a company that is worth millions of pounds—conceivably, hundreds of millions of pounds—to qualify for the moratorium clearly runs counter to our policy. It would be bizarre if a company with a liability of £10 million or more could qualify for a small company moratorium simply because it otherwise satisfied the eligibility criteria set out in the Act. I hope that the Committee will agree that we need to ensure that those types of larger company do not qualify for a company voluntary arrangement moratorium that was intended only for the genuinely smaller company.
Mr. Waterson: I hope that this will be my last intervention. I appreciate that we are dealing with company voluntary arrangement moratoriums. In the lengthy debates on the Enterprise Bill, we discussed whether, in due course, it would have the effect of downgrading the importance and popularity of individual voluntary arrangements. Do the Government intend the Bill to have the effect of making corporate voluntary arrangements less popular, or does the Minister think that they will continue to be as popular as they are now? If it is the latter, the regulations will be just as valid and significant as they are at the moment.
Mr. Wilson: That is difficult to foresee. We are dealing with hypothetical circumstances, and must safeguard against what might happen, not what we confidently predict will happen. It must be borne in mind that the Insolvency Act 2000 provides alternative tools leading to rescue.
The regulations will make companies involved in the transactions under discussion ineligible for the new moratorium introduced by the Insolvency Act 2000.
They do that not by replacing any of the criteria set out in the Act, but by making additions to the types of
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company that will be ineligible for the moratorium. I am sure that hon. Members on both sides will see the sense in excluding those companies, and will agree that no harm will be done to our principal aim of giving the smaller company a short breathing space in which to mount a rescue. I hope and expect that the Committee will support the concept in general.
Once the regulations are passed, we shall be able to make the company voluntary arrangement moratorium available to the small company in need of a breathing space. It is the usual practice for a Minister inviting Parliament to approve a draft statutory instrument to volunteer a view on its compatibility with the convention rights as defined in section 1 of the Human Rights Act 1998. I confirm my view that the provisions of the regulations are compatible, and I commend them to the Committee.
Mr. Waterson: I wish to express broad support for the aim of the regulations. However, we have various concerns, some of which I flagged up when I intervened on the Minister. I am grateful for his generosity in giving way several times.
We have two principal concerns. The first is that the regulations are still aimed at companies that are small by various definitions. I want to probe the logic behind that. The second is the Government's piecemeal approach to insolvency legislation. We have the Insolvency Act 2000 and the regulations. We also have part 10 of the Enterprise Bill, which has only just gone to the House of Lords, which relates to corporate and personal insolvency. We must pull together what the Government are trying to achieve in insolvency law and try to ensure that the regulations are as compatible as possible with the aims of parallel legislation.
As the Minister said, the point of the regulations is simply to modify the criteria to determine whether a company is eligible for a company voluntary arrangement moratorium. The concept of voluntary corporate and individual arrangements has been extremely helpful in many situations where companies or individuals sailed into choppy waters and needed a breathing space, and could carry their creditors with them at any time. There are many examples of companies and individuals who came out at the other end and were successfully reinstated on a proper business footing as a result. The 2000 Act added schedule A1 to the Insolvency Act 1986 in that regard.
It is important that we bear in mind the three basic criteria summarised by the Minister when we consider the detail of the regulations. The first criterion is a turnover of not more than £2.8 million. In today's money, that is not a vast turnover, by any stretch of the imagination. The second criterion is assets of not more than £1.4 million. A similar argument applies. The third criterion is not more than 50 employees. My hon. Friend the Member for Christchurch (Mr. Chope) and others expressed concerns in debates on Second Reading of the 2000 Act, or the Bill as it was then, about the extent of the Bill, and, by definition, the regulations. He rightly asked:
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''Why is the Bill not being extended to cover medium-sized and large businesses? One of the rationales for introducing the Bill''—
or the Insolvency Act 2000, as it became—
''is that it will save jobs. Only 0.5 per cent. of all businesses have more than 100 employees, but the businesses excluded from the terms of the Bill account for about 55.7 per cent. of business turnover in the United Kingdom, and employ 48.8 per cent. of those employed in this country.''—[Official Report, 24 October 2000; Vol. 355, c. 184.]
That argument seemed to be based on a limit of 100 employees. I cannot say whether that was the figure set out in the legislation, so we must assume that if the limit is now 50 employees, a much bigger percentage of both businesses and employees will be exempted from the provisions.
My hon. Friend went on to make the point on benefits, which I am happy to endorse today, that
''it might be more realistic to apply them to larger businesses than to very small ones.''—[Official Report, 24 October 2000; Vol. 355, c. 184.]
He prayed in aid the assistance of, among others, the Federation of Small Businesses.