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Mr. David Borrow (South Ribble): I welcome the new clause. I am extremely grateful that the Minister delivered on the promise made in Committee. The new clause is long and complex, because this is a complex and difficult area of law, but the principles are simple, to echo the word used by the hon. Member for Eastbourne (Mr. Waterson). When a person goes bankrupt, it is reasonable for the creditors to be able to get access to all the assets, but we are talking not about assets but about a family home in which there is no interest, or only marginal interest, at the time of bankruptcy.
The new clause means that the creditors must, within three years, either take possession of the property and dispose of it or allow the bankrupt to continue to own it so that equity builds up, either by an increase in its value or by a lessening of the mortgage debt. If the house were a moveable chattel, it would be sold and the value would be distributed among the creditors, but at the time of bankruptcy there is nothing for the creditors to get hold of, because it does not exist.
Under the current law, the value in the property that is built up, through hard work and paying off the mortgage and through changes in the property's value after the bankrupt is discharged, can end up being distributed to the creditors a decade or more later, when any other asset belonging to the bankrupt at the time of bankruptcy would already have been sold and distributed.
In my view, it is important to be able to say that, once a bankrupt has been discharged, a line has been drawn under the matter and he can get on with his life, build up equity in the home and anticipate being able to retire with a property that has been bought and paid for. Under the current law, that may not happen. The hon. Member for Eastbourne asked about what happens if the family home does not come to the attention of the trustee at the time of bankruptcy, but that point is adequately dealt with in new clause 6, which points out that the three-year period begins when the property's existence comes to the attention of the trustee.
This is a modest but important new clause for certain people. I welcome its introduction by my hon. Friend the Minister, and the fact that her officials have found time to ensure its correct drafting. I hope that the House will accept it.
Mr. Mark Field: I accept the points made by the hon. Member for South Ribble (Mr. Borrow) today and in Committee. It seems unusual and perhaps unfair on a bankrupt to be left in limbo for such a period, particularly in cases where the matrimonial home is clearly part of the bankrupt's estate when proceedings begin, and the risk of needing to sell it off to pay the bankrupt's debts is therefore small or non-existent. Such uncertainty would be especially unfair on the bankrupt's spouse and children, for example. However, there are also concernsarticulated well by my hon. Friend the Member for Eastbourne (Mr. Waterson)about stigma and the position of creditors. In tabling this and other provisions, the position of creditors has perhaps been forgotten, or at least downgraded somewhat.
Although I appreciate that the same could be said of any arbitrary time limit, my concern about a strict three-year limit is that it might be deemed necessary to sell the bankrupt's hometo realise perhaps only a relatively small proportion of the equityat a difficult time in the property market. I am a relatively new MP, with 12 and a half months' experience in this place, but those who were MPs during the mid-1990s will be familiar with stories of individuals who, on becoming bankrupt, had their property taken over by the mortgage company or building society, and sold for a very low value. Any arbitrary time limit such as that proposed involves the inevitable risk that the property will have to be sold at a time disadvantageous to the bankrupt. Notwithstanding the level of discretion provided by the clause, such risk remains.
Mr. Waterson: Although the Minister rightly pointed out that a court can apply a period longer than three years, under subsection (7) it is possible, in principle, for a period of less than three years to be applied.
Mr. Field: I fully appreciate that there is flexibility, but if the clause is too flexible, it risks going against the grain of the intended aim of achieving some certainty. Such certainty is necessary in the light of the concerns of the bankrupt, and particularly of the state, about housing any dependants.
It seems that the new clause will ultimately be accepted, and instinctive support does indeed exist on both sides of the House for some of the aims of the hon. Member for South Ribble and the Government. I hope, however, that thought will be given to the underlying concern that it might be made far too easy to apply for individual bankruptcies. The real risk of this clause and other clauses is that the interests of creditors will be undermined.
We will no doubt brandish statistics later in the debate, but newspapers have recently reported that significant numbers of graduates leave university with large personal debts. They may not have the benefit of owning property, but such debts could lead to less of a stigma for being bankrupt, and students with large debts may go into bankruptcy at an early stage in order to draw a line under
I hope that the Minister will be able to provide some assurances on the points that have been made. Given the debate that we had in Committee, we can understand why the new clause is considered a good idea, but we are worried that creditors' interests will be downgraded in some way and that the strict time limitsnotwithstanding the potential for some flexibilitywill cause grave injustices. Examples of such injustices will no doubt have a high profile press coverage, and that will not do any of us any credit. We may find that the good intentions behind the clause will be undermined by the reality.
Mr. McWalter: I congratulate my hon. Friends the Member for South Ribble (Mr. Borrow) and the Minister on the new clause. It will significantly strengthen the Bill in terms of trying to promote a culture of enterprise. People will have greater opportunities to set up businessesto implement a business ideawithout risking all the assets that they have accumulated before setting out on a venture that will always be hazardous and difficult, no matter what the Government do. People who try to develop new businesses will always win the respect of Members of Parliament.
The new clause exposes again the fault line between the Government and the Opposition. The Opposition say that they do not support the idea that one can distinguish between bankrupts who are benign and those who are malign. Of course, the third category of serial optimistor people who might be described as recklesswill come to the attention of the courts after the first or second reckless venture. In such cases, the courts would begin to think that such persons were malign.
Mr. Field: The legislation on individual bankruptcy and, to an extent, corporate insolvency is predicated on the basis that some bankrupts and insolvent companies are good and some are bad. However, does the hon. Gentleman agree that there are shades of grey? We are concerned that the Government's approach is naive. The issue therefore should be dealt with as a matter of fact, rather than of strict law.
Mr. McWalter: I agree with the hon. Gentleman. It is a matter of shades of grey and difficult decisions need to be made about whether somebody who has left a lot of creditors in the lurch is so culpable that they should face a long period of imprisonment or be banned from being a company director. In other cases, people might go bankrupt because someone defaulted on a large debt that was owed to them, so it was no fault of theirsespecially if the default was unforeseeable. There is a spectrum of cases and it is ultimately for the courts to decide some of them.
Under the new clause, it must be decided whether someone is malign or benign. People heading for bankruptcy can do everything possible to salt away resources so that when they go bankrupt and default on their obligations to their creditors, they can live off the fat of the resources that they have salted away. I have come across a case in my constituency of someone making extraordinary payments into a pension plan which can be
Similarly, people can vest in their property a significant amount of resources that they should have been paying out on the bills to those who supplied commodities and services to their companies. However, new clause 6 caters for that eventuality. Someone may develop a significant capital in a property that is in council tax band H, for example, at the same time as they have been defaulting on their obligations, and if the company and its directors fail to take account of the process of giving an early warning and indicating to the authorities that they will have difficulty in meeting their obligations, I am sure that when the trustee applies for an order for sale in respect of the dwelling house, it will be granted. That is the process envisaged by the new clause.
Of course, much of the time, people genuinely have a single dwelling housea principal residencewhere not only they but their family and children live. Under the old regime, that asset is taken away and it falls to the state to house the family and children. These days, it is difficult for local authorities to respond positively in those circumstances. I agree with the hon. Member for Cities of London and Westminster (Mr. Field) about grey areas, but if we assume that the person has built up an inordinate amount of capital as a result of malign activities, it is ultimately for the courts to decide on which side of the line they fall. Have they built up that capital while failing to co-operate with the authorities? Some cases might be difficult to decide. Sometimes the order for sale will be granted because it will be reasonable to expect the family to rehouse itself in a lower value property, paid for out of residual assets.