Enterprise Bill

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Clause 244

Liquidator's powers

Question proposed, That the clause stand part of the Bill.

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Mr. Waterson: Again, a small point has been raised with me by PricewaterhouseCoopers, which, among other things, is a well-known practitioner in insolvency matters. It suggests that the clause appears to be intended to overcome problems caused by a 2001 Court of Appeal decision involving re Floor Fourteen Ltd. One or two members of the Committee may not be as familiar as they would like with that decision, so I shall explain that it was held in that case that the costs of pursuing an action to recover money from directors for wrongful trading could not be recovered by the liquidator as a liquidation expense.

Mr. Carmichael: Incredible.

Mr. Waterson: I assume that the hon. Gentleman is not describing his party's policies, but is commenting on the decision or the purport of it.

The same principle applies to other types of action related to pre-liquidation transactions and events. That can make it difficult for liquidators to pursue such actions and it reduces the likelihood that money will be recovered for the benefit of creditors. Incredible, as the hon. Gentleman says, is the word that springs to mind. I presume that there was no attempt to appeal to the House of Lords, which puzzles me slightly.

The clause attempts to overcome the problem by specifically including the pursuit of such actions in the powers that a liquidator can exercise, with the consent of the liquidation committee. PWC states that, unfortunately,

    ''So far as we can see this does not overcome the problem, as the difficulty does not lie in the scope of the liquidator's powers but in the definition of liquidation expenses in the Insolvency Rules 1986.''

Although we understand why the Government are trying to deal with the problem caused in re Floor Fourteen Ltd., the clause does not do the job. The matter can presumably be approached through regulation, and the Under-Secretary may be thinking along those lines. In the real world of insolvency practitioners, the point is significant. It seems important to me, and it should be dealt with.

Miss Johnson: In terms of the Cork recommendation, I confirm that it will be possible to pursue antecedent recoveries subject to sanction by the creditors. Under a recent decision, the Lewis case, a liquidator may utilise funds held in a liquidation to pursue antecedent recoveries without sanction. The clause will ensure that the decision to use funds to pursue such actions lies with creditors, not the trustee.

The hon. Gentleman raises the subject of liquidators recovering costs. The Insolvency Rules 1986 are being amended to allow a liquidator to recover his costs when taking such actions.

Question put and agreed to.

Clause 244 ordered to stand part of the Bill.

Clause 245

Duration of bankruptcy

Mr. Waterson: I beg to move amendment No. 455, in page 171, leave out line 33 and insert—

    '(a) in the case of an individual whose bankruptcy arises from the closure of a business or trade established or operated by that

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    individual, one year beginning with the date on which the bankruptcy commences; and

    (b) in cases not falling within subsection 1(a):

    (i) where a certificate for the summary administration of the bankrupt's estate has been issued and is not revoked before the bankrupt's discharge, two years beginning with the date on which the bankruptcy commences; and

    (ii) in any other case, three years beginning with the date on which the bankruptcy commences'.

The Chairman: With this it will be convenient to take the following amendments: No. 44, in page 171, line 33, leave out 'one year' and insert 'two years'.

No. 430, in page 171, leave out lines 34 to 37.

No. 519, in page 171, leave out lines 34 to 41.

No. 520, in page 172, leave out lines 10 and 11.

11 am

Mr. Waterson: The clause is extremely important, and we need a pretty detailed stand part debate when we have disposed of the amendments to pull together some broad issues in this part of the Bill and, I hope, to save time on debates on later clauses.

I apologise for suggesting earlier that, whatever else would interest and delight us in the final part of the Bill, there was nothing political in it. I have considered the personal insolvency provisions more carefully, talked about them at length and received substantial briefing from a variety of organisations such as the Consumer Credit Trade Association, and it is plain that there might be plenty of politics in the proposals.

If the provisions go ahead as the Government envisage them, there will be not only massive practical problems, but a major redistributive effect, especially if we follow the path of places such as the United States of America, Hong Kong and—dare I say it—Scotland, where similar changes to bankruptcy practice have had such an effect. On clause stand part, I hope that you will allow us to develop those arguments, Mr. Conway, as they are causing enormous concern in the credit and banking industries. The provisions are likely to have significant effects on those borrowing money as well.

It may help if I sketch out the three broad issues that need to be covered in this and subsequent clauses on the new personal insolvency regime. The first is principle, on which there is a divide between the Government and us as to whether it is outdated and unacceptable for an element of stigma to be attached to people engaged in personal insolvency. We shall return to the more philosophical aspects of that in detail.

The second issue is effect in the real world. Plenty of evidence from other countries in similar situations seems to confirm the strong feeling that the law of unintended consequences will kick in with a vengeance if we are not careful.

The third issue is resources, which we again want to consider in detail in a more general debate. However, I flag it up because it has specific reference to the clause. If we are considering a regime in which the majority of bankrupts will come out of bankruptcy within a year at most, and in some cases much more quickly, apart from the exceptions where a special bankruptcy

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restrictions order is made, will the resources, let alone the time, be available to investigate those cases fully? Will there be a rubber-stamp system, in which people's assets and ability to pay back their creditors are not gone into in any depth? Some American states take the idea to its extreme, and people can come in and out of bankruptcy within 28 days. That strikes us as phenomenal, but we need to probe further on exactly how the Minister thinks that the provisions will work.

I want to take up some general points that were made about the amendments, but if you will permit me, Mr. Conway, I shall deal with them later in more depth. Amendment No. 455 tries to deal with a central problem. Unlike the law in some countries, English law treats business and consumer bankruptcies in more or less the same way. The Bill will not change that. Its declared aim is to encourage enterprise, but we have a slight suspicion that Ministers do not understand the meaning of the word, or how it operates, and they certainly do not understand the effect that the Bill will have on the business community. We would have had precious little to say during our many enjoyable sittings were it not for the business community's legitimate and deep-seated concerns about many of its aspects, of which this is one example.

If we accept the premise that the Bill is designed to make bankruptcy a more attractive option for entrepreneurs, it seems, at least in theory, that there can be no objection to limiting its effects to those people. Of course, the effect on consumer bankrupts will be much more serious not only for them, but for the economy as a whole because of the likely expansion of insolvency as a result of this part of the Bill.

We cannot see how a sharp increase in consumer bankruptcies can possibly be good for business. Indeed, we would have thought that the opposite is true. It is a basic tenet of business that customers should pay for what they receive in goods and services, which is why amendment No. 455 would limit the new fast-track approach to business bankruptcies. If the justification for the Bill is that it should encourage entrepreneurs to take risks, to try, to fail honourably and then to try again and eventually get it right—we have problems with some of that premise, but I shall return to it in a moment—why not build that into the Bill? That is what we suggest.

I want to look in much more detail at the American experience. Much of the Bill is based on superficial ideas of what happens in the United States of America. We know that the right hon. Member for Hartlepool (Mr. Mandelson) went to the States and came back with impressions about how such provisions could be transported to the UK. Indeed, we know that the Chancellor, whom I believe to be responsible for much of the Bill, has a narrow and often misconceived admiration for what happens in the USA.

We believe that the Bill will have a different effect if we are not careful about its drafting. Speaking of the right hon. Gentleman, I am sure that the Committee shares my shock and horror that no less a personage than the Deputy Prime Minister has been overheard

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saying that Hartlepool is the only place in the country to be represented by two monkeys. I hope that the press made up that story.

I do not claim that the drafting of amendment No. 455 cannot be improved. It is a probing amendment, but it draws a sharp distinction between consumer and business bankruptcies. Amendment No. 44 takes a rather broad-brush approach by changing the period of one year to two. It reflects our worry over whether the resources will be available, even for the current number of bankruptcies each year, let alone the likely increase, to make proper inquiries.

Amendment No. 430 is designed to limit the period to a year and no less. We take the view, and many practitioners agree, that a set period is desirable, as it will prevent variations in practice, procedure and resources from causing variations among different official receivers' offices. It is not a seamless service—even the Under-Secretary would not claim that—and different offices are under different pressures. Hon. Members will have found that from their experience of constituents' problems. If the discharge period is to be limited, let us make it 12 months.

Another issue raised by the practitioners, particularly PricewaterhouseCoopers, is that an early discharge may inhibit a private sector trustee when applying for an income payments order. Such an application must be made before discharge. As trustees are rarely in office within two months, and often not within three, there is little time to make the necessary inquiries, instruct solicitors and make the application.

There is also a worry that variations between official receivers' offices may lead to windfalls being available to creditors in some cases, while others remain with the discharged bankrupt in similar cases elsewhere. It is possible to envisage a situation in which a person in a business—perhaps authorship—with enormous variations in income knows that they are due to receive a large sum a year or two down the line. They could go in and out of bankruptcy, avoiding problems with previous creditors, and then receive that income scot free. That would certainly be possible without a thorough investigation of such a bankruptcy.

Official receivers, again as PricewaterhouseCoopers point out, will take on additional responsibilities, particularly bankruptcy restrictions orders and individual voluntary arrangements, which we shall discuss in more detail later. However, it is unlikely, unless the Under-Secretary has good news for us, that significant additional resources will be available, and compiling reports on early discharge will be an additional burden. With an automatic 12-month discharge, that reporting function will be unnecessary, as it is under existing legislation. In the past few months, I have asked a series of written questions about the pressures on the official receivers under the existing system. We might discuss that later.

Amendments Nos. 519 and 520 have a similar thrust—they are designed to establish a fixed period of 12 months. If we are to go down that route, we should

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at least have a minimum period for people coming out of bankruptcy. It will be quite tight, based on experience under the existing arrangements, for all such cases to be investigated thoroughly within the 12 months. There will be an understandable temptation for what appear to be simple, straightforward cases to be rushed through and discharged quickly. A sensible approach to allocating resources by individual official receivers' offices will achieve that, but what appears to be simple and straightforward may not be so. On clause stand part, we want to discuss in detail the practical experience of other countries.

The amendments are just the start of the debate on this area of personal insolvency, and I shall be fascinated to hear the Under-Secretary's response.

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