House of Commons portcullis
House of Commons
Session 2005 - 06
Publications on the internet
Standing Committee Debates

Draft Enterprise Act 2002 (Disqualification from Office: General) Order 2002

TheCommittee consisted of the followingMembers:

Blunt,Mr. Crispin (Reigate)(Con)
Burt,Lorely (Solihull)(LD)
Dowd,Jim (Lewisham, West)(Lab)
Farrelly,Paul (Newcastle-under-Lyme)(Lab)
Fitzpatrick,Jim (Parliamentary Under-Secretary of State for Trade andIndustry)
Hendry,Charles (Wealden)(Con)
Howarth,David (Cambridge)(LD)
Joyce,Mr. Eric (Falkirk)(Lab)
Love,Mr. Andrew (Edmonton)(Lab/Co-op)
McCabe,Steve (Birmingham, Hall Green)(Lab)
McKechin,Ann (Glasgow, North)(Lab)
Pelling,Mr. Andrew (Croydon, Central)(Con)
Penrose,John (Weston-super-Mare)(Con)
Redwood,Mr. John (Wokingham)(Con)
Short,Clare (Birmingham, Ladywood)(Lab)
Stoate,Dr. Howard (Dartford)(Lab)
Whitehead,Dr. Alan (Southampton, Test)(Lab)
John Benger, CommitteeClerk
† attended theCommittee

SeventhStanding Committee on DelegatedLegislation

Thursday18 May2006

[Mr.Martyn Jones in theChair]

Draft Enterprise Act 2002 (Disqualification from Office: General) Order 2002

TheParliamentary Under-Secretary of State for Trade and Industry (JimFitzpatrick): I beg to move,
That the Committee hasconsidered the draft Enterprise Act 2002 (Disqualification from Office:General) Order2006.
It is apleasure, Mr. Jones, to see you in the Chair.
The majority of thoseprovisions of the Enterprise Act 2002 that amended or replaced thoseprovisions of the Insolvency Act 1986 that deal with individualbankruptcies came into force on 1 April 2004. The most significantimplemented the Government’s policy of encouraging entrepreneursby reducing the stigma of bankruptcy.
Among those provisions,section 256 of the 2002 Act changed the Insolvency Act 1986 byintroducing new section 279. That new section provided that bankruptsshould be automatically discharged from bankruptcy after one yearrather than three years, beginning with the date on which thebankruptcy commenced. However, that provision applies withoutdistinction both to bankrupts who are merely unfortunate and to thosewhose conduct before and after the making of a bankruptcy order isculpable.
By way ofnew schedule 4A to the Insolvency Act, the 2002 Act introducedprovisions intended not only to maintain but to enhance restrictions onthat minority of bankrupts whose conduct is irresponsible or reckless.Those provisions consist of the bankruptcy restrictions order, a courtorder placing restrictions on the activities of the bankrupt, whichcontinues after discharge from bankruptcy; the interim bankruptcyrestrictions order, which deals with the period prior to the hearing ofan application for a bankruptcy restrictions order; and the bankruptcyrestrictions undertaking, which enables those bankrupts who areprepared to admit to their culpable conduct to provide an undertakingthat has the same legal effect as a bankruptcy restrictions order, butby way of an offer by the bankrupts to the Secretary of State ratherthan by application to the court.
As a consequence of thechanges introduced by the 2002 Act, it became necessary to review themany existing statutory provisions that disqualified bankrupts fromholding an office or position because they did not reflect thedistinction that the 2002 Act made between the culpable bankrupt andthe merely unfortunate. There are obviously offices and positions forwhich it is necessary to provide continued protection to thepublic.
Certain of those provisionswere modified under the 2002 Act by way of amendment to the 1986 Act.For example, section 426A of the 1986 Act provides that those who aremade bankrupt in England and Wales are not thereby disqualified frommembership of the House; but those persons in respect of whom abankruptcy restrictions order has effect are so disqualified. Similarprovision was made in respect of membership of local authorities undersection 267 of the 2002 Act. However, some of the changes were to bemade through secondary legislation. Accordingly, section 268 of the2002 Act made provision for changes arising from the existence of thebankruptcy restrictions regime to be made to non-insolvency legislationunder affirmative resolution. That is why we are here today.
The order implements changesto bankruptcy disqualification provisions of a similar nature in a widevariety of legislation, involving various Departments. The changesgenerally remove disqualifications that automatically applied when aperson became bankrupt. They will go some way to mitigating thenegative social consequences of bankruptcy but will also take accountof the more serious implications of bankruptcy restrictions orders orundertakings.
I havereferred to the distinction that needs to be made between bankrupts whoare culpable and those who are merely unfortunate. For some offices orpositions, particularly those in which the probity of the office holderis of great importance, it is necessary to provide continued protectionto the public by extending restrictions on membership to those subjectto the bankruptcy restrictions regime. The order ensures that necessaryprotections are in place; to that end, I draw the Committee’sattention to the following amendments.
The order extends thedisqualification for being a trustee of a charity to those subject to abankruptcy restrictions order while retaining restrictions on thatoffice being held by an undischarged bankrupt. Similarly, the orderextends the disqualification for being a pension trustee to thosesubject to a bankruptcy restrictions order, while retaining therestrictions on that office being held by an undischarged bankrupt.Comparable changes are made in respect of registrars of births, deathsand marriages, plan managers of personal equity plans, and accountmanagers of individual savings accounts.
Information on individualssubject to the bankruptcy restrictions regime is made publiclyavailable. The Insolvency Service maintains a free public register thatshows details of current bankruptcies, those that have ended in thepast three months, current individual voluntary agreements, fast-trackvoluntary agreements and current bankruptcy restrictions orders andundertakings.
Theregister may be searched online using the surname, or part of thesurname, of the individual. A search can be made in respect of thewhole of England and Wales or the area covered by an individualofficial receiver’s office. A further register is devoted tothose who are the subject of bankruptcy restrictions. Both registersare available via the Insolvency Service I commend the order to theCommittee.
CharlesHendry (Wealden) (Con): It is a pleasure to serve underyour chairmanship, Mr. Jones. I am delighted to welcome the Minister tohis new role. There has been a fairly wholesale clear-out of theDepartment of Trade and Industry team; to use business parlance, I amnot certain whether that resulted from a management takeover or whetherthe receivers were called in to provide a new level of management.However, we welcome the Minister and wish him every success in his newrole.
I pay tributeto his predecessor the hon. Member for Bradford, South (Mr. Sutcliffe),who was extremely diligent. It was always a tremendous pleasure to workwith him; he never agreed to anything that we asked, but he did that inthe nicest way possible and made the wheels of government work thatmuch better. We wish him success in his new role as Under-Secretary ofState for the HomeDepartment.
There isno doubt that the new proposals are extremely sensible. We support theorder in principle. When the Employment Act 2002 was introduced, we hadconcerns that it could make bankruptcy too easy for some people, whomight turn to it as a first resort rather than when everything else hadbeen explored. However, we agree that it was absolutely right that somedifferentiation needed to be made between people who become bankruptinadvertently, whom the Minister described as being “merelyunfortunate”, and those who have clearly shown culpablebehaviour.
It iseminently sensible that the categories of people and organisations thatthe Minister has spoken about—trustees of charities, pensiontrustees, people managing personal equity plans and individual savingsaccounts—should be subject to the new rules. However, I have afew questions on some of the implications for those elected to publicoffice.
It isterribly important that there should be consistency at all levels ofpublic office. Will the Minister assure the Committee that the samerules will apply for Members of Parliament, councillors and parishcouncillors? He will be aware that these days it is often difficult toget people to stand for parish council election; people sometimes feelthat it is not worth the work or are concerned about the rules ofdeclaration, which they see as onerous. It is terribly important thatrules that disqualify people from elected office should apply equallyto all levels of publicoffice.
What aboutMembers of the European Parliament? I see why we want a set of rules inthis country, but it is paramount that the same rules should apply toall Members of the European Parliament, wherever in the European Unionthey happen to come from. Are similar moves afoot elsewhere in the EU?How can we ensure that there is no difference between the rules underwhich people in different places can beelected?
How mightthe order apply to the House of Lords? We recognise that the Lords maybe going through a further period of transition, but somebody wouldclearly not be appointed to that Chamber if they had been subject to abankruptcy restrictions order. However, such an order might apply tosomebody already in the House of Lords. Would they forfeit their seat,or would different circumstances apply?
The Minister will be aware thata number of former hereditaries were elected by their peers. Giventhat, will they be subject to the conditions? If they are to be, willthe non-elected peers be subject to those conditions aswell?
I hope that theMinister will have answers to those fairly detailed questions, but Ishall understand if he wishes to write to me, and we do not wish tostand in the way of theorder.
Who willpolice the measures? Are individuals who put themselves forward forelection expected to know? One would expect any person seeking tobecome a Member of Parliament, or a professional agent or even someonewho is an agent just for one election, to be aware of the restrictions.One would assume that people standing for election to a county,metropolitan or district council to be aware of that, too. But there isagain a question about parish councils. Given the commitments thatpeople are being asked to make, they may not be aware of what might barthem from taking office. Would it be an offence knowingly to stand forelected office if someone was subject to a BRO? Would the onus be onthe person to make sure that he or she did not fall foul of thelaw?
Will theMinister discuss the issue of consistency? People who serve a sentenceof 12 months or more in prison can stand for Parliament on theirrelease. But they are barred for five years from standing forParliament if convicted of a corrupt practice under electoral law. Andthey are disqualified for three years if convicted of an illegalpractice under electoral law. From my reading of the order, it seemspeculiar that someone could stand for Parliament on release from prisonfor murder but would be barred for up to15 years if subjectto a bankruptcy restriction order. We need a general revision of therules regarding disqualification as it seems that we could get into asituation in which very different periods of disqualification apply,which might sometimes look a little inverted in relation to the crimecommitted.
Will theMinister discuss considerations on implications for other changes tothe 2002 Act with regard to insolvency? The change of the period ofdisqualification to one year has, we now know, led to many studentsbecoming bankrupt on graduation. They cannot get rid of their studentloan debts, but they can get rid of all the others. They go off for ayear, come back and go into work, saving themselves thousands of poundsof debt. We do not approve of that, and it was predicted in somecircles at the time when the changes were made. Will the Ministerreconsider those dimensions of the Act? In those circumstances, onemight think that those people should be subject to a BRO where theyhave knowingly run up debts and see bankruptcy as a form of convenientescape from theircommitments.
TheMinister mentioned independent voluntary arrangements. Have the rulesregarding those been changed recently? I understand that many fewer arebeing granted than had formerly been the case. The impression that Ihave gained from constituency cases—I do not have manybankruptcy cases in my constituency but there has been a particularrecent one—is that a change in the rules, led by the Government,has resulted in IVAs becoming more difficult tosecure.
In principle, we support thestatutory instrument, and with those few questions, I am happy to givethe Minister thatsupport.
DavidHowarth (Cambridge) (LD): I have no doubt that this is aproper statutory instrument in the sense that it certainly falls withinthe policy of the parent act, the Enterprise Act 2002. Before itproceeds, however, I should like to raise one important aspect to dowith the parent Act. There is simply a question about whether theGovernment are still sufficiently satisfied with the policy of that Actto allow them to go ahead with this statutoryinstrument.
Policiescan have unintended effects. The problem is that personal bankruptciesare rising fast, especially debtor-initiated bankruptcies, in which theperson who owes money initiates proceedings. A press release issued bythe Department for Constitutional Affairs on 12 May states that 13,897debtor petitions had been issued in the first quarter of 2006, anincrease of84.6 per cent. on the previous year. From thestatistics that the DCA has put out, it seems that the increase startedaround the first quarter of 2004, which is about the time when the 2002Act first came intoforce.
That hashappened within the context of record consumer debt. Individuals owemore than £1 trillion in debt, and they would obviously bevulnerable if there were to be a change in economic circumstances. Havethe Government any evidence, or do they intend to look for it, that theincrease in the number of people making themselves bankrupt is indeedassociated with the benefit that the Act was meant tobring—namely, an increase in entrepreneurship. The policy wasthat if it became easier to become bankrupt, and if less stigma wasattached to it, people would be encouragedto be moreentrepreneurial. Are the Government investigating whether that is infact the case?
Thatpolicy is not without cost or risk. If people increasingly takebankruptcy lightly, and if they allow themselves to get into debt whichthey cannot get out of but think that it does not matter because theycan become bankrupt to escape from it, as the hon. Member for Wealden(Charles Hendry) suggested in reference to student debt, the effectwill be to make creditors more wary of lending. Lending will becomemore expensive for everybody as creditors take more care over whom theylend to. It will also add to the cost of lending—the interestrates that we all pay.
It is perfectly reasonable toassume that the burden of that extra cost of borrowing would be mostlikely to fall on people at the lower end of the income scale. No onewants a return to the humiliations of the old—veryold—bankruptcy law system. The underlying policy of the 2002 actseems worth while and humane, but will the Government say what measuresthey are taking or research they are doing to ensure that the Act isbringing the benefits claimed for it and is doing so at an acceptablecost?
JimFitzpatrick: I thank the hon. Members for Wealden and forCambridge (David Howarth) for their kind words. The former askedwhether this is a take-over, but I can say it is business as usual onthis side of the Committee, and he can make up his own mind about how heinterprets thechanges.
I shall runthrough the answers to questions asked by both hon. Gentlemen, with anapology if they do not entirely flow; there were a number of questions, andI have several separate answers, which may seem a littlestaccato.
On Membersof the European Parliament, the European Parliamentary Elections Act2002 provides that a person should be disqualified from the office ofMEP if he or she is disqualified for membership of the House ofCommons. Since new section 426 of the Insolvency Act 1986 provides thata person who is subject to a bankruptcy restrictions regime isdisqualified from membership of the House of Commons, such a personwould automatically be excluded from being an MEP.
In respect of individualsstanding for election, the Government do not feel it necessary to barthem. A person who consents to be nominated as a candidate forparliamentary elections must state that, to the best of his or herknowledge, he or she is not disqualified from membership of the Houseof Commons. There is, therefore, a degree of self-policing. Given thescrutiny of parliamentary candidature these days by local media andparliamentary opponents, one suspects that anyone trying to pull thewool would be quite quickly found out. In the unlikely event that sucha person were to be adopted and returned, the return would be void andthe person unable to take theseat.
Insolvency lawdoes not cover election law, to answer the point posed by the hon.Member forWealden.
On the Houseof Lords, there are similar restrictions for members there as on MPs.That is, bankrupts can stay, but bankruptcy restriction orders meanthat they are removed from office. I shall need to write to the hon.Gentleman about the technical difference between elected and lifepeers, and I shall also write about parish councils as I do not havethat information at my fingertips. The Standards and PrivilegesCommittee and the devolved Assemblies were fully consulted on theconsequences of the order, which the hon. Gentleman also asked about.New section 426A of the Insolvency Act provides that a member who isbankrupt may retain their seat. However, a member subject to abankruptcy restrictions regime is disqualified from membership of thoseAssemblies.
At therequest of my predecessor, my hon. Friend the Member for Bradford,South, we consulted Sir Nigel Wicks, chairman of the Committee onStandards in Public Life after publication of the White Paper“Insolvency: A Second Chance”. The Committee noted thatan individual subject to the bankruptcy restrictions regime will havedemonstrated an abuse of trust, and in such circumstances it would bedifficult to argue with the view that it was not in the public interestfor them to hold office. The Committee regarded the question of removalof disqualifications on members who became bankrupt as more difficultand did not offer a definitive response on thatpoint.
CharlesHendry: May I refer the Minister back to one point that Imade? Someone sent to prison for a criminal offence, such as fraud,which would by definition mean that they should forfeit the trust ofthe electorate, is able, on release, to stand for election again. Butsomeone subject to a BRO would be disqualified. Is not that an anomalythat he feels should beaddressed?
JimFitzpatrick: It may very well be anomalous. It comes downto a matter of trust. It was felt when the 2002 Act was passed thatBROs should appropriately be a disqualification from standing, and Isuspect it will be a matter of public judgment whether someone who hasbeen convicted and has served a term of imprisonment should be elected.No doubt the conviction and imprisonment would be a matter of publicrecord, and I should rely on the common sense of the electorate tojudge whether the crime was such as to warrant election to this placeor elsewhere. I entirely accept that there is an anomaly in terms ofthe law on disqualification, but our insurance policy is that it wouldnot be difficult to ascertain whether someone has been in prison andthe public are able to make a judgment onthat.
The hon.Gentleman also asked about students, acknowledging that their loanswould have to be repaid. However, BROs could apply if there wassufficient evidence to support an allegation that they had acteddeliberately, just as others in different positions could be judged tohave betrayed the trust of those from whom they sought to securemoney.
The hon.Gentleman also asked about IVAs. They have vastly increased. There havebeen no changes in the rules or advice given, and there has been anincrease, which one suspects arises from the newness of thelegislation, increased familiarity and the increasing indebtednessreferred to by the hon. Member for Cambridge. There has certainly beenno change in the rules that led to theincrease.
There hasbeen no change in the figures in Scotland, and no change in the law,which differs there from that in England and Wales, although it issimilar in many regards.
On the increasing number ofbankruptcies and whether it is an easy option, our view certainly isthat bankruptcy is not now and never has been an easy option. Themajority of bankruptcy are, indeed, cases in which the debtor presentstheir own bankruptcy petition, but that is not a step that people takelightly. Most will have sought advice from bodies such as a citizens advice bureau, and they will have exhausted other routes beforecontemplating bankruptcy. Bankruptcy is not an opportunity to walk awayfrom one’s debts. If the bankrupt can pay towards the debts,they will pay. The effects of bankruptcy are far-reaching, andbankrupts with surplus income will be subject to an income paymentorder or an agreement for three years and will face the potential lossof other assets, including their house and home.
In the year ended 31 March2005, 19 per cent. of bankrupts agreed to or were ordered to makecontributions from their income for the benefit of their estates. Forthe year ended 31 March 2006, the figure was 18 per cent. A bankruptcyorder will appear on an individual’s credit report for a minimumof six years from the date of bankruptcy and will be longer if thebankruptcy is of longer duration. In addition, if an individual hasbeen reckless, culpable or dishonest, they may be subject to abankruptcy restrictions order or undertaking that can last for betweentwo and15 years. That is obviously a serious length of time,and the hon. Member for Wealden compared it with the effect of othercriminal charges.
Inthe year ended 31 March 2005, there were 24 bankruptcy restrictionorders or undertakings, and in the year ended 31 March 2006, there were843. The average period for which restrictions have been imposed isjust under five years, but there have been three orders of 15 yearsduration. The most common allegation of misconduct is incurring debtwithout reasonable course ofpayment.
If I havenot fully answered either hon. Gentleman’s questions, I shallwrite to them. The order clearly brings other aspects and positions inpublic life into line with the legislation previously passed. No onehas challenged that, and everyone agrees that it is sensible to try todifferentiate between those who are culpable in their own bankruptcyand those who are unfortunately overtaken by events. We have tried toreduce the stigma, although bankruptcy is obviously still a difficultperiod in any individual’s life. If the order helps them toovercome that, so much thebetter.
Questionput and agreedto.
That the Committee hasconsidered the draft Enterprise Act 2002 (Disqualification from Office:General) Order2006.
Committeerose at three minutes to Threeo’clock.

House of Commons home pageParliament home pageHouse of Lords home pagesearch pageenquiriesorderingindex

©Parliamentary copyright 2006
Prepared 19 May 2006