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That this House disagrees with the Regulatory Reform Committee in its recommendation that the draft Legislative Reform (Insolvency) (Advertising Requirements) Order 2009 should not be approved.
The House regularly debates the need for regulatory reform and the need to reduce unnecessary red tape. Part of the backdrop to those discussions is the responsibility of all of us to ensure that rules that may have been cast a long time ago have not become outdated or been overtaken by the way in which people lead their lives, trade and do business, or obtain information.
It is incumbent on Government to take that responsibility seriously. Regulation is a legitimate part of the modern world—we live in a world with rules—but we do not want business, or creditors when insolvency is involved, to be burdened with rules when they no longer serve the purpose for which they were designed, or when it may be possible to do the job in a better way and, perhaps, at a lower cost. The order that we propose would give further help to creditors by reducing the bureaucratic burdens and costs imposed by one of the current elements of our insolvency arrangements.
I acknowledge that insolvency can be a complicated business, and that having to deal with a failing business is stressful enough, particularly during the current economic difficulties. I therefore feel that it is incumbent on us to do as much as we can to make the system simple and streamlined, bearing in mind the duty that we owe creditors in such circumstances. The order is part of that streamlining process.
Let me explain what the change means in practice. When a company finds itself unable to pay its debts, a liquidator is appointed to find and distribute the company’s assets. That can be done through compulsory liquidation, members’ liquidation or creditors’ voluntary liquidation. I shall not go into the details of the differences between those types of liquidation, but this order deals with voluntary liquidations.
Mr. Christopher Chope (Christchurch) (Con): Before the Minister gives us the background, can he explain succinctly why he does not believe that the judgment of the Regulatory Reform Committee is correct? Why is he second-guessing the judgment of a Committee that was set up by the House specifically to deal with circumstances of this kind?
Mr. McFadden: If the hon. Gentleman will exercise just a little patience, I shall come to that in a couple of minutes.
In the case of a voluntary liquidation, a meeting of the company’s creditors must be called under sections 95 and 98 of the Insolvency Act 1986. Notice of the time and venue of the meeting must be sent directly to all known creditors, advertised in the London Gazette and, at least once, in two local newspapers that are circulated in the areas where the company has its principal place of business. The Government propose to remove the obligation to advertise in two local newspapers. That means that it will be up to liquidators, under section 95, or the company, under section 98, to decide
whether advertising is needed, and, if it is, to choose the most appropriate method. I stress that it will still be open to liquidators and companies to use local newspapers if they consider that to be the most appropriate mechanism in the circumstances.
Mr. Brian Binley (Northampton, South) (Con) rose—
Mr. McFadden: I am always happy to give way to the hon. Gentleman.
Mr. Binley: The Minister is always immensely kind to me. I am most grateful to him. As he will know, insolvency notices provide a sizeable part of the income of many of our local newspapers—he will see the irony in the fact that those newspapers are the subject of the topical debate to follow. Indeed, the Government have expressed considerable concern about the solvency of the local press. Has the Minister taken that into account? I hope to speak in the topical debate, but I would like to hear his answer to that question.
Mr. McFadden: I am sure that it is more in order for me to concern myself with this debate, rather than the next one, in which I will not be seeking to speak, but I will say that we want to ensure that the advertising in terms of the insolvency process is the most effective. That is our concern and why we have proposed the order.
The hon. Member for Christchurch (Mr. Chope) asked why I disagreed with the Committee’s verdict. The Delegated Powers and Regulatory Reform Committee in another place was satisfied with the order; it gave it the thumbs-up, to use the colloquial phrase. The House of Commons Committee also stated that all the preconditions in the Legislative and Regulatory Reform Act 2006 and the Standing Order tests had been met, but it expressed several reservations and stated that, in its view, the order should not be approved. Those reservations are set out in the report, and I am sure that my hon. Friend the Member for Ellesmere Port and Neston (Andrew Miller), the Committee Chairman, will explain them, but, in brief, the Committee felt the order was too “narrow in its focus” and that its effects would be “minor”. It felt it may be unlikely to result in further dividends for creditors and would not provide them with enough protection.
We have two main reasons for wanting to introduce this order. First, it has the potential to save business and creditors money, by reducing costs. Each advert costs an estimated £300 a time, and since there is a requirement to place two adverts, that cost is obviously doubled. That £600 charge may not be a life-or-death sum in each individual case, but when one adds up the sums involved throughout the process, it can increase the costs of insolvency. For creditors who have already lost money, it is important to ensure that their money is spent usefully during an insolvency process, so that as much as possible can be returned to them at the end of that process. The savings from the proposals, together with parallel changes that we propose to the insolvency rules, will combine to mean estimated savings of some £17 million a year. This is not a “narrow” measure.
Lembit Öpik (Montgomeryshire) (LD):
I am pleased to hear that the Minister is concerned about the cost of insolvency practitioners. Is he therefore saying this proposed change is consistent with a narrative that will put pressure
on insolvency practitioners to charge less? I have been appalled by the amount of money that has been absorbed by insolvency practitioners in some cases, and I am just seeking an assurance, without going into details that take us beyond today’s debate, that other measures will be introduced to make sure insolvency practitioners do not take a disproportionately large amount of the funds when they are disbursing to creditors.
Mr. McFadden: There are rules governing charges, which I will come on to, but certainly the motivation behind the order is to increase the pot of money that is available to creditors. As I was saying before the hon. Gentleman intervened, the savings from the proposals, together with parallel changes that we propose in the insolvency rules, will mean estimated savings of £17 million per year. That is part of a wider package of proposals to streamline the process.
John Hemming (Birmingham, Yardley) (LD): The Minister says there are estimated savings of £17 million per year. I thought it was £3.6 million.
Mr. McFadden: The £17 million figure is the savings from both the order we have proposed, which has been considered by the Committee, and the parallel changes to the insolvency rules, which are dealt with in a separate order under the negative resolution procedure. The reason we have to do it this way lies in the origins of the insolvency legislation. There will be estimated savings of £17 million a year from the changes.
That is only part of a much wider package of proposals to streamline and modernise the insolvency rules and other relevant provisions—part of which, I should inform the House, will include a further legislative reform order—which should save a total of about £40 million per year. Huge sums may not be involved in each individual case, but over the piece the savings gained for the insolvency process are certainly worth having. We believe the costs of introducing the order are minimal, and there is no reason why we should not introduce the changes.
The Committee expressed concern about the money going to liquidators rather than to creditors, but protection against that is already built into the legislation. The terms governing the liquidator’s remuneration will be fixed by the creditors and the creditors can apply to the court if they consider the amount of the liquidator’s remuneration to be excessive. Any liquidator taking remuneration that was not justified could find themselves subject to the scrutiny of the courts. I understand that the Committee—this is reflected in its report—was concerned that the savings would not be passed on, so let me make it clear to the House that I want them to be passed on. There is absolutely no reason why what we propose today, and what we propose in the other connected changes to come, should increase fees charged by insolvency practitioners. This is not about increasing fees; it is about avoiding unnecessary expenditure.
Gordon Banks (Ochil and South Perthshire) (Lab):
Insolvency fees may be managed through the creditors’ committee, but does my right hon. Friend the Minister
agree that it is often very difficult to get creditors to serve on those committees and therefore to provide the adequate scrutiny?
Mr. McFadden: That may be the case, but, as I said, the fees will be governed by the courts. I stress that the proposal in the order is not about increasing fees for liquidators, but increasing the pot of money that is available to creditors.
Lembit Öpik: I am very encouraged by the tone of the Minister’s comments, but is he aware that some of the insolvency practitioners at the higher level of management charge more than £700 an hour for their time? That means that the £600 saving he cited is negated in about 55 minutes when certain practitioners are employed. Can he therefore assure us that, as well as discussing the measure today, he will consider whether we have adequate protection against the charging of such enormously high costs in circumstances when, by definition, the companies involved do not have much money?
Mr. McFadden: The fees can be high, but I put this point to the hon. Gentleman: given our concern about fees, it would be an odd judgment for us not to approve changes that would free resources for creditors.
Andrew Miller (Ellesmere Port and Neston) (Lab): I paid particular attention to my right hon. Friend the Minister’s last statement about his expectations. For the avoidance of doubt, I want to be clear that he is saying that he, as a Minister of the Crown, expects this saving to be passed on to creditors and not to be held by insolvency practitioners.
Mr. McFadden: I am very happy to repeat that. There is no reason why anything we are proposing in the order before the House, and the Committee’s report on it, should increase fees for practitioners. On the wider subject, I should inform the House that changes that are intended to come into force next year as part of the wider process of change in the insolvency rules will increase the transparency and accountability of insolvency practitioners.
This is not just about cost; it is about ensuring that where money has to be spent, that is done in the most effective way. The requirement to use local newspapers goes back to the beginning of the last century and the business practices at that time, when it was more likely that a company would be dealing with customers from its immediate local area. That is sometimes still the case in today’s business world, but it sometimes is not, and trading patterns are more widespread than they once were.
Mr. Binley: What assessment has the Minister made of the relationship between small businesses involved in insolvency and those that he is discussing, which trade over a wider area? What evidence is there to support the statement that he has just made?
Mr. McFadden:
The point about the order is that it gives both the companies involved and the insolvency practitioners the flexibility to choose the best medium for reaching the people whom they wish to reach. Obviously, in the age of digital communication and
wider trade patterns, the local paper may not always be the best way of reaching creditors. For example, where a business that was trading all over the country goes bust and we are seeking to identify unidentified creditors, how confident can we be that an advert in the local people is the best way to achieve that, given that all the customers may have been from hundreds of miles away? We are talking about a flexibility that simply reflects that reality.
Mr. Nigel Evans (Ribble Valley) (Con): May I offer another suggestion? A lot of local papers are on the internet, so advertising via the local newspaper means that people who trade with these businesses miles away can still access that sort of information.
Mr. McFadden: That is a perfectly valid point. I stress that nothing in the order prevents an insolvency practitioner from using the local paper—and its website—if they think that that is the best route by which to reach people. We are changing the requirement in legislation that they must place such adverts in the local press in every case, regardless of the trading patterns involved. That flexibility makes sense; it makes sense to be less prescriptive and to take into account the greater variety of media that are available today compared with when the rules were first instituted about a century ago. In about 98 per cent. of cases the advertising does not result in an unidentified creditor coming forward, so it is perhaps worth asking ourselves whether there is a more effective way to operate. That is what we have done in this order. It is about giving people the flexibility to choose the most appropriate media available and to use whatever sums are spent on that in the most effective way to try to identify unknown creditors; as I say, that may be done through a variety of media. There is also a misconception that the advertisements are about a wider public aim of bringing information about the liquidation into the public domain—that is not the case. Their purpose is to reach unknown creditors—that is the purpose set down in the legislation. The adverts are also not intended as general public announcements.
People have also asked about companies that might wish to conceal their insolvency from their creditors and whether our changes might enable them to do so. We think that that is very unlikely, because notice of the liquidation must be given to creditors personally; as we have heard about online publications, I should say that it is also placed in the London Gazette, which is available online. Companies are also under a legal obligation to maintain accounting records from which it should be possible to compile a list of creditors. They are required to provide that list for the purposes of the liquidation and to surrender the accounting records to the liquidator—a failure to comply with those requirements is a criminal offence. Liquidators must report to the Secretary of State on the conduct of the directors, and failure to comply with those requirements can lead to disqualification. So it would be both wrong and unwise of a director to conceal a creditor from the liquidator.
As I say, this is about using the most appropriate form of communication for the particular circumstances. Companies or liquidators can still choose to advertise in a local newspaper if they feel that that is appropriate. Some people have argued—this was reflected in the Committee’s report—that this is perhaps too minor a measure and that it is not worth introducing.
Dr. Doug Naysmith (Bristol, North-West) (Lab/Co-op): I am the longest-serving member of the Regulatory Reform Committee and its predecessors in the House. I was one of those who thought this was a trivial measure. I suspect that had the Minister and his civil servants spelt out, in the documentation that came before the Committee when we considered the measure, the much larger sum that can be saved with other measures that are coming along, we would not be discussing this matter this afternoon.
Mr. McFadden: I do not propose to go over all the exchanges between officials on this matter. I believe that dialogue did take place, and my concern is to ensure that the savings identified in this order, taken in the context of the wider changes to insolvency rules that we propose, are made. I believe that these savings will make a difference to creditors, who are already having to cope with the losses that they face from insolvent businesses.
The order will give liquidators and companies greater freedom to target their advertising as effectively as possible, either through local newspapers or elsewhere. It is incumbent on us, particularly during an economic downturn, to do what we can to help business. Given the comments that have been made about the charges and the fixed costs involved in this process, it is incumbent on us to try to increase the pot that is available to creditors. That is the motivation behind the order, and for that reason I commend it to the House. I hope that the House will side with those proposals today.
12.57 pm
John Penrose (Weston-super-Mare) (Con): It is always a pleasure to follow the Minister, who took such pains to be careful and reasonable in his exposition of the Government’s position and took time to try to anticipate many of the questions that will be raised in this debate.
It is vital that any modern economy such as Britain’s has an efficient and effectively functioning insolvency process, if only because at a time of pretty much unparalleled economic problems—this is one of the worst recessions for a generation or perhaps more—everybody involved in business needs to know that the insolvency process works as quickly, efficiently and effectively as possible and does not soak up in fees as many of the available assets in an insolvency as it might. It is to everyone’s advantage that as many as possible of a failing company’s assets find their way to its creditors, rather than being taken up in fees. I mean no disrespect to insolvency practitioners—I am sure that they are all stout and wonderful men and women, who are doing their work terribly carefully. None the less, it is clearly macro-economically to everyone’s advantage to ensure that as much money as possible reaches the creditors of a company that is going bust.
As I believe everybody here understands, when a company goes under there is not just the tragedy of the lost jobs and the destroyed hopes of its workers; the huge danger is the knock-on effect of the company’s suppliers being dragged down too. Any money that can be spared to pay creditors at a higher rate of pennies in the pound has to be to Britain’s overall economic advantage.
Taking the temperature of the interventions made, I would say that there is a great deal of sympathy on both sides of the House for the principles behind this measure.
There are some specific questions and details on which I shall press the Minister for further answers—I am sure that such matters will dictate how Members react at the end of this debate in deciding how to vote.
The Minister has admitted that this is a relatively small step down an important road. This measure produces some £3.6 million worth of benefits, although it is part of a larger package that is worth roughly £17 million. Given the total number of likely insolvencies this year, that is a relatively tiny drop in the large ocean of Britain’s economy, but the best should not be the enemy of the good. Put another way, it is better to have half a loaf than none. If we can take a small step as a start on an important journey, we should do so.
The Minister said that other measures are in the pipeline, which might stem from a process that began in July 2005 as a larger scale project to consolidate and modernise the insolvency rules introduced in 1986. Paragraph 9 of annexe C to the regulatory impact assessment, which I am sure every Member here has read assiduously, states:
“It was originally intended that all the remaining proposals would be taken forward by means of one draft Order. However, in order to meet Ministerial priorities”—
I would be interested to learn what those priorities were—
“the advertising changes...will proceed within a separate draft Order”—
which is this one. It continues:
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