Small Business, Enterprise and Employment Bill
The Committee consisted of the following Members:
Fergus Reid, Committee Clerk
† attended the Committee
The Chair: We now continue line-by-line consideration of the Bill. We resume with consideration of clause 92, the first clause in part 9. No amendments have been tabled on this part of the Bill, and I am minded to encourage the Minister to deal with all the issues in part 9 when addressing clause 92 stand part. I will allow reasonable latitude in the debate and then perhaps we can proceed speedily to discuss the next group of amendments.
I will now discuss part 9, on director disqualification, clauses 92 to 104 and the technical Government amendment 33. Part 9 comprises a series of measures designed to strengthen the director disqualification regime and to increase the likelihood of directors who act improperly being held to account for the harm that they cause. On average, some 1,200 directors are disqualified each year after action taken by the Insolvency Service. We recognise, however, that the regime can be strengthened to better protect businesses and consumers who have become victims of director misconduct.
The provisions of part 9 will increase the matters that a court must have regard to within director disqualification proceedings to ensure that more focus is placed on things such as the amount of harm that a director’s conduct has caused and their track record in running companies. For the first time, we will also be able to bring proceedings to bar a director when they have been convicted of a company-related offence abroad, such as fraud or tax evasion. I hope that that measure will be widely welcomed. We will also enhance the investigation process as part of a more intelligence-led approach, which will include improvements to how director misconduct is reported. Our new measures will ensure that we work smarter and better with other regulators when there has been director misconduct. To help creditors receive compensation for director misconduct, we will also allow compensation to be awarded against disqualified directors in certain circumstances, enabling help to victims of misconduct when creditors have not been adequately compensated through the insolvency process.
The measures will help to remove the perception that wrongdoers are not held to account and will improve confidence in the insolvency regime. Many hon. Members have raised concerns about directors whom they feel should have been disqualified but have not. The measures will strengthen the regime to ensure that the public, small businesses and consumers can be better protected when there is a track record of misconduct.
Government amendment 33 to schedule 8 is minor and technical and rectifies a drafting error in changes that the Bill makes to director disqualification legislation in Northern Ireland. It also relates to clause 93, which will enable a director disqualification application to be made against a person who has instructed an unfit director of an insolvent company. As a matter of policy, the measure will not extend to societies registered under the Industrial and Provident Societies Act 1965, but that policy has not been accurately reflected in the drafting of the corresponding amendments to Northern Ireland legislation in schedule 8 to the Bill. I hope that the Committee will be content to accept the amendment.
Mr Iain Wright (Hartlepool) (Lab): Good morning to you, Mr Robertson, and the rest of the Committee. I thank the Minister for her explanation of part 9 and for allowing me to leave the Committee early on Thursday afternoon to attend a debate in the Chamber. I am grateful to her and to my Whip for permitting me to do so.
The Opposition have no issues with part 9. A strengthening of the current regime is welcome. I have only a brief question regarding what the Minister said today. She mentioned that some 1,200 directors are disqualified each year. I know that this is difficult and that there will be an element of “how long is a piece of string?” but to what extent does she think that part 9 will extend that? Can the Minister say how many this wider net will capture? This is a welcome move; it imposes a sense of responsible capitalism, not just in the United Kingdom but elsewhere. For that reason, we welcome the Bill and hope that it has a speedy passage.
Jo Swinson: I hate to disappoint the hon. Gentleman, particularly when he has been so generous and constructive this morning. I understand that he was in the Chamber on Thursday afternoon to contribute to the debate on the sale of park homes. As a former Minister, he had done so much work on that area previously. He missed my comments in Committee on Thursday about the points he raised.
I will not be able to put a number on the expected change to director disqualifications. It is a difficult to do that and we would not necessarily target a certain number. By definition, it depends on behaviour. We hope that there will be more deterrence of unscrupulous behaviour and misconduct by directors.
The measure is about making sure that there is the confidence that, where directors behave in a way that is not appropriate, that will be taken into account. We will all have read of such cases in our constituency mailbags. I receive many pieces of correspondence from hon. Members about directors who have been involved in a string of companies that end up in an insolvent situation. In some cases, people feel that that is a deliberate
One of the challenges is that the first time that somebody undertakes such behaviour, it will be very difficult to catch them, before there is evidence. If somebody is entitled to be a director, they have the ability to behave in such a way. The measure will not eliminate the problems, but it will help that situation.
Mr Wright: I fully understand the Minister’s explanation. Given the fact that the regime is being strengthened and widened, will additional resources be given to enforcement and compliance in order to make sure that the new regime is as effective as possible?
Jo Swinson: The hon. Gentleman may be aware that there has been a period of significant change in the Insolvency Service over the past few years, especially because there has been a reduction in the number of cases that it deals with, not particularly in terms of directors’ qualifications, but in terms of insolvency more generally. There has been an organisational challenge for the Insolvency Service to manage a reduction in its footprint in terms of offices and numbers of staff to correspond with the falling case load. As a result, it has been improving its efficiency and resources remain available.
We will make sure that the Insolvency Service continues to be adequately resourced to undertake its important functions. The service has a good record in achieving disqualifications and is well respected for its work in supporting the insolvency regime. Press releases regularly show that prosecutions in cases of fraud and misconduct are increasing and that confidence in British business is increasing.
Toby Perkins (Chesterfield) (Lab): The Minister will be aware that the number of D1 reports made by insolvency practitioners that have led to a director’s disqualification has fallen from around 40% at the turn of the century to around 20% now. Many people in the profession are concerned that in the current regime the balance has gone too far and the burden of proof is too high, deterring them from pursuing disqualification. Does the Minister anticipate that the changes will lead to those percentages going up, or does she think the balance is about right?
Jo Swinson: We are changing the criteria and that can, of course, be looked at. I am not keen to put a number on it for the obvious reasons that the hon. Gentleman accepted. None the less, we anticipate that if the changed criteria make it easier to disqualify a director, there may well be an increase.
We need to look at things in context. In terms of trends in disqualification, there has been change over time. There was a big spike in 2003-04 after the law was changed, and there was also a bit of a dip in 2011-12. It does not stay constant from year to year. We will certainly ensure that the regime is one that everyone can have confidence in. Where directors need to be disqualified but there are currently barriers to that happening, this change will help. That should enable everyone to have
This amendment corrects a cross-reference to ensure that none of the provisions setting out the new ground for disqualifying a person for instructing an unfit director will apply to industrial and provident societies in Northern Ireland, to correspond with consequential amendments being made to that effect in Great Britain.
‘(3) This section shall not come into force until the Secretary of State has carried out a full review of the impacts of abolishing the time limits for administration and the effect of such a change on this section.”
On part 10, it is worth starting by recognising that we, in the UK, have an incredibly successful insolvency regime in terms of the number of businesses saved and jobs rescued from businesses that have gone into administration or insolvency. From a regulatory and professional perspective, Britain’s regime is the envy of many countries around the world. I draw the Committee’s attention to my registered interest and the support given to my office in the past by R3.
Our insolvency regime is powerful and has a strong track record of success. It is an incredibly important industry which deals with what is, understandably, a contentious moment in the business cycle. It often does its work at a time when businesses, through no fault of their own, are suddenly hit with the realisation that they will lose money that they expected to be paid because another business has gone bust. They often then turn to an insolvency practitioner, to rightly and legitimately question the actions taken. It is incredibly important to recognise that any changes we make to this regime must be made with great care and caution, as it deals with an important sector of business.
This Government have returned to the subject of insolvency on a number of occasions—in the Legal Aid, Sentencing and Punishment of Offenders Act 2012, the Deregulation Bill and now the Small Business, Enterprise and Employment Bill. It certainly gives the
On clause 105 and amendment 217, the official Opposition support any moves that make it easier for administrators or any other wronged parties to take fraudulent trading actions and to catch delinquent directors. The clause aims to do just that. We have reservations, which I will expand upon, about how the clause will work in practice, but the theory behind the clause—which we would support—is that it would allow administrators the same right as liquidators to bring wrongful and fraudulent trading actions, therefore allowing more actions to be taken overall.
Administration is a useful and important tool, which is often very successful in terms of saving jobs and recouping creditor money. It suggests that the business has the opportunity to trade out of the position that it is in. Often, employees who would lose their job under liquidation will retain their job under administration and move on to continue to work for the company under either similar or new ownership.
On that basis, it is important that we recognise that administration is an important tool not just for insolvency practitioners but for the business that is struggling. However, administration is, at this moment, a short-term procedure, used in specific circumstances. We are concerned that, in general terms, it takes a couple of years to bring a wrongful trading claim. Administration would be time-limited to 12 months. If there is a process that generally takes a couple of years, and administration only lasts a year, is that likely to work as an effective power, or is it likely to be a disincentive for businesses to go into administration? Our amendment intends to probe that. It is an important question.
If businesses have traded fraudulently or wrongfully, they should be held to account for that; but in cases where that is likely to have happened, it is important that we do not see businesses continuing to trade beyond the point where they are insolvent, because they are frightened of the administration process. That is an important distinction.
Extending the provisions on liquidations to administrations is unlikely to deliver much practical change, as long as administration is treated as a dynamic and short-term procedure and the existing time limits on the process remain in place. The period of one year, even allowing for possible extensions, does not generally allow enough time to begin a wrongful trading action and see it through to a conclusion before the end of the administration. The timings involved create incentives for delinquent directors to adopt obstructive and delaying tactics to hold up proceedings and therefore get away with wrongdoing. Therefore, we are not convinced that extending the wrongful and fraudulent trading provisions into the realm of administration will be successful, as
The amendment has obviously been tabled in a spirit of co-operation—as are all our amendments—to enable the Government to analyse whether the new regulation is likely to deliver on the Government’s intentions. As I say, we support the aims of clause 105. However, we know that the Government have said many times that they are against creating new regulations that are impracticable, so it is important to consider whether it will actually make a difference. This probing amendment asks the Government to consider whether the arbitrary time limit on the administration process is justified, and what impact that will have on the provision that the Government are attempting to introduce in clause 105.
Perhaps the Minister could respond on the specific question whether an administrator will be able to bring an action after the business has exited administration. If the start of the process of wrongful or fraudulent trading happened whilst the business was in administration, and the business then moves out of administration, would the administrators still be able to bring that action? What evidence have the Government heard about the likely impact of the new power on business rescue numbers and on jobs saved by the administration process?
Have the Government heard any evidence to suggest that this may cause businesses that would previously have moved into and then out of administration not to go into administration in the first place? Sometimes that is the best process and the best way of saving jobs and businesses. If this measure makes businesses plough on beyond the point of no return because they are concerned about the implications of not doing so, that could have negative consequences for the number of businesses and jobs that are saved. I would be keen to hear what the Minister has to say on our amendment, and on the specific questions I have raised.
Jo Swinson: I thank the hon. Gentleman for his amendment 217, which is, as always, tabled in a spirit of co-operation and constructive comment in order to explore these issues. I also very much welcome his recognition that the insolvency regime in the UK is well respected internationally, with many elements that are being echoed and learnt from by our partners in other European countries. Indeed, many look to the UK as having a regime that helps to deliver business rescue, and does so very efficiently. This is a good moment to put on the record my thanks to all those in the Insolvency Service who do such a fantastic job of making that happen and, indeed, to insolvency practitioners up and down the country who work to achieve that.
I turn now to the specifics of the amendment, which would seek to prevent the new right to allow administrators to pursue wrongful and fraudulent trading claims from
I appreciate the spirit of the amendment, but I hope the hon. Gentleman will be reassured that later in the Bill, in clause 115, we are proposing to increase the time limits for administration by allowing the creditors of a company to consent to extend the one-year duration of administration by up to an additional year. Of course, the court has the power to grant extensions beyond that, so some of those concerns about the timings should already have been dealt with. That is six months longer than creditors can currently consent to. That will also reduce the number of cases in which the administrator needs to apply to the court to prolong the duration of administration, which obviously removes a degree of bureaucracy, cost and uncertainty from the process.
Looking at the evidence and analysing the Companies House data for a sample of cases has shown that around 90% of administrations are concluded within two years. We think, therefore, that being able to have that one-year time period, with the possibility of consenting to extend for a further year before having recourse to the courts, should help to deal with this issue for the vast majority of cases. However, that said, it is important to recognise that there is a good reason for the time limit on administration. It is a dynamic procedure in which we want administrators to be acting as swiftly as possible to restructure and rescue businesses where at all possible. Allowing companies to remain in administration for longer than is needed would add unnecessary expense to the procedure and, in some cases, arguably give the insolvent business an unfair advantage over competitors.
I recognise the point that where an administrator commences a wrongful or fraudulent trading action the claim might take more than a year or two to complete if it is defended. However, the time limit on the duration of administration will not necessarily reduce the effectiveness of the right proposed under clause 105. For example, if the administrator’s legal action has not been concluded when the administration is otherwise complete, the administrator could use the new right to assign an office holder’s claim, proposed by clause 106, to pass the claim over to the liquidator or any other party well placed to pursue it. That helps to deal with the first question that the hon. Gentleman raised.
Toby Perkins: It might potentially offer some reassurance if we were not so opposed to clause 106. The Minister is saying that if an administrator has brought a claim and it is not completed by the time that the business moves out of administration, then the administrator themselves will not be able to pursue that claim.
Jo Swinson: They would have to assign that claim. I appreciate that the hon. Gentleman has objections to clause 106, which we will come to in a moment, but together as a package, those clauses mean that those cases can be covered by the alternative proposals. Either the liquidator or another party would be able to take that forward. Clearly, the intention is not that those that
Often the former administrator becomes the liquidator, so it might well be the same professional person in control of the claim if it was so assigned. That would be a pretty straightforward way of continuing the claim. If the administrator thought that it would be inappropriate to assign it outside of administration, then the time limit on administration is not a fixed end point. In addition to clause 115, which extends the period by which creditors can consent to an extension of administration, there is still recourse to the courts. Obviously, in those circumstances, an administrator would be able to make an application to the court to prolong the administration if they really felt that the claim needed to be pursued and action taken within that time frame. In all those potential eventualities, the ability to take that action remains in place.
Clause 105 was suggested by insolvency practitioners as part of the insolvency red tape challenge that we conducted earlier in the Parliament. Our earlier consultation tells us that removing the time limit on administration would not be well supported by many stakeholders, particularly creditor groups. Therefore, the review that is proposed in amendment 217 is not the best way forward, but I accept that the hon. Gentleman is keen to probe those issues and I am glad that he has done. I hope he feels reassured and able to withdraw the amendment and leave clause 105 as it is.
Toby Perkins: I thank the Minister for her response. I am glad to see, in the light of recent events, that she has decided to stick with the Government to the bitter end and is not feeling so much under the yoke of these Conservatives that she cannot carry on. My goodness, it will be a bitter end, but it is good to see that she is carrying on the fight.
The Minister made some interesting contributions on this clause. She is right that in some cases the administrator, in practical terms, will become the liquidator. I hope she will consider, as the clause moves forward, whether it might create a perverse incentive for administrators that have got so far with a process to think about liquidating a business because they want to see the process through to the end. That would fly in the face of what the industry would want and might be a perverse disincentive for administrators.
None the less, it does create provision, as the Minister rightly says, that is not there currently, so while it may not be used a huge amount—I am conscious that the Government do not want to bring regulations forward if no one uses them and clog up the statute book in that way—it may be used on occasion. I shall not preview our objections to clause 106, since we are about to have that discussion, but they are different from the issues that she has raised here. I hope that the Minister will consider how this clause will work in practice and will keep an open mind about what disincentives may be created.
Notwithstanding that, as I said at the start, ours was a probing amendment and the Minister is right to say that provisions in clause 115 will extend the opportunity
As with clause 105, we welcome the intention in this clause to get more money back to unsecured creditors. However, we have significant concerns that there is an easy assumption here that transposing language used elsewhere on to the Insolvency Act 1986 will automatically deliver similar benefits. We are very sceptical of that. There are many reasons why an insolvency practitioner may decide not to pursue a claim. It may be something as simple as lack of evidence or resource. In such circumstances, we can see the Government’s argument that it would make sense to let somebody else do it instead, particularly if they consider that there is significant reason to pursue a course of action.
This clause would allow the office holder to assign not only the right of action but the proceeds of such action. By ensuring that the purchaser would stand to gain fully from potential benefits arising from the action, alongside bearing all the risk and cost of pursuing the claim, the Government are assuming that a clear incentive will be created to pursue more wrongdoers. The clause may well deliver in that regard. However, there may be other, unintended consequences.
I am nervous that competitive advantages may be given to people who abuse the process in a way that is not necessarily predictable at the outset. Insolvency practitioners already assign company causes of action, so companies feel that extending that to other areas will have a clear impact. However, there is a fundamental difference between company actions and office holder actions.
A company action is brought by the company as the claimant and includes, for example, recovery of a commercial debt or a claim on the director’s loan account. The insolvency practitioner will collect information on behalf of the company and, where appropriate, can assign the claim. By contrast, office holder actions are claims conferred by statute on the insolvency office holder and arise as a consequence of the insolvency. Examples include wrongful trading, preferences and
An insolvency office holder has extensive powers of investigation as well as control of all the company’s records, including confidential and sensitive material. The exercise of investigatory powers is essential in deciding whether there is a case for bringing an office holder claim. When the office holder obtains information under their powers of investigation, they are imbued with a duty of confidence to use that information only in the interests of the administration or liquidation. They cannot, for instance, share such information with creditors for the creditors’ gain. Therefore an office holder’s investigatory powers and their powers to bring office holder actions are closely bound up—a fact recognised by the law in providing that only a licensed insolvency practitioner can pursue such claims.
That is where we have concerns. By assigning such powers to third parties, the ethics, duties and obligations on qualified professional insolvency practitioners are separated from the incentive and the right to pursue a complaint.
Office holders are given the necessary powers because they can be relied on to pursue an investigation in the correct manner and a regulator is in place to ensure that they do so. The third party, in this case, would nevertheless require access to the necessary information to pursue the claim, and currently the only way of obtaining such information is through the office holder.
On the assumption that there can be no suggestion of the office holder’s powers being delegated to the assignee, it is difficult to see how the proposal could be implemented. Conceivably, the insolvency practitioner could retain the primary responsibility for exercising investigatory powers and dealing with confidential material; but that could mean that the claim could be pursued only if the insolvency practitioner continued to run it from start to finish but—rather than its being subject to their own professional view and discretion as now—on the instructions of the assignee. That is likely to put an insolvency practitioner in a very difficult situation and, therefore, lead to a reluctance to assign claims.
Will the Minister expand on how she anticipates the clause will work in practice? Where does the balance of responsibility sit in the process of assigning a cause of action in terms of the confidential information that the office holder holds and can investigate?
We should not forget that the proposal is being considered only because of the Government’s record on action for justice; it would not be required if it were not for the assault on legal aid. Funding is currently available for these types of actions: conditional fee arrangements and after-the-event insurance can fund insolvency litigation when an insolvent estate has no money to fund the pursuit of directors or third parties who have taken money. Under the current regime, legal costs are paid for by the losing party and, in most cases, the simple threat of the regime encourages the director or third party to settle long before the case is taken to court. That quick resolution helps to keep insolvency costs down, so more money is returned to creditors.
According to a report published by Professor Walton of the University of Wolverhampton in April 2014, the current regime enforces claims of approximately
In that context, does the Minister understand that we see the approach in its totality as a piecemeal means of making up for the failures of previous legislation? Will she clarify how the measure will operate in practice? Specifically, will she address the issue of the assignee having access to confidential information about other businesses’ buying prices, or other confidential information that is held by businesses? Let us remember that businesses that are suppliers to other businesses may also be their competitors. Businesses are not always organised in a straight up-and-down manner, with neat tiers of supplies. They are often other businesses’ suppliers in one department and their competitors in another. There are potentially serious unintended consequences to enabling creditor businesses to become assignees, allowing them to pursue actions of this sort and potentially enabling them to access information that they were not previously able to access.
What representations has the Minister received, and from whom, about the likelihood that the confidentiality expected of an office holder will be passed on to the assignee? What evidence does she have that insolvency practitioners will be motivated to pass it on? Can the Minister envisage reasons—for example, competitive information gathering—why an assignee might want to access information that can currently be seen only by the office holder? What safeguards does she propose against abuse?
Jo Swinson: I understand the hon. Gentleman’s concerns about clause 106, which is intended to increase the prospects of creditors recovering their unpaid debt—an issue that he acknowledged. One way of doing that is to enable liquidators and administrators to assign to a third party insolvency actions that can currently be brought only by a liquidator or administrator.
The clause will help in a range of circumstances, such as when the liquidator or administrator is unable or not inclined to pursue the action themselves. As the hon. Gentleman said, such actions include claims for wrongful trading against directors who caused their company to trade when they ought to have known it was insolvent, and claims against directors who deliberately paid off favoured creditors or sold company assets for less than their worth in anticipation that the company would enter insolvency. It is right that we try all avenues to take recovery action against the directors and others who have benefitted in such cases, to ensure that creditors are compensated for their financial loss.
However, the decision to take action is a judgment of the liquidator or administrator. In some cases, they may be unable to take action, perhaps due to a lack of funding for the litigation or because of the costs involved in prolonging the insolvency procedure. Currently, when the liquidator or administrator chooses not to bring a claim, there is no way for anyone else to take the claim; there is no other avenue, even if there is a creditor or another party who is willing to take it over. We have come to the view that that is illogical. Just as the liquidator or administrator can assign pre-existing claims that the company itself had the rights to pursue, the new measure will mean that claims that arrive on entering insolvency will be brought into line with the pre-existing claims that can already be assigned. It is not consistent to treat the two circumstances differently.
The hon. Gentleman should be reassured about the concerns he expressed. He asked about how the power under this measure would work. It is basically about recognising that insolvency practitioners will still tend to bring claims where they can. Of course, many do, so the measure is not about saying that they should not or will not be bringing such claims; it just gives a little more flexibility by giving the insolvency practitioner the additional option of assigning the action instead of taking action themselves.
The hon. Gentleman rightly raised the issue of confidentiality. The IPs will still be bound by statutory limitations on disclosing information and the assignee will not have access to the statutory powers that exist for the insolvency practitioner. That is a particularly privileged position conferred on IPs, so that they can fulfil their statutory duties. It would not be right or appropriate to transfer those powers or, indeed, any information received under those powers.
In making any assignment, the insolvency practitioner will need to consider carefully whether there are any legal restrictions—such as those in the Data Protection Act—on the information that they can pass on. It will be for the prospective purchaser who is considering taking on such an action to establish in the negotiation whether or not they can access sufficient information to bring the action and therefore whether it is sensible for them to take on the assignment.
The hon. Gentleman raised the issue of changes to the funding of legal aid. I accept and understand the concerns expressed in various quarters about those changes. We are in incredibly challenging financial times, so changes have been made that have made the situation more challenging for many. It is sensible to look at every possible avenue through which a claim can be brought.
It is difficult to estimate and assign the potential loss. The hon. Gentleman mentioned the report by Professor Walton, who had the challenging task of trying to find out the likely effects. The sample of cases was small—less than 1%—and no process is currently in place that allows the accurate measurement of losses to creditors. None the less, it is in the public interest to try to ensure that we control costs on both sides of civil litigation by removing excess litigation from the system.
We want to ensure that the actions that should be taken are still taken. Clause 106 will give additional flexibility to insolvency practitioners to assign such
This amendment and amendment 164 make technical changes to reflect different legal terminology in Scotland.
‘(4A) The deemed consent procedure may not be used where the insolvency practitioner judges that a face-to-face meeting would incur no additional cost saving to creditors.”
This group of amendments adds a new clause which introduces a schedule of consequential changes to the Insolvency Act 1986. These changes are necessary for clauses 110 to 113 to work effectively. The schedule also abolishes final meetings in liquidation and bankruptcy proceedings, which may take place months or even years after the date of insolvency. These are rarely, if ever, attended by creditors. As drafted, clause 114 contains a Henry VIII power, which will be removed, and there are technical amendments to clauses 107, 110 to 113, 122, 145 and 147.
The amendments to clauses 110 to 114 relate to the removal of face-to-face meetings as the default way in which decisions are made in insolvency proceedings. They also relate to the ability of creditors to opt out of receiving correspondence from insolvency office holders. Amendment 187 will remove clause 114, which contains a Henry VIII power to amend the 1986 Act by removing meetings as the default method of decision making in insolvency proceedings and also enables creditors to opt out from receiving correspondence during insolvency. Clause 114 will be replaced by new clause 8, which introduces new schedule 1. The new schedule will make those changes to the 1986 Act, removing the need for the power. Amendments 189 and 190 remove references to clause 114 from clauses 145 and 147.
Amendments 165 and 176 amend clauses 110 and 111 to enable the insolvency rules to make provision for particular insolvency processes to use specific methods of decision making, which may include face-to-face meetings. Similarly, amendments 166 and 178 clarify when deemed consent may be used to make decisions in an insolvency. Deemed consent allows for a proposal to be approved by default unless there is a certain level of objection to it. Amendments 167 and 179 clarify the position where creditors object to the use of deemed consent, while amendments 170 and 181 remove a definition that is no longer needed because of amendments 166 and 178.
Amendments 168, 169, 172, 173, 180, and 183 to 186 clarify that parties such as company directors may participate in decision-making processes without being entitled to vote when proposals are being considered. Amendments 171 and 182 allow the insolvency rules to provide for who receives notice of decision-making processes, specifically allowing those who have opted out of receiving correspondence to be excluded. Amendments 174, 175 and 177 improve the consistency of language used in clauses 110 and 111 relative to each other and the rest of the insolvency legislation.
Let me turn to the final amendments in the group, which are fairly technical. Amendment 188 makes a minor change to the drafting of clause 122. It extends the scope of the challenge against the outcome of a meeting where a proposal for an individual voluntary arrangement, or IVA, is either accepted or rejected. Clause 122 will now take account of an interested party’s ability to challenge the outcome of a meeting where an IVA proposal was rejected by creditors.
Finally, I would like to mention some minor and technical amendments to clause 107, which is to be read alongside clause 106. That clause, which we have just discussed, amends the Insolvency Act 1986 to allow legal actions that arise on insolvency to be assigned to another party to pursue. The measure extends to Scotland, but two technical amendments are required to reflect
Toby Perkins: First I shall respond to the Minister’s comments on the Government amendments and then I shall speak to our amendments 218, 219, 220 and 225. On clause 107, while it is more of a technical change, in determining which class of creditors are the beneficiaries of which type of claim, we were, along with many in the industry, surprised to see the clause included in the Bill.
The main change brought about by the clause is that the proceeds of office holder claims will no longer form part of the net property of the company. That means that they will not form part of the assets that are covered by a bank’s floating charge and so will be treated as available for the general body of creditors. We accept that the amendments are necessary to take account of the different legal terminology in Scotland.
We believe that in practice the clause will be likely to mean that the general body of creditors will see increased returns and secured creditors will see reduced returns. Many in the industry who have responded to Government consultations in the past were very surprised that the clause, which will have a real impact on the returns to secured and unsecured creditors in different ways, and therefore the wider economy, appeared in the Bill without, apparently, any widespread consultation. They were concerned that in all the Government’s consultations on the process of insolvency, this provision was not raised.
I see that the Minister is writing a note that will lead precisely to the question that I am about to ask her. What consultation was engaged in before bringing forward this clause and what representations were received on its impact, particularly on secured creditors? Will the Minister commit to further scrutiny of the clause and its potential impact before the Bill is passed?
I should also be interested to know what estimates the Minister has produced of the impact of the clause. How much more money does she believe will be returned to the general body of creditors as a result of the change, and how much less money does she believe will be returned to secured creditors as a result of the reforms?
Our amendment 218 omits the phrase “creditors’ committee or” from clause 109. It has always been the case that office holders in liquidations and bankruptcies require official permission to carry out certain functions as part of the process. This is for the simple reason that the insolvent estate needs to be protected from powers that could have a negative impact on it financially and, as a result, on its creditors and employees.
These permissions are obtained from creditors’ committees or, where there is none, from the Secretary of State or the court. Clause 108 gives liquidators the ability to exercise any of these commonly used functions without gaining approval first. Likewise, Clause 109 gives trustees in bankruptcy the ability to exercise any of these powers without the need to obtain approval of either the court or a creditors’ committee or, where there is none, the Secretary of State.
We accept that insolvency practitioners are regulated professionals who are paid to work in the interests of creditors and protect the monetary value of the estate, and that in most cases any misconduct should be dealt with by their own regulatory system. However, in the small number of cases—around 3%—where creditors’ committees are used in bankruptcy cases, we feel that these committees can be a very useful way of empowering creditors. Obtaining permission from creditors’ committees is also accepted to be far less costly than an application to the Secretary of State or to the court due to their ability to reach quick decisions and propensity to be in a localised area.
We therefore have some doubts as to whether the need to seek permission from such a committee should be removed altogether, which is the aim behind our amendment. What does the Minister believe will be the implications for the continued existence of creditors’ committees at all if this position of influence is removed altogether? Why does the proposed change have creditors’ committees within its scope? Our amendment 218 would allow sanction to be removed in the absence of the approval of the court, but would still leave power in the hands of the creditors’ committee. In responding to the amendment, it would be helpful if the Minister could let us know the circumstances under which she sees the creditors’ committee as not being worthy of being consulted before that step is taken.
I turn to our amendments 219 and 220, which amend clauses 110 and 111. Whilst the clauses I have just discussed were drafted with the intention of further empowering insolvency practitioners to use their own discretion, clauses 110 and 111 do the exact opposite. Again, we believe that the Government have got the balance wrong. The intention of clauses 110 and 111 is to end once and for all the automatic practice of insolvency practitioners holding physical creditor meetings in all types of insolvency procedures. Instead, the insolvency practitioner will need to hold virtual meetings through other means, such as phones or over the internet, or whatever they judge to be the most effective.
The official Opposition strongly support the principle of adapting the insolvency regime to incorporate modern technology. We tabled amendments to the Deregulation Bill earlier this year to create an online version of the standard paper D1 forms. At the time that move was blocked by the Government’s moratorium on new regulation for micro-businesses, even though 82% of insolvency practitioners said that it was a deregulatory measure. We are glad that the Government subsequently indicated that they agree to our proposed amendment to the Deregulation Bill, albeit they voted against it at the time.
However, in this instance we have concerns that the savings predicted to be brought about by the reforms are too optimistic and that, left as they are, the clauses would lead us down a road towards further creditor disengagement. Creditor engagement is a core part of a strong, transparent, fair and trusted insolvency regime. Insolvencies by their nature can be complicated, confusing and frustrating for those who have lost money through no fault of their own. Creditor meetings are an essential part of creditor engagement, trust and confidence in the insolvency regime. The very fact that the Government are leaving in place a provision for creditor meetings,
The mindset behind going down the route of saying that we do not need to have physical meetings, and that everything can be done either on the phone or using the internet, calls into question the whole basis on which this place works. When we had the evidence session to the Bill Committee, we could have invited all the witnesses just to talk down the telephone or be on an internet link. We did not; we wanted to actually get people here to question them, because we recognised that the kind of communication that happened on the telephone or on the internet was less perfect, and did not deliver in the same way. That is why we ask witnesses to come from across the country to attend our Select Committees or our evidence sessions to Bill Committees. It is because we know that the interaction we get will be different and better if it is face to face.
If you have a policy that encourages creditors to engage, why would you want to weaken that by saying, “Let’s not have face-to-face meetings; let’s do it all on the phone or on the internet”? Creditor meetings are an essential part of creditor engagement. Physical creditor meetings are formal meetings of all creditors, which are called by an insolvency practitioner who is handling an insolvency. A meeting is usually called at the outset of an insolvency proceeding, and on occasions periodically thereafter. The meetings play a number of important roles, including helping to establish who all the creditors are and what they are owed, updating creditors on the process and progress of the case, and finding out more details about the financial affairs of the debtor.
Creditors will often be able to provide details to the insolvency practitioner of which they would not otherwise have been aware. It is often on the back of the creditor meeting that creditors—whether they be employees or other people known to the directors of the business that had gone bust—will come forward and say, “I am aware of properties that the business owned,” or “I am aware of other transactions or other bank accounts.” One creditor may say something that triggers something in another’s mind, which will lead them to say, “Actually, that reminds me of something I heard about this debtor.”
It is important that such meetings are held because they create creditor engagement and they often lead the insolvency practitioner to additional resources held by the debtor. As a result of those conversations, greater resource is found and that goes back to the creditors, which is what we all want.
I am worried that so much of what the Government are doing on insolvency is not about finding all the potential sources of revenue held by the estate to maximise the amount of money for creditors, but about reducing the costs of the process. The measures proposed will reduce the costs that the insolvency practitioner introduces at the end in some cases, but that may mean that a substantially less thorough job is done and, as a result, money that should be with the creditors is held in accounts available to the debtor.
We already have a regime that is admired around the world, that delivers on creditor returns and saving jobs. If we end up with a process that leads to a smaller bill from the insolvency practitioner but also reduces the amount of money that goes to creditors and the number of jobs saved, we will not have done the creditors any favours. The thrust of amendments 219 and 220 is about ensuring that creditors are engaged.
Creditor influence on how insolvency practitioners perform their function and charge fees could be limited. Some small creditors, such as sole traders and small businesses, could be permanently excluded from engaging with insolvencies. Creditors are often individuals who already find the process confusing, and they are often face it at a time when they are in despair about the fact that moneys that they were expecting will never arrive. To suggest that they could pick up the phone for a 10-minute call and that that will somehow engage them is wrong-headed in the extreme.
Mr Wright: My hon. Friend is making a powerful case. Does he think that the clause will increase burdensome bureaucracy on small businesses when the Bill’s purpose is to minimise that as much as possible?
Toby Perkins: My hon. Friend makes a valid contribution. I have raised our concerns about the clause and, while I do not intend to vote against it, we certainly do have reservations about the impact of clauses 110 and 111. We are worried that those clauses will reduce creditor engagement and that, as a result, the amount of money that ends up in the creditors’ pockets will be reduced. That flies in the face of what we should want our insolvency regime to achieve.
At the beginning of the insolvency process, the insolvency practitioner often has limited knowledge about a company or individual’s financial history. The first creditor meeting often allows useful information about financial affairs to emerge, such as: how many creditors there are, who they are; whether there are hidden assets and whether there was any possible wrongdoing by a director or an individual. That knowledge allows the insolvency practitioner to maximise returns to creditors and ensure that any wrongdoing is dealt with by the justice system.
We would all recognise that in our day-to-day jobs we are asked to attend many meetings; many individuals want to have meetings with Members of Parliament, with shadow Ministers and even more so with Government Ministers. Often, when we are discussing whether or not to have a meeting, we will say, “Let’s have a telephone call.” Why do we say that? We know that it will take less time, we know that it will be less thorough, but we believe that it is a way of reducing the time taken in a way that still enables us to get the basic facts across, although probably not in the same depth. That is precisely what amendments 219 and 220 would prevent happening in the case of creditor meetings. I do not mean that I take anyone that I suggest having a phone call with rather than a face-to-face meeting less seriously; I do not want to create that impression. However, we all recognise that there is a difference between face-to-face contact and telephone or internet-based contact.
In administrations and liquidations the first meeting is a really useful opportunity for creditors to participate in the process and is the most appropriate and convenient
Anne Marie Morris (Newton Abbot) (Con): I thank the hon. Gentleman for referencing my constituency and he makes a valid point about broadband. It is a critical issue. The difference between his position and mine is that I recognise the problem, but my challenge to the Government has been to fix the broadband issue. I have to say that, to the Government’s credit, we are now working strong and fast to beyond 96% coverage in Devon. I understand the issue, I just think there is a different solution, which the Government is already on top of.
Toby Perkins: I agree with the hon. Lady to a point—let us solve the main problem of broadband speeds. She gives credit to the Government, but she will be aware that the pace of broadband roll-out is far slower than was previously intended. It should be a legitimate right for every business that pays tax in this country to expect a basic, decent level of broadband speed and I urge the Government to get on with that.
Oliver Colvile (Plymouth, Sutton and Devonport) (Con): Does the hon. Gentleman recognise that the issue of connectivity down to the south-west is really important? As my hon. Friend the Member for Newton Abbot has said, it is not only to do with broadband, but trains, roads and everything like that too, which has been due a significant level of investment for the past 20 or 30 years.
Toby Perkins: The hon. Gentleman attempts to expand the debate to a whole variety of different infrastructure questions, and they are legitimate questions. By definition, the focus of infrastructure spending becomes more difficult the further one gets from the largest bodies of the population. His constituents should have the right to expect the same broadband as businesses in other areas. It is no surprise to me that the more remote communities are from London, the more impoverished they are. That has been at the forefront of the broader question we have been raising about the rebalancing of the economy. It is why we are so concerned that the movement over the past four years, under this Government, rather than being to rebalance the economy, as everyone spoke about back in 2008, to reduce the reliance on
The hon. Gentleman is right to raise the point about the broader infrastructure question for his constituents and for those in more remote parts of the UK. It is all the more reason why changes that disfranchise businesses that do not have access to superfast broadband—the sort of broadband that would be needed in order successfully to operate a video conference link—should not be brought in until such issues are resolved.
It may well be that in 10 years, Select Committee and Bill Committee evidence sessions will happen by video link; we will not need to ask our witnesses to come down here because it will be second nature for all our meetings to take place via the internet. I must say that I doubt it—human beings are social creatures and will always want a face-to-face link. In such an important area as the engagement of creditors, before we have resolved the issue of internet connectivity in certain parts of the country, particularly, and much more broadly across the rest of the country in the context of superfast broadband, we should not be proposing anything that disfranchises creditors in some areas and leaves creditors in other areas able to take part in the process. That will only increase the inequalities that exist, to which the hon. Member for Plymouth, Sutton and Devonport just referred.
In the interests of transparency the option should remain on the table and we can get back to this sort of thing in the future, once we have changed the way that we operate. In the interests of transparency, the Bill’s language around a prescribed proportion of 10% of creditors being needed to call a physical meeting is problematic, since it could cost time and take money out of the process. This system could build in delays as votes are taken and in large insolvency, such as the recent cases of HMV or the wedding gift website, the organisational efforts to get responses from the hundreds or thousands of creditors that would make up the 10% threshold would be extreme.
Government amendment 165 slightly improves the situation by enabling rules to allow physical meetings in certain prescribed circumstances, where an alternative meeting format has not been able to come to a conclusion. We presume that the Government have in mind a teleconference failing to reach a verdict, or a Skype meeting failing, so they seem to be implicitly accepting our argument that in certain circumstances, new media options would not be appropriate. In order to overcome this confusion I ask the Committee to accept our amendment 219 to clause 110, which is clear, straightforward and enforceable and allows the insolvency practitioner to be the judge of the circumstances and what is most likely to be useful.
Likewise, the Government seem to assume that holding meetings in a virtual, online space will be cheaper for creditors and IPs alike. We are dubious about that claim. In certain cases, all the creditors will be local and known to the business in insolvency, so it makes more financial sense for them to meet in the business’s boardroom rather than connect to broadband facilities or dial into a conference call. Our amendment 220 to clause 111 simply acknowledges that fact. It would enable IPs to use their discretion to decide which option works best financially for the creditors and the businesses they are trying to save.
Finally, our amendment 225 to schedule 9 would bring about changes that are dependent on our previous amendments. It would make a real difference to improving creditor engagement. I intend to press amendments 218 to 220 and 225. I look forward to hearing what the Minister has to say about how the Government will ensure that these changes, which are designed to reduce the cost of the process, do not dumb down the industry, return less money to the creditors and weaken our successful insolvency regime, which is one of the great strengths of our economy.
Jo Swinson: I welcome the hon. Gentleman’s comments setting out the thinking behind the amendments. A variety of issues arise in relation to the amendments to clause 107, which also address a later part of the Bill—in particular, the provision for face-to-face meetings. It is important to clarify that clause 107 simply formalises in statute a long-standing position in case law. It makes a helpful clarification, rather than a law or policy change, so it was deemed that a consultation on the clause was not necessary.
In an overarching sense, the hon. Gentleman challenged whether the Government’s action will return more money to creditors, which is the ultimate intention of the insolvency regime. Our insolvency regime does it well, but there are significant ways in which it can be improved. We share the hon. Gentleman’s motivation to improve the situation. However, he said that we should focus on getting more money out of creditors, rather than on reducing costs, but those two things are linked.
Jo Swinson: Absolutely—sorry. The hon. Gentleman is quite right. I like to keep Committee members on their toes. We are trying to get more money for creditors out of businesses, and going through a business rescue situation is intended to maximise the money that is used to pay off the creditors.
The hon. Gentleman suggested that we are too focused on reducing the costs of the process, but those two things are inextricably linked. To maximise the money that creditors receive, we must not only maximise the amount of money in the business but minimise the cost of getting money to the creditors. Both sides of that equation are important. Therefore, there is a balance to be struck, which insolvency practitioners consider daily. They must look at the costs of their undertaking an action and whether it will bring in a worthwhile amount of money for the creditors. Those two things are linked. Therefore, it is important that we reduce the costs of the insolvency regime, as it will result in more money going to creditors.
Amendment 218 would ensure that the trustee in bankruptcy needed the permission of the creditors’ committee before appointing the bankrupt to assist them in dealing with the bankruptcy. Clause 109 removes the requirement for trustees to seek permission before exercising certain powers given to them in insolvency legislation, including permission to issue legal proceedings
Amendment 218 would make an exception for cases where the trustee wished to appoint the bankrupt to assist in dealing with certain tasks. That sometimes happens where the bankrupt is involved in a particularly unusual trade or there is some urgency to the matter and the trustee cannot find someone else to perform vital tasks.
I will give the Committee an example: imagine that someone who is bankrupt has been running a business selling tropical fish. The fish will need to be fed and the water maintained at an exact salinity and temperature—a certain degree of skill and expertise is required in carrying on the business. Finding someone with the necessary expertise to take over the business while the fish are sold could be challenging, so the trustee may ask the bankrupt to continue running the business. Such decisions will normally need to be taken very quickly, so seeking permission could cause unnecessary delay, which could also increase costs unnecessarily. Put bluntly, in the example I have given, the fish could die, reducing the business’s assets and the money that could be returned to creditors. It would obviously not be very nice for the fish either.
If a trustee acts improperly by employing a bankrupt when they should not have, that will be a matter for the regulator to address. We are strengthening that system as well. Of course, creditors’ committees can still meet. It was acknowledged that they are relevant only to a very small proportion of cases—about 3%—but they will still be able to meet. The issue is whether or not their permission must be sought before urgent action is taken. I would argue that it should not.
Clause 110, which amendment 219 would change, removes face-to-face meetings as the default method of getting decisions from creditors and contributories in corporate insolvency proceedings, but, crucially, it allows them to require the insolvency office holder to call a face-to-face meeting if they want to. That may happen only if a set amount of the creditors or contributories agree with the request. It is currently planned that that amount will be 10% of the creditors or contributories by value. The level will be set by the insolvency rules. The important thing is that the people who are paying will have discretion as to whether a meeting takes place. That is an important principle when we are trying to ensure that creditors are not paying unnecessary costs.
Amendment 219 would allow a meeting to be called by just one creditor, whatever the value of their claim. Although that might seem straightforward at first glance, giving everyone a say and even more say to creditors, it would actually introduce an element of risk into proceedings by giving a lot of power to one individual creditor, who could have very little economic interest in an insolvency
The general principle of face-to-face meetings has been discussed in some detail. We all recognise that there are times when a face-to-face meeting is the right way to proceed and can be a useful tool. Nevertheless, it is far from the only tool. If such a meeting is not welcomed, well attended and well used, it just adds expense to the process. Bearing in mind the fact that insolvency practitioners often charge several hundred pounds for an hour of their time, the cost that can be added is not inconsiderable.
We know from Elaine Kempson’s report that generally only 4% of creditors engage with meetings, so the ability to hold them is not necessarily well used. Indeed, insolvency practitioners themselves tell us that meetings are often poorly attended. The basic outcome of most of these meetings is that they lose money for creditors, which is not in their interests. We do not want a situation where an insolvency practitioner calls a meeting of all creditors and no one turns up but, none the less, they are able to tick a box and suggest that there has been engagement with the process. That does not do anyone any favours.
Toby Perkins: A dangerous precedent is set here. The Minister is right that creditors, on many occasions, will say, “I’m not going to get my money back. I’ll get 10p for £1, so what’s the point in me going to the meeting?” We understand that. However, people may turn up to the meeting and, on the back of it, discover things that they did not know. As a result, the insolvency practitioner might be able to find additional resource. The fact that only 4% or 10%—whatever the figure may be—choose to engage in the meeting is not, in itself, a reason not to have the meetings.
Jo Swinson: It ought to be at the discretion of the people who pay for the privilege of holding such meetings. The hon. Gentleman paints a picture of various creditors going along to a meeting and finding additional pots of money that the company may have. From the discussions we have had and the evidence submitted through the various insolvency reviews undertaken, that does not seem to be the reality. Often, not a single creditor turns up to these meetings; not a single one. It is purely the insolvency practitioner sitting there, waiting to see if anyone will turn up.
It is important that a proactive effort is made to engage creditors, rather than having something that can all too easily turn into a tick-box exercise, where people have been invited to a meeting and the engagement is therefore done. That proactive effort might be through a virtual meeting, e-mails, correspondence or telephone calls. The creditor engagement might involve everyone being there at the same time, or individual discussions being held. It must depend on the individual circumstances. Where there is a real appetite among creditors to have a meeting, they can, of course, ask to do so. It is right that they can make that decision to call a meeting.
The hon. Gentleman said that more money may be found as a result of the meeting. Where creditors have such information—perhaps because they are given the
Toby Perkins: The Minister is in danger of being entangled by her own contradictions. She says, on the one hand, that it should be up to the creditors to decide whether a meeting is held. On the other hand, she says that if 89% of creditors do not want a meeting and 11% do, they can still have it. I believe that creditor meetings are important and that valuable things will sometimes come out of them. She is, of course, right that sometimes no one turns up and the meeting is a waste of time. However, we cannot know that in advance. Often creditors are disillusioned when they find the business has gone bust. If they do not engage with the process up front, the whole process just collapses. I think that that is wrong-headed.
Jo Swinson: I appreciate that the hon. Gentleman takes a fundamentally different position. He says that it is a waste of time if no one turns up to the meeting; it is not only a waste of time but a waste of money. It is a waste of money for the creditors who the whole process is designed to help. Meetings should take place only if there is a significant chance that holding it will increase the money available to creditors. Those criteria are not met through the current provision. There is too great a tendency and temptation to feel that holding the meeting is creditor engagement. It should be done in a much more cost-effective and proactive way. He talked about 11% of creditors wanting to have a meeting. Those people have a significant stake in the outcome of the insolvency process, so if 11% of them want a meeting, that at least indicates that there is a demand and that it is worth having one.
Obviously, the exact threshold will be set in the insolvency rules. If there are strong views among Members of this House or among stakeholders about whether 10% is the right level, that can of course be considered. We want to set a level that is feasible and that can be reached if people want to have a meeting, not one that is a huge bar. I am happy to take representations from Members on whether 10% is the right level.
We live in a different world from when the initial provision came in, in the 19th century. Apart from anything else, the vast majority of creditors will often not necessarily be geographically close to the location where the meeting is to be held. That is significantly different from the situation in the 19th century, when a business’s creditors tended to be nearby. We live in a globalised world and businesses trade all across the country, so creditors might be hundreds of miles away, so a meeting is less likely to be the most effective form of engagement; none the less, creditors still have the right to ask for one.
Amendment 220 would change the way in which deemed consent was used in personal insolvency proceedings. Under the proposed process, an insolvency office holder would write to creditors with a proposal, and unless a specified number objected to it, it would be passed. The office holder could see thereby whether the proposal was likely to be uncontentious, meaning that a
Amendment 225 would amend schedule 9, which contains changes to the Insolvency Act 1986 that are required for clause 121 to operate effectively. The Government’s proposal is that the official receiver should be appointed trustee on the making of a bankruptcy order, unless the court orders otherwise. As things stand, the official receiver is appointed receiver and manager, with limited powers to act, when a bankruptcy order is made; only later in the process is a trustee, who has more power to deal with the assets of a bankrupt, appointed.
There are no particular benefits in delaying the appointment of a trustee. The clause is designed to cut red tape at the start of the bankruptcy process, whether the official receiver remains the trustee or an insolvency practitioner is later appointed. The amendment would mean that, even though the official receiver was already the trustee, they would still need to consider whether the creditors should be asked to nominate an IP, and a notice would have to be sent to them if the intention was not to do so. The amendment would retain what is in most cases a pretty meaningless process, and it would not achieve the objective of cutting red tape—in fact, it would result in provisions of the 1986 Act being retained for the appointment of a first trustee in bankruptcy when a trustee is already in place.
Under the new process, official receivers will, as they do now, seek insolvency practitioner appointments where they do not have the necessary expertise to deal with the case. In addition, creditors have ultimate control over who acts as trustee, as they may seek to replace the trustee, provided that they represent at least a quarter of the creditors by value. Official receivers will continue to consider the wishes of creditors, and published guidance is already available on how they should consider requests for the appointment of an insolvency practitioner. Clause 121 and schedule 9 are designed to cut red tape. Unfortunately, the amendment would put it back into the Bill, which is contrary to what we are trying to do maximise returns to creditors.
See the explanatory statement to amendment 163.
‘( ) Subsection (2) is subject to any provision of this Act, the rules or any other legislation, or any order of the court—
(a) requiring a decision to be made, or prohibiting a decision from being made, by a particular qualifying decision procedure (other than a creditors’ meeting or a contributories’ meeting);
(b) permitting or requiring a decision to be made by a creditors’ meeting or a contributories’ meeting.”
This amendment enables the Insolvency Rules to make provision for particular decisions by creditors and contributories to be made by specific decision making processes, including by way of a physical meeting.
(a) a decision about the matter is required by virtue of this Act, the rules, or any other legislation to be made by a qualifying decision procedure, or
(b) the court orders that a decision about the matter is to be made by a qualifying decision procedure.
‘( ) If the rules provide for a company’s creditors or contributories to make a decision about the remuneration of any person, they must provide that the decision is to be made by a qualifying decision procedure.”
This amendment clarifies that a process of deemed consent may not be used to make a decision where the Insolvency Act 1986, the Insolvency Rules, other legislation or the court specify that it may not, or where the creditors or contributories make a decision about an office-holder’s remuneration.
“(a) the creditors or (as the case may be) the contributories are to be treated as not having made a decision about the matter in question, and
(b) if a decision about that matter is again sought from the creditors or (as the case may be) the contributories, it must be sought using a qualifying decision procedure.”
This amendment clarifies that where a deemed consent procedure fails to produce a decision on a matter, there is a power but not a duty to seek a decision on the matter using a qualifying decision procedure.
This amendment and amendments 169, 172, 173, 180, 183, 184, 185 and 186 draw a distinction between the rights of creditors and contributories to vote in decision making procedures and the rights of other parties, such as company officers and bankrupt individuals, to participate but not to vote.
This amendment removes the definition of “office-holder” from clause 110. This definition is no longer required in consequence of the amendments made by amendment 166.
( ) the rights of creditors, contributories and others to be given notice of, and participate in, procedures,”
This amendment clarifies that the Insolvency Rules may determine who receives notice of decision making processes in order to participate and vote in them. The Rules will provide for cases where creditors who have opted out of receiving further correspondence will not be sent notices.
This amendment inserts a reference to a Group of Parts into clause 111. This is to make the language used in clause 111 consistent with that used in clause 110.
This amendment changes the way to which a natural person is referred in clause 111 in order to make it consistent with the language used elsewhere in the Insolvency Act 1986.
‘( ) Subsection (2) is subject to any provision of this Act, the rules or any other legislation, or any order of the court—
(a) requiring a decision to be made, or prohibiting a decision from being made, by a particular creditors’ decision procedure (other than a creditors’ meeting);
(b) permitting or requiring a decision to be made by a creditors’ meeting.”
This amendment enables the Insolvency Rules to make provision for particular decisions by creditors to be made by specific decision making procedures, including by way of a physical meeting.
This amendment changes the way to which a natural person is referred in clause 111 in order to make it consistent with the language used elsewhere in the Insolvency Act 1986.
‘(4A) The deemed consent procedure may not be used where the insolvency practitioner judges that a face-to-face meeting would incur no additional cost saving to creditors.”—(Toby Perkins.)
(a) a decision about the matter is required by virtue of this Act, the rules or any other legislation to be made by a creditors’ decision procedure, or
(b) the court orders that a decision about the matter is to be made by a creditors’ decision procedure.
‘( ) If the rules provide for an individual’s creditors to make a decision about the remuneration of any person, they must provide that the decision is to be made by a creditors’ decision procedure.”
This amendment clarifies that a process of deemed consent may not be used to make a decision where the Insolvency Act 1986, the Insolvency Rules, other legislation or the court specify that it may not, or where the creditors make a decision about an office-holder‘s remuneration.
“(a) the creditors are to be treated as not having made a decision about the matter in question, and
(b) if a decision about that matter is again sought from the creditors, it must be sought using a creditors’ decision procedure.”
This amendment clarifies that where a deemed consent procedure fails to produce a decision on a matter, there is a power but not a duty to seek a decision on the matter using a creditors’ decision procedure.
This amendment removes the definition of “office-holder” from clause 111. This definition is no longer required in consequence of the amendments made by amendment 178.
( ) the rights of creditors and others to be given notice of, and participate in, procedures,”
This amendment clarifies that the Insolvency Rules may determine who receives notice of decision making processes in order to participate and vote in them. The Rules will provide for cases where creditors who have opted out of receiving further correspondence will not be sent notices.
“which relates to pre pack administrations,”
‘(6A) Regulations under this paragraph may only be made in relation to pre-packaged sales by administrators.
(6B) For the purposes of this paragraph a pre-packaged sale is an arrangement under which the sale of all or part of a company’s business or assets is negotiated with a purchaser prior to the appointment of the administrator and the administrator effects the sale immediately on, or shortly after, his appointment.”
There are around 20,000 corporate insolvencies in the UK a year; about 3% or 600 to 700 of these are pre-pack sales. While only a tiny percentage of all corporate insolvencies are pre-packs, it is understandable that they attract public scrutiny—because of a lack of transparency, because they appear to fly in the face of fairness, and because of the way in which pre-packs are delivered as a fait accompli for any businesses or individuals that have lost money through no fault of their own by that insolvency process.
Pre-packs are agreements for the sale of an insolvent business put in place but not completed before the company goes into formal insolvency. This is often done without the knowledge of the creditors. We all want to save as many businesses as possible and the jobs they provide, and pre-packs are one of the reasons why Britain’s track record on saving businesses and jobs is such a strong one. Notwithstanding that, it is vital that we do whatever we can to increase the confidence that creditors have in the process.
We should recognise that, although creditors will always feel aggrieved about pre-packs, they are often the least worst option facing a struggling business. Independent research shows that pre-packs fare considerably better than straightforward business sales in terms of the retention of jobs and returns to secured creditors: in 92% of pre-pack cases, all the employees were transferred to the new company, compared with 65% in business sales; and the average returns to secured creditors in pre-packs are higher than those in straightforward business sales. In addition, Teresa Graham’s 2014 review found that found that pre-packs have a place in the UK’s insolvency landscape because they preserve jobs and businesses, although reform was proposed. I believe that the Government share that intention, but I also believe that the clause as drafted captures connected party sales in all types of administrations. Such wide drafting may have unintended consequences, and the Minister may have to look again at the clause on Report. In particular, R3, the insolvency practitioners’ trade body, warns that a business could end up going into liquidation instead of administration as a result of the clause. This would lead to job losses and the UK’s business rescue culture being undermined.
The clause provides the Government with the reserve power to prohibit not only pre-pack administration sales to connected parties if certain criteria are not met, but potentially all connected party sales in administration. Our amendments 221, 222 and 216 are designed to overcome that problem. The Government have confirmed
Returning to the Minister’s example of the expertise of someone in the fish industry and the knowledge that would be held about how a particular business was operated, I do not believe that it is the Government’s intention to exclude anyone who is either a family member or a previous employee from being involved in the business, but that might be the effect of the clause. Amendment 221 aims to clarify that the reforms are targeted solely at pre-packs. I hope this will also prompt the Clerks to change the title of the clause—we were unable to table an amendment to do this—to reflect the fact that clause 117 should be concerned only with pre-packs. The amendment fits in entirely with the spirit of the clause, but offers more specific wording.
Likewise, although the Minister may dismiss this as semantics, as she has, rather ungenerously, dismissed other arguments, amendment 222 would remove the reserve power granted to the Secretary of State to prohibit pre-packs altogether. Given the sensitive nature of the subject and the potential negative impact on UK plc, we feel that if such a move were ever to be taken, it should be subject to public scrutiny and debate in Parliament, rather than simply being a reserve power for the Minister to execute.
Amendment 216 would ensure that new regulations made under the clause were targeted only at the bad pre-pack practice we all want to discourage, rather than applying more generally to all pre-packs. We should be taking action on the small percentage of bad pre-packs which give all pre-packs a bad name and which may lead to measures being proposed that will capture many perfectly legitimate means of operation and see them targeted along with the small number of bad pre-packs.
I hope that the proposed changes will have the support of the Committee, and particularly that the Government will look favourably on amendment 221, which would provide useful clarification. None of us wants to walk away from this Committee leaving the Bill containing measures that will be challenged in court and ultimately deliver very different outcomes to those we anticipated. I intend to press the amendments to a vote.
Jo Swinson: The hon. Gentleman finished his remarks by stating his intention to press the amendments to a vote. He accused me of being ungenerous, but that is slightly ungenerous of him, given that he has not even heard my responses. Perhaps I am on a fool’s errand here and have little chance of persuading him, but I shall try none the less.
Jo Swinson: Perhaps my generosity is being overstated. What this shows is that if you snooze, you lose. Perhaps I should have been a little more attentive at a key point, when I was also trying to look ahead to check a particular fact. None the less, I shall try to reassure the hon. Gentleman on the issues that he raises, even though he may not be minded to be reassured.
The hon. Gentleman is right that pre-packs have a role in a business rescue regime, and in some cases they can prove valuable in saving jobs and continuing to ensure that creditors can get a better deal. Research on that subject by Professor Peter Walton for the Graham review states that 60% of pre-packs are between two connected parties, and the issues are with business failure within a short time after the pre-pack takes place.
The report, however, shows that if a business is sold to a connected party, it is more likely to fail than if it is sold to an unconnected party. Of the businesses that were sold to connected parties, 29% failed within three years, compared with only 16% of businesses sold to unconnected parties. Although the hon. Gentleman points out some positive statistics about how pre-packs can be helpful, there is genuine concern about pre-pack sales to connected parties in particular. The business failure rate also suggests that there is an issue. This is a genuine query that has been raised in previous debates and in correspondence by Members on both sides of the House, which is why the Government are minded to address the matter.
Jo Swinson: No, the research by Professor Walton shows that about 60% are sold to connected parties. The amendments seek to ensure that the policy is targeted at addressing the harm identified by the Graham review on pre-pack insolvencies. We asked Teresa Graham to consider the matter because hon. Members had raised it on many, many occasions. She took evidence and drew on research by Professor Walton of the University of Wolverhampton, and she came up with a series of conclusions that the Government accepted and are taking forward. She proposed a route to try to create greater confidence in pre-packs.
The amendments are not necessary, and I will explain why. Clause 117 gives the Secretary of State a power to introduce regulations to address problems in relation to sales in administration to connected parties. As hon. Members know, administration is the main way in which we attempt business rescue here in the UK. Sale to a connected party is where an insolvent business is sold to a purchaser that was previously involved with the business. The most common type of connection is where someone is a director of both the insolvent business and the business that is buying it.
Amendments 216 and 221 would restrict the scope of the clause to pre-pack sales only, and not all sales in administration. I understand the intention behind the amendments, and the pre-packs we are talking about are commonly understood to be a sale that is agreed prior to the appointment of the administrator and that is effected on, or shortly after, the administrator’s appointment. The amendments could lead to a situation in which unscrupulous individuals might delay a sale specifically to avoid the regulations, which is why we drafted the current wording of clause 117. Indeed, the wording is partly a result of the independent Graham review, which gathered evidence and considered the issue in detail. The Graham review recognised the existence of the risk, and Teresa Graham’s recommendation was that all potential sales out of administration to connected parties should therefore be captured in legislation to ensure that this particular issue can be addressed without there being some kind of loophole. I hope the hon. Gentleman therefore understands why we have drafted the clause in this way, even though the specific concern tends to be about pre-pack sales to connected parties.
Amendment 222 would remove the power to ban all sales in administration to a connected party. It is absolutely the Government’s intention to review the market before introducing any related regulation, which will enable us to see whether the problems that were identified by the Graham review have been addressed, and to assess whether the six voluntary reforms recommended in that review have been effective. We very much hope that they have been, which is why we have accepted them and are taking them forward, but there remains significant uncertainty about what the market might look like within the five years of the sunset provision for the clause, so we need a range of tools to address any shortcomings.
The power to prohibit sales in administration to connected parties is a necessary tool. Although it is unlikely that the Government would seek to ban such sales, it is important that the ultimate sanction is available should the evidence show it is the right response. The availability of that power will probably increase the likelihood of the voluntary mechanisms being more effective.
I want to reassure the Committee that the Government will of course review the market and consult on any changes before regulation is introduced. I hope that I have reassured the hon. Gentleman and that, even though he thought he would not be, he has been convinced to withdraw his amendment.
Toby Perkins: I am partly reassured by what the Minister has said, but it seems slightly odd to go about Government business by saying, “We are going to create powers for ourselves, but we promise not to use them until we have reviewed whether or not they are needed.” I would not have thought that that is generally how a Government go about their policy.
Toby Perkins: The prohibition of pre-packs would be a really significant step, if it was taken. I appreciate that the Government are saying, “Don’t worry, we will not actually take that step without undertaking a review,” but they are approaching the end of their term and a different Government might come in after the general election. The new Government might decide to get rid of all pre-packs, and the new Secretary of State could do that very easily. I do not think that a Labour Government would do that, but if an alternative Government came in and was minded to take up the power, and the Minister said, “Hang on a second, let’s think about this,” they would say, “You put it on the statute book—you let us do this.” Is it not a dangerous power to propose?
Jo Swinson: The hon. Gentleman is perfectly entitled to take that view. I know how much correspondence I receive from MPs from all parties about constituents who have experienced real problems with phoenix companies. They end up frustrated, because a company that owes them money might be trading and they think that things are fine, but then it seems to disappear, only to pop up again a few days later with all the same people involved but none of the debt remaining.
We have discussed other measures in the Bill that are aimed at enabling action to be taken to address directors who misuse procedures in the way I have described, but we must tackle the issue of pre-packs as well. They can be a legitimate vehicle for business rescue, but they are certainly not without their problems. The issue of phoenix companies comes up so regularly that we want to ensure that the Government have the ability to act if the voluntary approach is found to be unsuccessful. That applies to this Government, but whatever the colour or shape of the Government after the general election, we also want them to be able to act without having a whole primary legislative process to consider. Obviously, there would still be the requirement to consult and then to go back to Parliament for secondary legislation.
It is right for us to make sure that that power is here within the Bill, but the hon. Gentleman is at liberty to disagree if that is his view. However, as I say, I encourage him to consider the large number of individuals and small business that have expressed genuine concerns about phoenix companies. They expect the Government to act. They want a guarantee and some confidence
Toby Perkins: I thank the Minister for what she has said. On amendment 222, to be frank it is a pretty odd way of doing policy for the Government to go through the legislative process and create powers that the Secretary of State could use that involve fairly fundamental changes but then say, “Don’t worry, we won’t actually bring in these changes until we have the evidence and the research base, but this will be sitting there from now on in primary legislation as a sort of potential ticking time bomb for any future Government to come in and just enact.” There are other ways in which the Government might operate on this and other ways for a Government to introduce policies. We do not think that we would introduce this—although some people would like it if we did—but any future Government could just do it without needing even to come to the House, because this Government have already given them the powers to do so. It is a fairly odd way of operating for this Government to promise that they would not use these powers, but that a future Government could do so.
Jo Swinson: On a point of clarification for the Committee, future Governments would still need to come to the House. This would still be subject to the usual procedures of the House in approving secondary legislation, but it would remove unnecessary delay. This is an issue, and the approach was recommended by Teresa Graham, who looked into it in detail for the Government. She recommended that this measure should be taken.
Toby Perkins: I hear what the Minister says, but the point remains about the way of operating. If the Government were saying that they are minded to do this, we would be having a totally different debate. However, they say that they are minded not to do this, but will create the opportunity to do it without having to return to Parliament. I appreciate that the Minister says we can do it by secondary legislation and a Statutory Instrument Committee could look at it. However, it is a pretty substantial change to an insolvency regime to propose on the basis that, “Look, we will do it, but don’t worry—we won’t use it.”
I will therefore test the will of the Committee on amendment 222. Notwithstanding the Minister’s remarks that amendment 221 would be helpful to the Government, after hearing the Committee’s will on it, I am willing to take a view on amendment 216. If we press the amendments, we will do so in the order that they appear on the amendment paper. I shall seek to divide the Committee on amendments 222 and 221.
Toby Perkins: As the law stands, and as we all know, to receive a dividend in an insolvency, a creditor must first submit a claim to the office holder. Where necessary, the office holder will request further evidence to verify the claim. The clauses simplify the process for what the Government term “small debts”, so such creditors do not have to prove their ownership of the debt in the same way.
Clause 119 takes care of company insolvency and clause 120 takes care of individual insolvency. We do not object to the overall principle of such moves, but I am very concerned that £1,000—the figure that the Government have floated for the prescribed amount—is far too high. I would be very interested to hear how the Minister came to the figure of £1,000. I appreciate that
We all know that in the event of corporate insolvencies, businesses can be chaotic places. Employees are often desperately attempting to find alternative employment, with the pressure of their mortgages hanging over their heads, and the business that they expected would be capable of paying them and to which they were dedicating their career looking vulnerable and unable to do so. Under those circumstances, many normal practices go out of the window. It is also often the case that insolvent companies have been in a less than ordered state in the run-up to declaring themselves insolvent or bringing administrators in, and they are often scrambling around to find anyone who they are not on stop with to purchase supplies in an effort to stay afloat. Systems such as purchase order numbers and others may have become irregularly used. In those circumstances, it is a very dangerous step for any business to be able to say, “We have an outstanding invoice for £826. Can you send it to us? We don’t need to provide any evidence or documentation to show whether the goods were received.”
Let us make no mistake; it would be very dangerous if the insolvent business started seeing all its assets going not to the businesses to which it rightfully owes money, but to chancers making erroneous claims in the general mayhem of the situation. It is not impossible to imagine the unscrupulous making quite a good living by submitting several claims below the limit and withdrawing them only if challenged. We recognise that considerable work aimed at securing very small invoices is often unnecessary. We do not want huge processes to be pursued for invoices of £50 or £60. Our amendment is a sensible step to deal with some of those smaller claims. However, up to £1,000 is quite a significant amount to expect no invoices for in the event of insolvency.
I have never worked for a business that has gone into insolvency but I have worked for one that went through periods of quite significant redundancies. I do not know if the business was under threat at that time, but the redundancies it was making were certainly a distressing sign that all was not well. In those circumstances, where a lot of redundancies were made and the business had put some suppliers on stop, systems start to break down. If businesses have put certain suppliers on stop, they have to look round to see who else might supply them. Other people make decisions because the person previously performing that role has now been made redundant. The business attempts to continue functioning. It is therefore not unusual, in the run-up to a business becoming insolvent, for paperwork not to be in place as it normally is.
This figure of £1,000 as a limit under which businesses can claim invoices is a very high bar, particularly if a business is engaged in providing products that are common to virtually all businesses. Let us take the example of a paper supplier. Someone might purport to be a paper supplier and put in an invoice saying, “We provided £726-worth of A4 paper.” No evidence would be required.
I do not in any way discredit what the Government are attempting to do here. There are many cases in which this would be helpful and entirely valid. However, I ask the Minister to consider carefully whether this might lead to a rogue’s paradise and a situation where businesses end up making illegitimate claims. The Bill says that the insolvency practitioner can still ask for evidence where it has cause for doubt. However, if a business had supplied something on four occasions, knew that it would get only 20p in the pound against the four different invoices and decided to put another couple in as well, it would be very difficult for the insolvency practitioner, in the event of many of the previous employees of the business disappearing, to say whether that was a legitimate claim. If the Government are saying, “You can have up to a grand before anyone even asks to see a proof of delivery signature or before anyone checks that there was ever a request for this work to be carried out”, it does not take a genius to work out how that could be exploited by unscrupulous businesses.
Let us say that there is, under clause 120, to which our amendment 224 relates, a personal bankruptcy. We are talking about claims of up to £1,000, and those are quite significant amounts in individual insolvencies. Removing the need for proof for any bill up to £1,000 in a personal bankruptcy is quite surprising to me. Often, the person who has been made bankrupt has little reason to continue fighting. They might easily be vulnerable to unscrupulous people saying, “Look, just say that we lost £800. No evidence will be required, and we’ll cut you in for a bit of it.” Who knows how the provision could be exploited?
These are important steps. The Government are, rightly, attempting to ensure that, where possible, costs are brought out of the processes and that, where there are small amounts, they can be dealt with in a way that does not unduly trouble anyone or add unnecessary cost to the process. However, a bar that is set at £1,000, particularly for individual insolvency, is quite significant. I am concerned about that and I intend to press amendments 223 and 224 to a vote.
Jo Swinson: I see a trend developing. The hon. Gentleman is determined not to be persuaded by anything that I say, but I hope that we can return to more positive and consensual discussion on later parts of the Bill.
Clauses 119 and 120, to which the amendments relate, will give the Secretary of State the power to make rules dealing with the treatment of small debts in insolvencies. At the moment, it does not matter how much or how little a creditor is owed by an insolvent company; the creditor has to submit a claim to an insolvency practitioner or official receiver, who then has to scrutinise it to ensure that the debt is properly recorded. For small debts, that is likely to result in very small dividends, and that administrative burden is disproportionate to the amounts involved.
We know that insolvency practitioners normally charge on a time basis, and we know the concerns that have been expressed by many hon. Members on behalf of their constituents about the level of insolvency fees. Of course, that was the subject of the review by Elaine Kempson. The time spent dealing with these small claims results in additional costs being incurred, which of course reduces the funds available to be given back to creditors. Stakeholders have told us that the cost of dealing with very small claims can exceed the value of the resulting dividend. Clearly, that does not make sense.
In terms of the amount of time that some of the claims take to process, a whole raft of information needs to be included. There is the creditor’s name and address, the company registration number, the total amount of the claim, including VAT, as at the date when the insolvency order happened, whether it includes any outstanding uncapitalised interest, how and when the debt was incurred, any security held, the date when it was given, what value the creditor puts on it, details of any reservation of title in respect of goods to which the debt refers, and the name, address and authority of the person authenticating the proof. A whole raft of information has to be submitted. Obviously, that then has to be
Toby Perkins: I think that we are in the same place on the principle. The issue is where the bar is set. Will the Minister accept that if the bar is set so that £999 is a small amount that does not even require a signature or proof of order, that is quite a high bar? Will she accept that our amendment fits in with the principles that she is laying out, but would ensure that the provision was not open to exploitation?