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Baroness Buscombe: I thank the Minister for his comments. This is extremely good news. It is a complex and controversial issue which deserves serious consideration. We take a number of the points that he has made—particularly, for example, in relation to costs that would probably be incurred by landlords—and obviously want to read with great care what the Minister had to say.

The consultation itself is important. We are delighted to hear that there is now in place a consultation with the industry so that it has an opportunity perhaps to offer ideas for a resolution to this. We note his remarks and therefore have pleasure in withdrawing the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 15 and 16 not moved.]

Lord McIntosh of Haringey moved Amendment No. 17:

(" .—(1) This paragraph applies where there is an uncrystallised floating charge on the property of a company for which a moratorium is in force.

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(2) If the conditions for the holder of the charge to give a notice having the effect mentioned in sub-paragraph (4) are met at any time, the notice may not be given at that time but may instead be given as soon as practicable after the moratorium has come to an end.
(3) If any other event occurs at any time which (apart from this sub-paragraph) would have the effect mentioned in sub-paragraph (4), then—
(a) the event shall not have the effect in question at that time, but
(b) if notice of the event is given to the company by the holder of the charge as soon as is practicable after the moratorium has come to an end, the event is to be treated as if it had occurred when the notice was given.
(4) The effect referred to in sub-paragraphs (2) and (3) is—
(a) causing the crystallisation of the floating charge, or
(b) causing the imposition, by virtue of provision in the instrument creating the charge, of any restriction on the disposal of any property of the company.
(5) Application may not be made for leave under paragraph 12(1)(f) or (g) with a view to obtaining—
(a) the crystallisation of the floating charge, or
(b) the imposition, by virtue of provision in the instrument creating the charge, of any restriction on the disposal of any property of the company.").

The noble Lord said: The concept of a floating charge, as I have been calling it—a debenture as the noble Lord, Lord Kingsland, has been calling it—is well known in this country, particularly to those who have needed to obtain financial support for their companies. Indeed, it is worse than that. Having run my own company for 30 years I am very familiar with the floating charge and, indeed, very familiar with personal guarantees, which go much further than the floating charge.

As the name suggests, the floating charge is a form of security which does not attach to a particular asset. It covers, like the Sword of Damocles, assets not subject to a fixed charge. Generally, it attaches itself only to those assets, or "crystallises", as it is usually called, when some specific event or events occur. What these events are is usually set out in the legal documents creating the charge. A consequence—and a very desirable one at that—of the charge floating is that the company is free to deal with the assets without constantly having to refer back to the chargeholder.

However, on Second Reading I referred to our concern that without this amendment the stay of creditors' rights contained in the Bill would not be fully effective against possible action by the holder of a floating charge. The intention is that we have an effective stay on creditors' rights and so give the company the breathing space it needs to put its rescue plan to creditors. We have therefore brought forward this amendment so as to prevent a floating charge from crystallising, or restrictions being imposed upon the company's ability to dispose of charged property during a moratorium. This leaves the company able to deal with its assets during the moratorium in the same way as it could before the moratorium was obtained. That is because if we permitted either of those events to occur during a moratorium it would be likely to result in a virtual paralysis for the company. To dispose of any goods covered by the charge if either of those events had occurred would need the consent of

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the chargeholder or the permission of the court under paragraph 19. That clearly would be impractical in a trading situation and make any rescue attempt very difficult to achieve, if not an impossibility.

However, we have also provided that the charge may crystallise, or restrictions be imposed on the disposal of assets, once the moratorium ends—if that is what the floating chargeholder wishes. The reason is that the secured creditor's rights are only stayed during a moratorium and they should be reinstated as soon as the moratorium ends. That will be achieved by the chargeholder issuing a notice to that effect once a moratorium has come to an end. That will mean that the floating chargeholder will still be able to rely on an event which occurred during the moratorium, so as to crystallise their charge or impose restrictions. Without such a provision, in certain circumstances such an opportunity might otherwise be lost—for example, where crystallisation is to be based on an event which cannot be repeated, such as the resignation of a specific individual.

This approach is consistent with the impact of a moratorium on the treatment of other creditors who are generally prohibited from taking action against the company—other than with the leave of the court—for the period that a moratorium is in force, and whose rights are restored once a moratorium ends, subject to their not being bound by an approved voluntary arrangement. A stay on creditors' rights is fundamental. Without it, the directors will not have the necessary short breathing space within which to put the rescue plan to creditors.

Members of the Committee will note the symmetry of my amendment with those which were moved by the noble Lord, Lord Kingsland, in an earlier group. I beg to move.

On Question, amendment agreed to.

Lord Kingsland moved Amendment No. 18:

    Page 14, leave out lines 49 to 51 and insert—

("13.—(1) Any security granted by the company at a time when a moratorium is in force in relation to the company is invalid except for the extent of the aggregate of—
(a) the amount of any money paid, or the value of goods or services supplied, to the company at the same time as, or after, the security is granted, which is, and is intended to be, secured by the security, and
(b) the amount of such interest (if any) as is payable on the amount falling within paragraph (a) in pursuance of any agreement under which the money was so paid or the goods or services were so supplied.
(2) For the purposes of sub-paragraph (1)(a), the value of any goods or services supplied is the amount in money which at the time they were supplied could reasonably have been expected to be obtained for supplying the goods or services in the ordinary course of business and on the same terms (apart from the consideration) as those on which they were supplied to the company.").

The noble Lord said: Paragraph 13 of the new Schedule A1 provides that any security granted during the period of the moratorium can be enforced only if, at the time it was granted, there were reasonable grounds for believing that it would benefit the company. That provision will make it extremely

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difficult to raise finance during the moratorium. Its validity would depend on whether there were reasonable grounds for believing that the security would benefit the company, and that is too demanding a criterion.

Instead, we suggest that the Bill imitates the provisions of Section 245 of the 1986 Act, which avoids floating charges created within a specified period before a company goes into liquidation. Such charges are invalid, save with respect to fresh money or the value of new goods and services provided after the security was granted. That test would, in our view, be a workable one. I beg to move.

The Deputy Chairman of Committees: I remind the Committee that this amendment pre-empts Amendments Nos. 19 and 20.

5 p.m.

Lord Sharman: I would like to speak to Amendments Nos. 19 and 20 which stand in my name. As the noble Lord, Lord Kingsland, has already explained, there are concerns, which I share, about the ability to raise finance during the period of the moratorium, were paragraph 13 to remain unamended.

Amendment No. 19 effectively creates some sort of safe haven, albeit a small one, for a funder who acts in good faith in dealing with the nominee who, in his opinion, is taking the right action in accepting the security.

Amendment No. 20 seeks to clarify the issue but, of course, it is difficult, even in my judgment, for security to benefit an entity; it is the transaction which gives rise to the granting of security that should be the test in terms of benefiting the entity.

For the reasons outlined by the noble Lord, Lord Kingsland, the paragraph does need amendment. My own view is that it could be simply amended as I have set out in these proposals.

Lord McIntosh of Haringey: I propose to speak to the three amendments together. I apologise for not having grouped them together when we first sent out the groupings list yesterday.

We can see that Amendment No. 18 would guarantee the enforceability of a charge taken where new moneys are advanced or goods or services are supplied on credit during a moratorium; that is clearly its intention. It is possible, however, that giving security for an existing debt may be necessary in order to, say, secure future essential supplies during the moratorium. This would not be covered by the amendment, but it would be for the benefit of the company.

The amendment would not ensure that the security could only be enforceable if there were reasonable grounds for believing—at the time the security was taken—that it would benefit the company. I remind the Committee that the phrase "for the benefit of the company"—I am not sure whether the noble Lord,

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Lord Kingsland, thinks that it is not clear enough or not important enough, but in any case he does not think it is sufficient—is absolutely critical to this part of the Bill. This pre-condition of benefit is essential. The position of the company's other creditors should not be prejudiced by the company giving new security over its assets to a supplier of new credit where no benefit will flow, as it is likely to reduce the amount of money available for them all. If a plausible case were put to a bank for credit and the directors went off on holiday with the money, clearly that is not an acceptable use of the moratorium, and the other creditors would have a right to feel aggrieved.

The company's "free" assets, which would be available to pay its unsecured creditors, may be depleted to no advantage. And that is why we have provided that security can only be enforced if there were reasonable grounds, when it was granted, for believing that it would benefit the company. We appreciate that this throws the onus on the creditor to satisfy himself, before taking security, that he will be able to enforce it if it is necessary to do so. But this should ensure the desired effect as no one is likely to lend on the basis of security unless there is a clear benefit to the company.

We can also see how this amendment might enable the company to obtain funding during a moratorium. But in certain instances we do not consider that what is proposed would be appropriate, for the reasons I have given, as equity to the other creditors. We consider it vital that security should only be enforceable where a benefit would flow to the company. We remain of the view that we need to consult fully on the issue of funding before we can find an effective solution to this complex and difficult problem. We should not overlook the fact that before entering the moratorium the nominee would need to have given his opinion that the company is likely to have sufficient funds to enable it to carry on its business during the short moratorium period.

As for Amendments No. 19 and 20, we consider it appropriate that the onus should be on a potential lender to satisfy himself, before he takes new security from a company during a moratorium, that he will be able to enforce it if necessary. By placing the onus on the creditor this should produce the desired effect as no one is likely to lend on the basis of security unless there is a clear benefit to the company; in effect, as if he had read the Bill or the rules which will be publicised if and when the Bill is enacted.

We consider it undesirable for the nominee to be involved, particularly as, no doubt, lenders would want to satisfy themselves that their security will be enforceable if they need to take action to recover their debt by realising their security. We see that the granting of the security and the transaction leading to it is inextricably linked, so there is no real need to distinguish between the two as the noble Lord, Lord Sharman, suggested. Thus, alas, we are not able to accept these amendments.

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