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Lord McIntosh of Haringey: My Lords, I am grateful to the noble Lord, Lord Kingsland, for not repeating what he said in Committee but I am going to have to repeat something of what I said then, because it is still true. These are wrecking amendments. I am serious: if they were carried there would be no point in our proceeding with the Bill at all.
The first two amendments would mean that there would be nothing to stop a floating charge holder--which is what the noble Lord, Lord Kingsland, calls a debenture holder--from appointing an administrative receiver during the moratorium. In our view, the appointment of an administrative receiver would probably be disastrous for any rescue attempt, as in most cases--and the noble Lord, Lord Kingsland, recognised this--it is likely that the receiver would assume control of all the company's assets. He would then proceed to dispose of them with a view to repaying the moneys due to the floating charge holder. The primary purpose of receivership is to recover the money for the charge holder and not to achieve a rescue.
Of course we accept that receivership can result in rescues, but it is not usually the company which is rescued. The directors lose control and the whole purpose of the moratorium that we are looking to is not the replacement of an administrative receivership--that can still carry on--but an alternative to administrative receivership for a very short period, initially 28 days, in which the directors retain control and it is thought there is a possibility of preserving the company. So administrative receivership during a moratorium simply kills the moratorium and makes it impossible to sustain.
The third amendment would mean that during a moratorium a floating charge could crystallise or restrictions could be imposed on the disposal of the company's assets. Either way, that would result in virtual paralysis for the company and it would make any rescue attempt very difficult, if not impossible, to achieve.
We simply do not see any reason why a floating charge holder should be the only creditor whose action should not be stayed by the moratorium. If we are serious about giving the directors the necessary short breathing space to put in place a rescue plan for all their company's creditors, these amendments must be rejected. If not, we would be legislating for a dead letter.
The noble Lord, Lord Kingsland, made much of the floating charge holder's ability effectively to veto an administration order, but if he looks back at the history he will see that the Court Committee, whose review of insolvency law preceded the Insolvency Act 1985, recognised that the process of receivership could rescue businesses. However, it also saw that possible business rescues were lost when there was no floating charge holder to appoint a receiver to effect the rescue.
So the Government then brought into place the administration procedure, but left in place the right to appoint a receiver wherever possible. Recent research has shown that in some 50 per cent of administrations a floating charge was in existence; yet the administration was agreed to, or not vetoed, by the floating charge holder. That suggests that what in the past appeared to be an automatic preference of secured creditors for an administrative receivership over administration has diminished.
What we must not lose sight of is that both these procedures, while offering the potential for a rescue of the business, means that the directors lose control and the company itself is rarely saved. As a consequence, directors may be reluctant to let their company enter either procedure. The prospect of being able to remain in control of a company while a rescue goes ahead, we think, will mean that directors are more willing to attempt a rescue, and perhaps at an earlier stage. And of course the earlier a rescue is attempted, the more likely it is to succeed.
We think that there are enough safeguards in place to protect the position of a floating charge holder during the moratorium. After all, his existing rights are not being changed; they are only being stayed for the rather short period of the moratorium itself. We have provided that the company is only able to obtain a moratorium if the nominee is of the view, among other things, that the directors' proposal for a voluntary arrangement has a reasonable prospect of being approved and implemented.
Any company which obtains a moratorium should stand a reasonable prospect of being able to agree and implement a rescue plan with its creditors. In any case the moratorium is only initially for a maximum period of 28 days, which is a much shorter period than most administrations. We intend to allow secured creditors, including the floating charge holder, to vote for the full amount of the claims on any proposal for an extension of the moratorium beyond the initial period and so they will be able to have a say on whether or not the moratorium should be extended by up to a further two months.
I would say that if any creditor--that includes a creditor who holds a floating charge--felt that a rescue by moratorium would not work for some reason, it would be open to him to express his concern to the nominee. The purpose of that would be to persuade the nominee that he must withdraw his consent to act and bring the moratorium to an end. A floating charge holder may perhaps make it plain that he fully intends to appoint an administrative receiver the moment the moratorium comes to an end. That act itself may have an impact on the viability of the voluntary arrangement, which may in turn cause the nominee to conclude that he should withdraw his consent to act. That would end the moratorium.
We would expect any floating charge holder who viewed a moratorium as pointless, because he fully intends to appoint an administrative receiver, to approach the nominee to make that point and because of the floating charge holder's potential ability to
wreck the implementation of an approved voluntary arrangement it may well be that the nominee will feel the need to approach the charge holders at an early stage to sound out their views on a proposed rescue attempt.So plenty of defences for floating charge holders are provided in the Bill, but to allow them to appoint an administrative receiver during the moratorium period would simply mean that the moratorium could not work, and the Bill would have no point.
Lord Kingsland: My Lords, I am shocked by the Minister's suggestion that this is a wrecking amendment. It is nothing of the kind. As the noble Lord well recalls, at Committee stage I carefully explained why the Opposition believed that a debenture holder was a proper exception to the general rule as to the options available to creditors during a moratorium. I accept that there is a clear difference of approach between us. I shall reflect carefully upon this matter between now and Third Reading before deciding whether it is appropriate to re-table this amendment and perhaps press it to a vote. Meanwhile, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 7 and 8 not moved.]
7.30 p.m.
Lord Kingsland moved Amendment No. 9:
- Page 15, leave out lines 23 to 25 and insert--
The noble Lord said: My Lords, in Committee the Minister made it clear that the intended effect of what is now paragraph 14 of Schedule A1 was to place the onus on the creditor to satisfy himself, before taking security, that he would be able to enforce it if it became necessary to do so. That was to ensure that no one would lend on the basis of security unless there was a clear benefit to the company. Implicit in that statement was that the onus was on the creditor to satisfy himself that the security would benefit the company.
The Opposition still believe that this approach is unacceptable. It is not for a creditor to satisfy himself that security is for the benefit of the debtor. Why should the creditor concern himself with the benefit to the debtor when there is a nominee acting who should be as experienced and knowledgeable in moratoria as
We are also puzzled as to what the creditor must do to discharge this onus. Simply to ask the directors is not sufficient. If he is told a pack of lies by the directors his security may be unenforceable. Any creditor must, therefore, go further and make independent inquiries to ensure that the security is for the benefit of the company. I remind the Minister that, in response to another amendment tabled at Committee stage, he said that a nominee should be entitled to rely on information given to him by the directors and not be obliged to establish or verify the information for himself because of the cost of so doing. If a nominee is entitled to rely on information given to him by the directors, why should a lender not be entitled to rely on such information but, instead, be put to the expense of making independent inquiries to make certain that the security is for the benefit of the company?
The cost of any investigation may be prohibitive. If that cost is recoverable from the company, as it inevitably will be, almost certainly it will mean that the security is not for the benefit of the company. The cost will be prohibitive, particularly when the company is in financial difficulties. Instead, any potential lender will simply not bother to lend money. It will be difficult enough for a company in financial difficulties to borrow money; but to impose this extra burden will deter all but the most foolhardy lenders. The inevitable result is that it will prove to be extremely difficult to fund the continued trading of the company.
Instead, the Opposition propose a provision based in part on Section 245 of the Insolvency Act 1986. That section is workable in practice. The enforceability of any security will be a simple matter of mathematics that is easily within the capability of the new type of insolvency practitioner envisaged elsewhere in the Bill. The company, its directors, the nominee and the creditor can all see at once the extent to which the security is enforceable. As your Lordship would expect, the amendment is simple, straightforward and workable and is based on a previous provision in the legislation which has stood the test of time. I beg to move.
("14.--(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 and 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.").
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