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Lord Thomas of Gresford: I support these proposals. We are returning to a topic that we dealt with at earlier stages, and I have yet to hear a satisfactory explanation from the Government as to why the innocent trader who has done work or lent money should be penalised and why the state should take all the money that can be recovered from the person who is the subject of various orders made under the Bill.

The argument is that it creates too many loopholes. There is the machinery in place, as the noble Baroness said, under the Insolvency Act to make proper inquiries into the provenance of the debt that the trader, for example, is seeking. Those inquiries can be satisfied in the ordinary way by the courts. It seems to me wrong in principle that the state should take all the money and leave bona fide creditors penniless. I support the amendment.

6 p.m.

Lord Rooker: Because of the latter point made by the noble Lord, Lord Thomas, of Gresford, I shall be somewhat longer in responding to this important group of amendments than the noble Baroness was in speaking to them. I hope that my reply will answer the noble Lord's point. I shall divide this large group into two sets of amendments and two sets of clause stand part debates. In that way, I hope that the flow of the argument will be clearly set out in Hansard for Members of the Committee to read and consider whether they wish to return to these matters.

I shall deal first with Amendments Nos. 271 to 278, because they are the driving force behind the group. They would affect Clauses 411, 414, 417, 420 and 422. This first set of amendments would have a number of fundamental effects. First, Part 9 establishes a scheme that sets out clearly when confiscation proceedings take precedence over insolvency proceedings, and vice versa, in cases where the same property is subject to both sets of proceedings. The amendments would abolish that scheme and in effect grant precedence to the insolvency legislation under all circumstances.

In particular, this set of amendments provides that where a restraint or receivership order has been made over property under the confiscation legislation, it can be trumped later by an insolvency order and all the property that has been subject to restraint or receivership action can be given to creditors under the insolvency legislation.

This first set of amendments would have further ancillary effects. It would require the prosecutor, the director and an accredited financial investigator to assert their interest in the property of an insolvent person or company in the same way as any other creditor. The amendments also provide that the prosecutor, the director and an accredited financial investigator would be paid only after any creditors had been satisfied. In other words, their claim to confiscate property would have to give way in all cases to the

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claims of creditors. As a footnote, should noble Lords think about coming back on the amendments, Amendment No. 285 is technically defective, because it draws on the language of personal bankruptcy, but relates to Clause 420, which deals with company winding-up.

The second set of amendments—Amendments Nos. 289 and 290—would make essentially consequential provision in relation to Clause 424, which deals with floating charges. They would change the provision in Clause 424 to give the charge holder precedence over the confiscation legislation in all circumstances.

The third limb of the group is the proposal that Clauses 413, 416, 419, 421 and 423 should not stand part of the Bill. These clauses address the fact that the confiscation legislation and the insolvency legislation both enable gifts and undervalue transactions to be recovered from third parties. The potential problem that Clause 413 and its siblings set out to resolve is what happens where the confiscation and insolvency legislation both enable a gift to be recovered from a third party at the same time. The approach adopted by the Bill is consistent with the approach taken by Part 9 in general. It is also consistent with the current legislation on this subject.

Briefly, the Bill establishes a system of precedence on gifts. The effect of Clause 413 is that if a restraint order is made under the confiscation legislation or proceedings are instituted before a bankruptcy order is made, then confiscation has first call on a tainted gift. On the other hand, where a bankruptcy order is made before either of these takes place, the insolvency legislation has first claim on the gift. We assume that the reason for proposing to delete the clauses is that the system of precedence in Part 9, of which they are an ancillary part, would be abolished by the amendments that I described earlier.

Finally, there is the proposal to delete Clauses 426 and 427. These deal with a number of issues relating to insolvency practitioners, particularly the situation where an insolvency practitioner interferes with property subject to a restraint order. We assume that the reason for proposing to delete these clauses is that under the amendments I have described above insolvency practitioners would be free to seize property that had previously been subject to restraint or receivership action under the confiscation legislation. It is worth adding in passing that Clauses 426 and 427 also cover insolvency practitioners who deal with property subject to an interim receiving order under Part 5, to which none of the other present amendments relate. It is not clear whether it was intended to remove that provision as well. I say that in case noble Lords wish to come back with their advisers and see how they can take the whole lot out.

We think all these changes are wrong in principle and would be detrimental to the practical operation of the Bill. On a practical point, the main reason for having a precedence system is to avoid two sets of legislation operating simultaneously against the same property. Without such a system, there could be two

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receivers in post in the same case—one confiscation and one insolvency—with competing interests. That is to be avoided, but it is what the amendments would achieve.

On the underlying principles, the current scheme strikes the right balance between the competing interests of confiscation and of creditors. I stress that they are competing interests. First, the legislation needs to address the risk of criminals attempting to manipulate their proceeds into the hands of creditors who were in reality their criminal associates. The amendments would open up the legislation to that possibility.

Of course, claims in insolvency proceedings are not accepted without verification or examination. However, we are worried that the larger and more sophisticated criminal gangs, of which the numbers are legion, are capable of producing persuasive evidence from front companies and other purported creditors. A precedence system makes sure that once a restraint or receivership order has been obtained, property is secured from that moment on for confiscation and so is immune to that risk.

Secondly, without a precedence system, criminals could run up large amounts of genuine debts so as to leave as little as possible available for confiscation and in this way disrupt the activities of the enforcement authorities. As your Lordships will be aware, the reality of operational life is that cases are not pursued unless the assets available for confiscation at the end of the day justify the outlay of time and effort in bringing a confiscation action.

Criminals know that just the same as anybody else does and they would be well able to exploit such resource pressures. The amendments would invite abuse in this respect. The director, the prosecutor and other authorities would not pursue cases if they had to operate against the real prospect of the assets disappearing to satisfy the defendant's debts.

Under these amendments, there is nothing to stop bankruptcy proceedings from being instituted after a restraint or receivership order has been obtained. Where that happened, any creditors subsequently laying claim to the property would have precedence over authorities seeking to confiscate it. As soon as the authorities obtained a restraint order, the defendant would be able to run up debts, which would take first call on the restrained property in the event of a subsequent insolvency. There would be little prospect of assets remaining for confiscation at the end of the day. That would have a deterrent effect on the willingness of the authorities to take on cases.

Experience teaches us that if claims are postponed behind the claims of creditors in general, as would be the case under the amendments, the postponed claims tend not to get paid. That underlines my point—we would not receive any of the proceeds of crime.

There are strong public interest grounds for rejecting the amendments. We know that organised, sophisticated and extremely well advised criminals would find a way of getting round the legislation if we accepted the amendments. I entirely accept that

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nobody is happy when any creditor, secured or unsecured, lends in good faith and loses money. I cannot make a fantastically robust defence of situations in which that happens except for what I have already said about the Bill and about organised criminals.

It would be wrong, however, to allow creditors to be paid out of property that represents the proceeds of crime, any more than they should be entitled to be paid with assets which the defendant does not own for some other reason, such as when a creditor lends on the strength of a person's ownership of a car that turns out to be stolen. Consequently, we believe that the Bill is soundly based. Nevertheless, I accept that a case can be made for the proposals if the issue is taken in isolation. However, that case has to be judged against my earlier remarks on the reasons for the policy. I therefore believe that the policy is defensible.

As we do not accept the main thrust of the amendments, it follows that we must also seek to reject the ancillary provisions. The system of precedence which Part 9 establishes needs to cover tainted gifts. This means that we are unable to accept the removal of Clauses 413, 416, 419, 421 and 423. The amendments to Clause 424 on floating charges are of a slightly different order, but the same principle applies. Nor could we countenance the removal of Clauses 426 and 427, as these flow from the central provision of Part 9 that insolvency practitioners should not interfere with property reserved for confiscation.

For those detailed reasons, I hope that noble Lords will reconsider their position and not press their amendments. I do not know whether I have done any better this time in satisfying the noble Lord, Lord Thomas of Gresford, but that is the best case I can make. Some people may feel that some of the provisions could operate unfairly, but I think that they will agree that it is in the wider public interest to obtain the proceeds of crime. I therefore believe that a case can be made for the Bill to remain as it is.

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