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Lord McIntosh of Haringey: There are a number of amendments in this group, and I shall try to deal with all of them. I refer first to Amendments Nos. 298, 299, 300, 327 and 333A.
Paragraph 50(1) provides that an administrator does not need to hold an initial creditors' meeting in certain circumstances if he or she thinks that the company has sufficient property to enable creditors to be paid in full or that the company has insufficient property to enable the distribution to be made to unsecured creditors other than the prescribed part, or that the first two objectives of administration cannot be achieved. The amendments would require the administrator to hold an initial creditors' meeting in all of those cases or seek the permission of the court not to do so.
I certainly agree with the spirit behind the amendments, which is that creditors have the right to be involved in the process of administration. Incidentally, I shall not rely on regulation at all in this answer. However, it is right and proper that creditors' involvement should be focused on cases where their financial interest is at stake. That is why the Bill provides that in the specified cases where this is not the case, the administrator does not need to hold a creditors' meeting or seek all creditors' consent or approval for his actions because that would add unnecessarily to costs, burden the courts and reduce the returns for those creditors who did have a financial interest.
In addition, paragraph 51(2), which would be deleted by Amendment No. 300, provides that in cases where the administrator is not required to hold a meeting, he or she must do so if requested by creditors whose debts amount to at least 10 per cent of the total debts of the company. That is a low threshold. Having been a creditor many times, I would never have dreamed of attending a creditors' meeting. I would not
have known what to do in order to get my views expressed. I believe that the virtues of creditors' meetings are grossly exaggerated. It costs a lot of money for the boss of a small company to attend a creditors' meeting, possibly more than he is owed.Creditors also have ways in which they can challenge the conduct or actions of the administrator, for example, if they believe that he or she is unfairly harming their interests or is guilty of malfeasance. In our view the provision should provide sufficient protection to unsecured creditors even where they have no financial interest.
Amendments No. 301 and 302 provide that the administrator must report the decision of an initial creditors' meeting within seven days rather than as soon as is reasonably practical. Our view is that the administrator should make such a report as soon as he reasonably can. That is what the Bill provides. We do not think that there is any room for uncertainty here.
Amendment No. 303 narrows the scope of the provision in the case of the failure to approve a revision so that the courts' powers can be used only where the administrator considers that the original proposals are not reasonably likely to be achieved. We do not think that that is necessary. Paragraph 54 allows the court the power to make such provision as it deems necessary. It will not prevent an administrator from pursuing proposals that have been approved by creditors if the court is persuaded by the administrator that that is the right way to proceed.
Finally, Amendment No. 304 would remove the facility to conduct creditors' meetings through correspondence. But the provision to do that was made in response to suggestions by people rather like me that that would avoid the cost and bureaucracy of a meeting of creditors when business can be conducted just as effectively via correspondence. As the paragraph says, the details of how an administrator should deal with such correspondence will be set out in the rulesto that extent I am relying on regulationand will ensure that the business could not be conducted in such a way as to disadvantage a particular creditor or group of creditors. However, we believe that being able to conduct business by correspondence will save creditors the time and expense of attending meetings when it is not really justified.
Lord Kingsland: I am glad that the Minister at least agrees with the principle lying behind these amendments although he may not feel quite so comfortable with the detail. The Minister appeals to his own experience as a creditor and draws certain conclusions from that about the attitude the Government should take to the amendments. Perhaps over the summer break the Minister might try to think what it is like to be a different sort of creditor in different circumstances from himself and then come back and look again at these amendments and see whether his mind changes.
Lord McIntosh of Haringey: I believe that I should imagine myself as a floating charge holderas a
banker. In either role, I should be glad about the abolition of Crown preference. That is what I should be thinking about.
Lord Kingsland: The Minister seems to be an admirable example of the unsecured creditor. Having said that, I swiftly beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 299 to 304 not moved.]
Lord Hunt of Wirral moved Amendment No. 304A:
The noble Lord said: I hope that the Minister will not take me too much to task for the point in the Bill at which I seek to place the amendment. I wanted an opportunity to discuss the important need for super-priority financing, which does not appear to be mentioned in the Bill as it is currently drafted.
It is now some time since a review was set up by agreement between the Chancellor of the Exchequer and the Secretary of State for Trade and Industry, with the following terms of reference:
That was a very timely review. One of the principal areas of focus given to the review was:
I have had an opportunity to examine the report of the review group, which is entitled, A Review of Company Rescue and Business Reconstruction Mechanisms. The report, which comes from the Insolvency Service, is a most interesting document.
We have previously been referred to the position in the United States, where, in recognition of the critical nature of post-petition funding, Chapter 11 of the US bankruptcy code creates a framework in which new lenders can be afforded an advantageous position as regards other creditors of the company.
The review group concluded that it would be wholly inappropriate to attempt to replicate Chapter 11 in the United Kingdom, where the business culture and the economic environment are quite different. But it went on to say:
What I cannot understand is what has happened since. The working group strongly recommended detailed consideration and wide consultation on the issue. It concluded:
I believe that we heard a declaration of interest earlier. I should ensure that the Committee is aware that I am the senior partner of a law firm called Beachcroft Wansbroughs. We have some very bright young lawyers in our insolvency department. They warned the Minister's Bill team that I was going to raise these issues and refer to this report, and rightly so. I believe that those who served on the working party deserve an explanation.
The clause that I propose provides for super-priority financing where priority is given to a lender who is prepared to put cash into a business in order to keep it going while a rescue is worked out. I believe that failure to provide for that financing during an administration under the new regime proposed by the Bill will undermine the ability of administration to operate as an effective rescue tool.
Therefore, this is not an attempt to introduce a Chapter 11-type systemfar from it. Rather, I believe that the amendment provides for a key component currently missing from the Bill to facilitate properly business rescues and to give the aims which the Bill seeks to achieve a real chance of working. I beg to move.
"To review aspects of company insolvency law and practice in the United Kingdom and elsewhere relating to the opportunities for, and the means by which, businesses can resolve short to medium term financial difficulties, so as to preserve maximum economic value; and to make recommendations".
"The further development of the rescue culture".
That was clearly set out as one of the review's objectives.
"is central to any discussion of a rescue culture in the UK".
It goes on:
"Continued trading is essential for some form of going concern to emerge at the end of the process",
just as it is essential,
"for a company to continue trading through an insolvency procedure",
but often only if it receives access to some form of external finance.
"Unless that finance is available the rescue will fail, the assets will have to be sold piece-meal and the company will usually be forced into liquidation".
The review group rightly centred on the need for a special form of financing if a company was to continue as a going concern. In broad terms,
"new secured finance is only available to support a rescue procedure in the UK to the extent that existing secured creditors agree, and/or if the company has uncharged assets (or charged assets with sufficient equity)".
"we nonetheless thought that the basic principles underlying US practice were the most important aspect for our purposes".
The review group continued:
"We would summarise these basic principles as follows:
The provision of additional finance to businesses in distress can be 'value-enhancing' for the business, provided it is part of a properly considered plan for financial recovery".
I could not agree more. The issue of finance and, in particular, super-priority finance in company and business rescues was, indeed, recognised as a key issue in that original report, which, I understand, was produced in May 2000.
"The review group believes that there is a case for a more radical approach to company rescues giving the courts (or supporting tribunals) discretion to agree to superpriority finance within tight criteria. This would be a major change, and there would need to be detailed consideration and wide consultation. Key issues would include the development of institutions and a legal framework to support it".
"We recommend that a debate on this proposal should begin as soon as possible".
That was in May 2000. So far as I can see, the idea has been dropped. The Bill does not provide for it anywhere, and, I say to the Minister, surely there needs
to be some kind of explanation as to exactly what has happened. If an enhanced form of administration is to be used successfully as a rescue tool, I believe it is necessary to tackle the issue of funding. In future, under these changes in the Bill, funding will not necessarily be forthcoming from the party who seeks the appointment of an administrator. Therefore, it is important to have a mechanism which provides for companies having access to ongoing finance during a rescue.
10 p.m.
Lord McIntosh of Haringey: I am grateful to the noble Lord, Lord Hunt, for having given the notice that he did about the background to the amendment. Of course, we are familiar with the review of company rescue and business reconstruction mechanisms. However, I hope that the noble Lord will agree that the conclusion of the review was a good deal more tentative than one might suppose by listening to what he said. He said that they called for debate. Indeed, they did but they did not actually recommend anything. They discussed the whole issue of super-priorities, but they did not reach a concluded view. In the absence of a concluded view, we have taken a view. I agree that we have not gone for an extended debate. Perhaps we could be at fault on that, although I assure the noble Lord, Lord Hunt, that if there is to be a debate we would happily take part. I want to explain our position, which can be our contribution to the debate for the time being.
We have taken the view that the issue of whether to lend to a company that is in administration should be a commercial one, best left to the commercial judgment of the lending market. If the proposed rescue would constitute a commercially viable proposition, or if there are free assets which can be offered as collateral, then it is for a lender to decide whether or
not to lend. It is not an issue, as the amendment says, for the courts to make an order granting an application for super-priority financing. We do not consider it an issue with which the courts should be equipped to deal. Perhaps the suggestion is that there are uncharged assets, which certainly is the case in the United States, but it is much more rare in corporate insolvencies in this country, where we have so many floating charges.If the suggestion behind the amendment is that there is little or no funding available during a rescue, that is clearly not the case. In company rescues, a company's existing bankers are the most likely source of continued funding, but alternative sources of finance for companies and businesses have emerged. There is the growth of asset financing, factoring and discounting where funders may be more oriented towards the rescue environment and prepared to advance funding to companies in administration and subject to company voluntary arrangements.
We shall certainly keep the matter under review and we shall certainly participate in any debate that takes place. There will need to be a continuous review as the new provisions in the Bill take effect because they will need to be monitored. However, our present position is that the matters of funding should be left to the commercial judgment of the lending market.
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