Grand Committee
(9 years, 10 months ago)
Grand CommitteeRead Full debate Read Hansard Text
Small Business, Enterprise and Employment Bill
(9 years, 10 months ago)
Grand CommitteeRead Full debate Read Hansard Text
The Deputy Chairman of Committees (Lord Brougham and Vaux) (Con)
My Lords, I do not think that there will be a Division but if there is we will adjourn for 10 minutes.
Clause 114: Power for administrator to bring claim for fraudulent or wrongful trading
Amendment 61ZA
“( ) 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.”
Lord Stevenson of Balmacara (Lab)
My Lords, I speak to Amendment 61ZA in the name of myself and my noble friend Lord Mendelsohn, who is not able to be present today—I am sure to the considerable dismay of his growing fan club. I am sure that no one involved in this section of the Bill would resile from the view that we in the UK have an incredibly successful insolvency regime in terms of the numbers of businesses saved and jobs rescued from businesses that have gone into administration or insolvency. We have a much admired insolvency service within BIS and we recognise the good work that it does. From a regulatory and professional perspective, Britain’s regime is the envy of many countries around the world. It is a powerful regime with a strong track record of success. If we want to change it, we have to be clear that what we are doing is well argued and it should be done with care and caution.
The Government have returned to the subject of insolvency on a number of occasions, including in the Legal Aid, Sentencing and Punishment of Offenders Act, the Deregulation Bill and now in the Small Business, Enterprise and Employment Bill. It certainly gives the impression of a Government who are tinkering, rather than going for a bold expansive plan for this area. That is a pity because as we go through the Marshalled List today I think we will find that there are a number of issues which may need attention, if not now, in the near future.
Our amendment deals with Clause 114. Broadly we support any moves that make it easier for administrators or any other wronged parties to take action against fraudulent trading and to catch delinquent directors. The clause aims to do just that and we think it is a sensible change to allow administrators the same right as liquidators to bring wrongful and fraudulent trading actions, therefore allowing more actions to be taken overall. However, we have some reservations about how this clause will work in practice.
Company administration is a useful and important tool, which is often successful in terms of saving jobs and recouping creditors’ money. It aims to give the business the opportunity to trade out of the position that it is in. Often, employees who would lose their job under liquidation can retain their job under administration and move on to continue to work for a company under either similar or, usually, new ownership.
On that basis, it is important that we recognise that administration is an important tool for businesses that are struggling. However, administration is, at the moment, defined in terms of a short-term procedure, time-limited to 12 months. But some of the processes which are required to get a business back on its feet can take longer than 12 months. Therefore, this may act as a disincentive for businesses to go into administration; they may prefer liquidation.
In the other place, a similar amendment took as an example a business that had traded fraudulently or wrongfully. Clearly, it should be held to account for that, but in cases where that is likely 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. Does the Minister agree that extending the provisions on liquidations to administrations is unlikely of itself to deliver much practical change if businesses treat administration as a dynamic and short-term procedure and the existing time limits remain in place?
The period of one year, even allowing for possible extensions which I am aware are available within the procedures and can be granted but need to be applied for, does not generally allow enough time to begin a wrongful trading action and see it through to conclusion before the end of the administration. This means that somebody else has to take on responsibility for that after the period of administration has occurred. There is a possibility, although I agree it might be remote, that the short timeframe could create incentives for delinquent directors to adopt obstructive and delaying tactics to hold up proceedings, and therefore get away with wrongdoing. So we on this side are not convinced that extending the wrongful and fraudulent trading provisions into the realm of administration will be successful as long as the provision for automatic termination of administrations within one year remains. That is why the amendment we have proposed to this clause gives the Government the opportunity and space to address these concerns by investigating whether that period of administration should be extended in more general terms or, if not, by considering the likelihood of this new regulation delivering what the Government intend.
The Minister’s colleague in another place suggested that the evidence from Companies House data for a sample of cases has shown that around 90% of administrations are concluded within two years. We think, therefore, that a two-year period would be better for this new initiative, although we would like to see more evidence before a decision is reached. I beg to move.
The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills (Baroness Neville-Rolfe) (Con)
I thank the noble Lord for helping us to probe the effectiveness of Clause 114, which of course was put forward as part of the Red Tape Challenge. Like him, I am sorry that the noble Lord, Lord Mendelsohn, is not here today. I thank the noble Lord, Lord Stevenson, for his kind words about BIS and the Insolvency Service, which of course has been intimately involved in preparing for the Bill and associated legislation.
Because of our concern to help small business, insolvency has recently been subject to the Red Tape Challenge, and suggestions made from across all parts of the industry have been incorporated into this Bill. Alongside measures being taken forward elsewhere, these clauses on insolvency will lead to improvements in the efficiency of our processes. The efficiencies will provide a total of over £30 million a year more for creditors, many of whom of course are small businesses—which underlines the purpose of the Bill.
Administration is the primary corporate rescue procedure in the UK. It is well respected internationally for its speed and the size of its returns to creditors, which many compare favourably with similar procedures in other countries such as Chapter 11 in the USA, which was mentioned at Second Reading. We are working with the industry to take forward the voluntary reforms set out by the Graham review, while taking a new power—this is important—in case the voluntary reforms do not bring the desired confidence.
Amendment 61ZA would delay the introduction of this clause and would force government to review the impact of abolishing the administration duration time limit. Administration is a dynamic procedure, and we want administrators to take swift action to restructure and rescue businesses where at all possible. For this reason, there are time limits; I think there is agreement that there should be.
Currently, administration lasts for 12 months with the option to extend it by six months. With the consent of creditors, we are seeking to extend this to 12 months. We do not consider that an administration should last indefinitely and do not intend to review the time period further. To allow companies to remain in administration for longer than necessary would add unnecessary expense to the procedure and, in some cases, might even give the insolvent business an unfair advantage over competitors.
I take the point the noble Lord, Lord Stevenson, made, that where an administrator commences a wrongful or fraudulent trading action he fears that the claim could take more than a year or two to complete. However, I do not think that that time limit will necessarily reduce the effectiveness of the right proposed under Clause 114.
During debate in the other place, concern was raised as to whether this clause will be used, bearing in mind that it may take longer to conclude such a claim. However, Clause 124 will enable creditors of the company to consent to an extension of the administration by an additional year, and the court has power to grant extensions beyond that.
Clause 114 was suggested by insolvency practitioners as part of the Red Tape Challenge. Our earlier consultation suggested that delaying its introduction pending a review, or completely removing the time limit on administration, would not be well supported by many stakeholders, particularly creditor groups. For this reason I hope that the noble Lord will be reassured and will withdraw his amendment.
Lord Stevenson of Balmacara
I thank the noble Baroness for that reply. I should have said at the outset that I was grateful to her and to her colleagues for organising a couple of meetings on this issue, which a number of noble Lords present attended and which were very helpful in providing us with background to this section of the Bill.
In her response the Minister alluded to the question which has been long debated but is still unresolved, of whether Britain should have a Chapter 11-style approach to trying to maintain companies that get themselves into difficulties. I have amendments later on in the Marshalled List, where we will come back to the more substantive issues here, so I will not deal with that in any detail now. However, it is worth saying that while the detail of Chapter 11 is not appropriate for translation across to the British system—or at least not at present—the one important thing that comes through in that is a very strong sense that existing companies should be retained and encouraged to try to trade themselves through the difficulties that they may be experiencing at the time. It is in that sense, and that sense only, that the questions posed in my original statement still hang in the air.
There is an awkwardness here. A one-year administration when many processes need to go beyond two years, a need to apply to courts or to other authorities to get an extension of the administration period, perhaps to two years, and the knowledge that most administrations actually complete within two years all suggest that there is a bit of a case here which would provide the struggling company, which will eventually be successful but is currently going through difficulty, an easier route through. I do not put it any stronger than that. That was behind the letter but the Government have set their mind against it. We will probably have to come back to this at some future date but at this stage I withdraw the amendment.
Lord Flight (Con)
My Lords, I will repeat and add to the comments made about the UK insolvency regime. It is fair to describe it as probably the best in the western world. It is thus rated by the World Bank. It returns more money to creditors faster and cheaper than the systems of the US, Germany or France. UK insolvency practitioners return more than £4 billion a year to creditors, including HMRC. There are some 1,700 insolvency practitioners in the UK and around 10,000 professionals who work in insolvency. Most insolvency practitioners are accountants or lawyers. They are all qualified and regulated, and have a statutory objective to maximise returns to creditors. According to the latest figures, for 2012, UK IPs saved more than 750,000 jobs and advised more than 95,000 businesses, with just under 50% continuing in some form.
Our arrangements have developed from statute law, from common law and from practice over many years. I am nervous about quite a lot of the tinkering with the system in the Bill, which is not necessarily for the better. As your Lordships will know, the professional body representing the profession is R3. The members range from senior partners of the big four accountancy firms to those who run their own small businesses. I am grateful to R3 for getting me up to speed considerably in this territory and I apologise in advance if I get some things wrong. It is not really my main territory.
It strikes me that the Treasury has not had as much dialogue with R3 as it might have done. I asked if anyone had had a meeting with the Minister and the answer was no. It is probably R3’s fault, but before this legislation gets completed it would be sensible for the Government to have a session with R3 going through its concerns in more detail.
Clause 116 appears to state that any proceeds of a claim—for example, transactions that undervalue—received by an administrator would be unavailable to the holder of a floating charge. This strikes me as unfair because the actions of a director that led to the claim will be putting the floating charge holder in a worse position, whereas the successful action will benefit unsecured creditors. This does not strike me as particularly equitable. This issue may be able to be dealt with by modifying the clause and, as far as I can tell, the clause does not automatically mean that unsecured creditors are excluded but it certainly needs a little more explanation.
Clause 124 allows an administrator to extend administration for a year—previously, it was six months—with the consent of creditors. This gives the administrator too much flexibility to let residual matters drag on if a long extension can be obtained. It is not unknown for the insolvency practitioner to get case fatigue when dealing with less interesting matters that are not at the front end, which is to the disadvantage of all creditors, and the extension could exacerbate this. I might add that this point is not especially supported by R3 but I do not see the need for an extension from six months to a year.
These two clause stand part Questions have been tagged on with my Amendment 61AJ, which goes with Amendment 61VA, and is about something entirely different. From this coming April, directors who commit fraud, are negligent or wrongly take money out of business can walk away with more than £160 million a year—money that is owed to creditors, including small businesses and the taxman. To prevent this from happening, the creditor representative groups, including the Chartered Institute of Credit Management and the British Property Federation, are calling on the Government to grant insolvency litigation a permanent exemption from the Legal Aid, Sentencing and Punishment of Offenders Act 2012. These groups wrote an open letter to the Prime Minister last October outlining their concerns but have not received a response. The issue is relevant to the Bill because it deals with tackling director conduct and returns to creditors.
From this April, the new regime for insolvency litigation will thus leave creditors out of pocket and create a system whereby directors who have committed misconduct could get away with their actions. The current funding regime for insolvency litigation also protects the public interest and public money—the two objectives that LASPO originally sought to address. It deters white collar crime and puts money back in the hands of creditors.
Insolvency litigation is a vital tool for recovering and returning money from rogue directors back to creditors, and conditional fee arrangements and after-the-event insurance are needed to fund insolvency litigation because there is often no money in an insolvent state to fund this type of action. There are many other benefits to using the current regime; the costs in a successful case are paid for by the director who has committed misconduct and, in most cases, the simple threat of the CFA-ATE regime leads to the directors or third party settling before being taken to court.
The impact of the reforms on insolvency litigation was not considered during the consultation phase of the policy, nor in the Bill’s impact assessment. The Government therefore granted a two-year exemption to allow time to seek alternatives to the current regime. Independent research, which considered virtually all cases that used insolvency litigation in 2010, has since shown that no alternatives will ensure that the same amount of money is returned to creditors. Since the report showed that there were no alternatives, the Government have changed their justification for the temporary exemption from allowing time to find alternatives to allowing those involved time to prepare for the changes. The change in justification, without any government review, is less than desirable—especially as independent evidence demonstrates that the current regime has clear benefits.
My amendment has been drafted in consultation with barristers; its wording is that of the current exemption and would therefore provide insolvency litigation with a permanent exemption from the litigation funding changes made by LASPO. This is an issue that is slightly aside from the main part of the section on insolvency but I should like to think that the Government will consult further on this territory.
I should also have started off by declaring my interests, as listed in the register.
Lord Stevenson of Balmacara
My Lords, I have little to say in response to the substantive points raised, but I would like to put it on the record that we have also received a lot of assistance from R3, and I certainly commend the suggestion made by the noble Lord that perhaps a discussion with that group might be helpful to round out the understanding of the position it is adopting in these matters.
Baroness Neville-Rolfe
My Lords, I thank my noble friend Lord Flight for his arresting figures on the strength and success of the insolvency industry, returning more money to creditors—£4 billion a year—than most other similar regimes, as well as a job-saving role. That is a cameo of success that we can only support. Indeed, I would be delighted to meet representatives from R3, as my noble friend Lord Flight has suggested and the noble Lord, Lord Stevenson, has supported. I reassure the Committee that R3 representatives met officials during the course of the Bill, and clearly they have met opposition Peers, but it would make a great deal of sense for us to try to fit in a meeting before Report. In the mean time, I will try to deal with some of the concerns which have been raised.
Clauses 116 and 124 concern corporate insolvency, and primarily administration. These measures are part of ensuring that the administration procedure, which is critical to the success of distressed companies in the UK, remains fit for purpose. Clause 116 is technical and relates to the order of priority for the payment of claims in a corporate insolvency. Generally speaking, after payment of the expenses and preferential creditors such as employees, any debts secured by a floating charge—bank debt is often a floating charge—are paid, and only thereafter are the ordinary unsecured creditors paid. However, the proceeds of a wrongful trading claim do not follow this order of priority. Such a claim is where a court has ordered that the directors should pay money to compensate creditors for their loss, having knowingly caused the company to trade while insolvent, such as where the directors have caused an insolvent company to take customer deposits for orders that they ought to have known could not be fulfilled.
Case law has established that these proceeds are not treated as assets belonging to the company prior to the insolvency. They are therefore not assets of the company at the time that the floating charge crystallises at the onset of formal insolvency. This means that the proceeds are not paid to the floating charge holder. Instead, they form part of the sums available for payment to unsecured creditors. I hope that I will be forgiven for explaining all this, but I found it very helpful myself.
It has been suggested that it is unfair that such proceeds are not available to the holder of a floating charge because the actions of the director which led to the claim may have worsened the position of the floating charge holder. Of course, a bank whose debt is not fully paid by floating charge realisations will rank alongside other unsecured creditors in respect of that part of the outstanding claim and may still share in those assets as an unsecured creditor. Furthermore, it would be open to the floating charge holder to give up its priority and claim for the entire debt as an unsecured creditor.
I would also highlight that the claims to which this clause relates are a very narrow band which have arisen primarily where assets have been sold or transferred for less than their worth, where favoured creditors have been paid off shortly prior to the insolvency, or where the directors have caused the company to trade wrongfully or fraudulently. Those claims will almost always be against the directors or persons connected to them. The intention of this clause is merely to put the existing legal position in respect of wrongful trading into statute. This will provide clarity and remove the risk of future challenge.
Clause 124 extends the period for which an administration can be extended by creditor consent, and I would stress “creditor consent” as this is not an automatic extension for the administrators. As my noble friend Lord Flight explained, an administrator complained that they can be too leisurely about a case, which is not what we want to happen. Administration automatically ends after a year, but there are times when not all matters can be concluded within this period. For example, selling a company’s property, particularly in difficult market conditions, may take longer.
Creditors can currently consent to extend an administration by up to six months. Usually this is enough time to finalise matters, but not always. Administrators must therefore apply to the court for any longer or additional extensions, a costly process that is ultimately paid for by the creditors. Insolvency Service data show that around 12% of administrations last for between 18 months and two years. That equates to around 300 cases per year where, in future, court applications costing around £5,000 will not be required, which will mean a substantial saving to creditors. If creditors are content to allow an administration to continue, they should be able to agree to that. If not, they can refuse consent. In setting the maximum period to which they can consent we have drawn a balance between making sure that the administrator tends to matters quickly and efficiently, and saving the unnecessary costs of applying to court.
Lord Leigh of Hurley (Con)
I hope that the Committee will allow me to come in after the Minister has spoken—I wanted to hear what she had to say. I declare of course my interests as on the register. Despite the accolades and praise I received in this place recently for my advisory abilities, sad to say they do not apply to my investment abilities. I have seen administrators and liquidators up front at the wrong end, so I have some personal experience—if not professional experience—of what happens when things go wrong. Of course, I very much welcome the Government’s work in controlling legal expenses and pay tribute to the work of the noble Lord, Lord Mitchell, on related matters. In this particular part of business life, however, there is a role for contingent and after-the-event funding. I rise simply to suggest that there may be a happy medium of a temporary exemption to allow time to see how things pan out during the Bill’s passage, if Amendment 61AJ cannot be accepted as a whole.
Lord Flight
My Lords, I thank the Minister for her helpful and constructive response. I am particularly pleased that she is happy to look at the new clause proposed in Amendment 61AJ and to meet with R3 to go through these issues.
Lord Stevenson of Balmacara
My Lords, Amendments 61ZB and 61ADG are in my name and that of my noble friend Lord Mendelsohn, who is today occupied by affairs in Gibraltar—for those who are interested in following his movements.
Our Amendment 61ZB omits the phrase “creditors’ committee or” from Clause 118. It has always been the case that officeholders in liquidations and bankruptcies require official permission to carry out certain functions as part of the process. That is for the very 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.
Those permissions are normally obtained from creditors’ committees or, where there is none, from the Secretary of State or the court. Clause 118 gives liquidators the ability to exercise any of those commonly used functions without gaining approval first. Likewise, Schedule 10 gives trustees in a bankruptcy the ability to exercise any of those 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 to protect the monetary value of the estate, and that in most cases any misconduct would be dealt with by their own regulatory structures. However, in the small number of bankruptcy cases in which creditors’ committees are used, 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 court, or even to the Secretary of State; they are likely to be local and therefore less costly to reach, and since they are stakeholders in the enterprise, in a way, they will know the background and are therefore more likely to reach quick decisions.
We therefore have some doubts over whether the need to seek permission from such a committee should be removed altogether under the Bill. What does the Minister believe will be the implications for the continued existence of creditors’ committees if this opportunity to influence the process is removed altogether?
Our amendment would not prevent an IP seeking the permission of the court or the Secretary of State, but would still leave power in the hands of the creditors’ committee. We regard Amendment 61ADG as a consequential amendment, affecting as it does Schedule 10. I beg to move.
Lord Flight
My Lords, the Government’s aim in Schedules 9 and 10 is to create a more efficient process for the Government’s official receiver to be appointed trustee of a banker’s estate—I mean a bankrupt’s estate; it might be a bankrupt banker. This would mirror the provisions for compulsory liquidation and therefore seem logical but the changes set out in Schedule 10 go further and remove the requirement for the official receiver to tell creditors whether or not they can hold a meeting to appoint a trustee. This means that creditors will not be informed that they have an up-front opportunity to appoint an alternative trustee, should they wish to do so, because there will be no process in place to inform them. The schedule would see a dramatic reduction in creditors’ power to influence insolvency proceedings and I fear that this could lead to a reduction in trust and confidence in the UK’s insolvency regime.
My Amendment 61WA—I mis-referred earlier on but Amendment 61VA also relates to this point—seeks to provide that the official receiver becomes a trustee on making the bankruptcy orders, and to omit the existing provisions which require the official receiver to decide whether to hold a creditors’ meeting to appoint a trustee and to notify the creditors if he decides not to do so. I take the view that three creditors or the proposed threshold of 10% by value of the creditors should be sufficient to requisition the qualifying decision-making process.
In addition, there is no provision in the Bill requiring the official receiver in each and every bankruptcy case to inform creditors of their rights to appoint an insolvency practitioner as trustee or for the mechanism to do so. This lack of provision disenfranchises creditors and surely flies in the face of increasing creditor engagement. Amendments 61WA and 61VA are intended to address these points.
Baroness Neville-Rolfe
My Lords, I thank the noble Lord and my noble friend for these amendments. I hope that I have understood their thinking correctly.
I will start by talking about Clause 118, which Amendment 61ZB seeks to amend. The clause removes the need for trustees to seek sanction before exercising certain statutory powers. That is a cost-saving measure, which arises, as I have already said, from the Red Tape Challenge; it receives considerable support externally and helps to achieve efficiency, as my noble friend Lord Flight explained.
The requirement for sanction was originally designed to protect creditors from an unregulated insolvency profession, preventing officeholders from taking steps that could have a negative impact on the bankruptcy estate such as continuing to trade a bankrupt’s business, which you have to look back in time to imagine. Now, of course, we have a much more highly regulated insolvency practitioner profession. Failure to act in the interests of creditors is a regulatory matter, and it would be for the trustee’s regulatory body to take appropriate disciplinary action.
The amendment would make an exception for cases where there is a creditors’ committee and the trustee wished to appoint the bankrupt to assist in dealing with certain tasks. This 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 to perform vital tasks.
Let us take the case of a bankrupt and a remote farm—which is close to my own personal experience many years ago—perhaps in winter when weather conditions are challenging. That may mean a quick decision is required to instruct the bankrupt to continue to feed the animals or to engage a vet to look after sick animals, and so on. The requirement for sanction where there is a creditors’ committee would add unnecessary delay and cost.
A further reason for resisting the amendment is consistency. If accepted, trustees would be able to exercise all other powers without permission except this one, and then only where there is a creditors’ committee. That might add unnecessary complexity to the insolvency framework.
Amendment 61ADG would have the effect of removing a part of Schedule 10, which updates the section of the Insolvency Act 1986 which itself dealt with the process of interim receivership. Noble Lords will be aware that an interim receiver is appointed to protect assets where a bankruptcy petition has been presented and there is a real risk that assets could be lost before the petition is heard.
While the official receiver is acting as interim receiver, he or she is protected from liability where they dispose of an asset which subsequently turns out not to be part of the person’s estate, provided that when they did it they had good reason to believe that it was. Schedule 10 makes amendments to extend that protection to insolvency practitioners when they are appointed to that role. Amendment 61ADG would act to remove the protection for insolvency practitioners while leaving it in place for official receivers. I suspect that that was not the intention of the amendment.
Amendment 61WA would introduce a requirement into the Insolvency Act for the official receiver to notify creditors how they may go about removing and replacing them as trustee. I am grateful for the noble Lord’s probing amendment to government Amendment 61W, which my noble friend Lord Popat will introduce later on in this debate. However, I will just say that it is intended that these matters will be dealt with by guidance to official receivers, and I do not agree that we should introduce new regulation when we are trying to cut red tape. I hope that that explanation is helpful, and that on that basis the noble Lord will withdraw his amendment.
Lord Stevenson of Balmacara
I thank the Minister for her comments. In answer to her direct question of whether she interpreted our comments correctly, as far as I am concerned she did. I will leave the noble Lord, Lord Flight, to respond, but my impression is that she also got to the heart of his comments.
I am still concerned about two things, although I will read what the noble Baroness said in Hansard and reflect upon it. As the noble Lord, Lord Flight, said, we have a brilliant IP insolvency system, which comes high in the rankings. However, that is because it spends a lot of time and effort bringing creditors into play. Whenever we see this dilution coming through in the Government’s Bill here, I worry about that. I understand the cost argument. It must be right that cost is taken out of this where it can be, but the creditors are important, particularly in relation to small businesses, which are after all the subject of the Bill. Creditors can often be critical friends as well as antagonists in these matters, so simply to disengage them from an area is not right. I think that we share the common view that, where possible, we should be careful about doing anything that diminishes the role that creditors or creditors’ committees may play. However, I take the point that there are costs that need to be balanced up.
“( ) In paragraph 52 of Schedule B1 (administration), after sub-paragraph (2)(a) insert—
“( ) by 10% of the number of creditors who have debts with the company,””
Lord Stevenson of Balmacara
In moving Amendment 61ZC, I shall also speak to Amendment 61ZD in my name and that of my noble friend Lord Mendelsohn. I have further information to share with those who follow my noble friend’s actions carefully. He is not in Gibraltar; Gibraltar is here and he is in a meeting not far away and hopes to join us later.
The Government’s aim in Clauses 119 and 120 is to increase creditor engagement by allowing the development of communications as technology improves. The clauses abolish the power of the officeholder to summon a physical creditor meeting in all types of insolvency procedures. Instead of these physical, face-to-face meetings, the insolvency practitioner will need to hold virtual meetings through other means, such as via the phone, over the internet or through written correspondence. The insolvency practitioner will be able to hold a physical creditor meeting only if it is requested by a required proportion of creditors—10% of the value of the creditors.
Our amendments would set a threshold for calling a physical meeting at 10% of the number as well as the value of the creditors. As this is a probing amendment, I am open to other suggestions. Indeed, the noble Lord, Lord Flight, has already suggested that a minimum of three could convene such a meeting. I understand that and would be interested to hear the Minister’s response to it. The amendments also seek to encourage the holding of meetings if there are no real cost savings. I cannot quite see the point of cutting creditors out if we are also trying to make sure that they have a part to play in the processes.
We fear that the net impact of the Government’s proposal will be that, rather than increasing creditor engagement, these clauses will reduce it. The Federation of Small Businesses believes that the proposal will be detrimental to small businesses and the BPF also has concerns. As we have touched on, creditor engagement is a core part of a strong, transparent, fair and trusted insolvency regime. By their very nature, insolvencies can be complicated and confusing for those who do not deal with them often. They can also be daunting and time-consuming for creditors.
We believe that creditors’ meetings are an essential part of creditor engagement, trust and confidence in the insolvency regime. At present, meetings are usually called at the very outset of an insolvency proceeding and periodically afterwards. The meetings achieve a number of important goals, 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 around the financial affairs of the debtor. Creditors will often be able to provide details to the IP of which they would otherwise have been unaware. The first meeting in a creditors’ voluntary liquidation, under both individual and company voluntary arrangements, also gives creditors the opportunity to question the directors of the insolvent company or the debtor himself or herself. This first meeting is a useful opportunity for creditors to participate in the process and is the most appropriate and convenient forum for agreeing the basis of the IP’s fees and establishing a creditors’ committee, should that still be permitted.
The drawbacks of alternative styles of meeting are clear. For example, a report published a few months ago by the Federation of Small Businesses revealed that some 45,000 small businesses do not have broadband and that thousands of others have very slow broadband speeds. In rural communities particularly, access to broadband can be very limited; so networks of information will not exist to allow such meetings to be held in the new virtual reality. Other areas, particularly outside London, have particular difficulties and it is therefore important to bear in mind that while the new virtual reality is coming, it may not have reached us all and, therefore, the Bill is sometimes in advance of where people are now. We are worried that this approach will reduce creditor engagement and, as a result, the amount of money that ends up in creditors’ pockets will be reduced. We are also worried that part of the process will be complicated. Our Amendment 61ZC ensures that there would be a more workable threshold whereby physical meetings can be staged, if required. I beg to move.
Lord Flight
My Lords, my nine amendments in this group also relate to creditor meetings. The Government’s aim, as I understand it, is to increase creditor engagement by allowing development of communications and new technology. The fear is that, in fact, the reverse will happen. The clause would abolish the power of the officeholder to summon a physical creditor meeting in order to act in insolvency procedures. Instead of those physical face-to-face meetings, the insolvency practitioner will need to hold virtual meetings through other means, such as on phones or the internet. The insolvency practitioner will be able to hold a physical creditor meeting if requested by a prescribed proportion of creditors—10% in their value.
The concerns are that rather than increasing creditor engagement the proposal will, as I say, serve to reduce it. The Federation of Small Businesses believes that the proposal will be detrimental to small business, and the British Property Federation also has concerns. The Government are concerned that creditor meetings are sometimes poorly attended. A 2013 report by Professor Kempson found that only 4% of creditors attend meetings. The report also showed that 86% of unsecured creditors, mostly small businesses, often or sometimes attend or vote by proxy at physical creditor meetings. It is these small businesses that will be harmed as a result of the proposal. Even where physical meetings are poorly attended, they still remain a vital tool for both the insolvency practitioner and creditors in getting all the facts, making important decisions and providing any information on the insolvent business or individual.
Insolvency practitioners should be encouraged to use new forms of media to hold meetings but all options should be available, including holding a physical meeting. The proposal should be dropped and Clauses 119 and 120 should not form part of the Bill. However, two possible compromise solutions could be considered. The first is to retain the requirement to call the first meeting, a proposal that would take into account the fact that the first meeting is the most important, where creditors are most likely to attend and important decisions taken. A further compromise could be that three creditors could call a physical meeting; this would be added to the existing proposal for a prescribed proportion of 10% of the value of creditors. Therefore, a physical meeting could be called by either three creditors or 10% of the value of creditors, whichever is smaller.
In December 2014, R3 surveyed its members on the proposals and found that 86% of insolvency practitioners believed that the proposals would reduce trust and transparency; 78% believed that the proposals would reduce creditor engagement; 87% agreed or agreed strongly that virtual creditors’ meetings were not suitable in all cases; 74% said that physical meetings were useful for finding things out that they did not know previously; 65% said that physical meetings were good for getting the views or input of a large number of people; 63% said that things go wrong with virtual meetings; and 48% would describe physical meetings as more useful than virtual meetings.
During the passage of the Bill through the Commons, the Opposition tabled an amendment in Committee to replace 10% of the value of creditors to allow a physical creditors’ meeting with just one creditor. The amendment was supported by the Federation of Small Businesses and the British Property Federation. It was passed, but was subsequently reversed on Report, so basically I think that I am still arguing the same case, and I would suggest that Clauses 119 and 120 should be deleted.
There are some additional amendments which I have included for consideration, while on 8 January the Government themselves tabled further amendments to Schedule 9. I have serious concerns about those amendments and propose that they should be amended further in order to avoid a potential hiatus, cost delays and confusion to the process of appointing a liquidator. As currently drafted, the proposal also throws up practical issues around the appointment of liquidators, who are currently appointed in Section 98 meetings at the start of the liquidation process. Those are physical meetings. If these issues are not dealt with, the liquidation procedure could be crippled and thus harm the interests of creditors. While the latest set of amendments recognises the unequivocal need for the appointment of the liquidator, the amendments do deal with what happens if the deemed consent procedure is overtaken by a creditor nomination or competing nominations. It must be necessary to allow reasonable time for creditors to engage, but the liquidation should not be unduly delayed.
There is obviously some tension between the two perfectly proper principles. The detail of the process is destined for the rules, but because the two principles are fundamental, I would submit that either the proposed process should be fully explained, or a virtual or physical meeting should be required. My Amendments 61UA and 61UB endeavour to address these points. The first is to ensure that the person nominated as the liquidator under the section takes office immediately and that the deemed consent procedure will not apply in these circumstances. This is because the procedure involves allowing a specified time to elapse for creditors to object before the decision is final. If this provision were to apply, it would mean that the period of time that the liquidation would be left in limbo to enable a liquidator to be confirmed in office would be taking place at a time when prompt action is essential to deal with the issues.
The second amendment would provide that the corporate representative is able to nominate a liquidator on behalf of the corporate creditor under Section 100. Corporate representation is dealt with under Section 434B of the Act. However, as modified by the Bill, that section would not allow a corporate representative to act for the purposes of nominating a liquidator under Section 100 because the amended section would allow such representation only for the purposes of a qualifying decision procedure or a meeting. As neither of these procedures would apply to the nomination of a liquidator under Section 100, special provision should be made to allow corporate representatives to act in these circumstances.
The issue of creditor meetings and the various points under it are the main substantial territory where the profession has particular concerns about the provisions of this Bill. It is particularly around creditor meetings and creditor arrangements that it would be helpful if the noble Baroness could have a very full discussion with the professional insolvency practitioner body.
Lord Leigh of Hurley
I rise to support my noble friend Lord Flight—I do not want to get into the habit but in this instance I do. I, too, pay tribute to R3—I hope my noble friend the Minister is not feeling left out here. I have also had a chance to speak to the people from R3 and meet them. I have known them for many years because when I was chairman of the corporate finance faculty of the Institute of Chartered Accountants in England and Wales, R3 was set up and I have remained in touch with it. R3 does a good job, as had been said around the Room. The insolvency profession in the UK is the envy of the world and R3 has helpfully given us some information to prove it.
All that having been said, there are instances of insolvency practitioners charging frankly eye-watering fees, in some famous instances greater than the sums they have returned to creditors, and in some instances there have been suggestions that they have stopped at the point where no more fees could be taken out of the company concerned. For this reason, more perhaps than many other reasons, I feel it is helpful to encourage creditors to meet. Creditors in these circumstances will include people who are in fact investors in a company, through mezzanine debt or something like that, and have a vested interest. As I confessed earlier on, I have been in such rooms. It is useful to see and meet fellow creditors because a dialogue will then exist between creditors outside the liquidator’s fees, and plans and actions take place. Often in such circumstances, there is, for example, potential litigation—which was discussed in earlier clauses—that might take place against a bank, perhaps, or even against a director, so meeting other creditors in the same environment is very helpful.
The suggestion that 10% of creditors should be required to call a physical meeting does not sound onerous but it could build delays into the insolvency process and increase costs. Attention has been drawn to a recent insolvency, that of a wedding gift website. In that instance, 10% of the value of the creditors was equivalent to hundreds of individuals. In the case of small businesses where debts are typically low, in value terms, it would take a large number of creditors to get to the 10% threshold. For these reasons, I support the amendment.
Lord Cope of Berkeley (Con)
My Lords, I, too, am sympathetic to a lot of what my noble friend Lord Flight said and what the Federation of Small Businesses and others have represented to us all, or to many of us anyway.
I am particularly concerned about the position of trade creditors who find themselves involved in a liquidation, a bankruptcy or whatever. What matters to them is not 10% of the total amount owed by the company; it is the percentage of their own turnover that matters. What can be quite a small sum in the bankruptcy as a whole may be a very large sum relative to the business of the trade creditor. At the same time, I understand that in some respects the system of meetings we currently have is a rather Victorian process, carried forward. I encourage the Government to consider looking for ways in which the process can be streamlined and brought up to date.
I want to make a quite separate point which is just about relevant to this point in the Bill. It is that once we have finished with this Bill and it becomes a law, the Insolvency Act 1986 seriously needs consolidation. When we get to the stage where sections such as 246ZF and a whole lot of others will be littering the Insolvency Act and a whole lot more as a result of this Bill—quite apart from other amendments that have been made or may be made to it—it will be a terrible muddle. I realise that the legal publishers will straighten it all out for us to some extent in their consolidated publications on legislation, but the Act seriously needs consolidation. Once all this is over, I hope the Minister will urge that on the department and get the process to move, because we all know that it is a very slow process.
Part of my interest in this is that the trade creditors need to have an idea of what is going on. If they look at the Act and discover it littered with sections such as 246ZF and so on, it will be even more difficult for them to do so. As others have said throughout the debate, it is important that there is transparency. Understanding of what is going on needs to be possible, even for those who are not doing it all the time. Of course, the creditors will have guidance from the insolvency practitioners, and I share the view of them that has been expressed. I have much less experience than my noble friend Lord Leigh; I, too, am a member of the Institute of Chartered Accountants, though by no means as distinguished a one as he, but I do share that view.
Baroness Neville-Rolfe
I thank noble Lords for their contributions to this debate. These are important amendments that touch on the process for collective decision-making in insolvency proceedings. As I expected, the issue has attracted a great deal of interest. It was good to hear support from the noble Lord, Lord Cope, for the need to reduce needless processes and to hear what he had to say about consolidation—which, I agree with him, is one for another day.
Modern technology means that it is now possible for all creditors to make decisions remotely, online or by correspondence, which can provide greater opportunities for creditors to engage if they are unable to travel or do not have time to attend a physical meeting. Removing meetings as the default method will also lower the cost of making decisions—costs which, as several noble Lords have said, are ultimately borne by creditors.
The noble Lord, Lord Stevenson, talked about broadband. He was probably hoping that I would rise to the bait, as a previous campaigner on the rollout of broadband. We are actually making a bit of progress now on the rollout of broadband and also on mobile. The figures that he quoted from the FSB apply to small businesses still using dial-up internet access at that time, rather than not having access to broadband. However, the noble Lord made a good point. If you use a video or internet option for a meeting, you do not have to have broadband at home. I have poor broadband where I am and when I was a director of a company I often used to arrange a time to go to a local café. Sometimes you can use proxies, if that is the right thing to do on that particular occasion. You do not always have to have physical meetings; I think we are all agreed on that. The officeholder in an insolvency will have a duty to consider the best decision-making process to use. If a lot of rural creditors are involved, obviously they should avoid using an internet link-up and a physical meeting may be more appropriate.
Face-to-face meetings of creditors are currently used as the default method of consulting creditors and making decisions. For a long time, insolvency officeholders and creditors have travelled to meet in the same room so that they may agree an appointment, remuneration, or how to deal with an asset, but these meetings are usually poorly attended. Professor Elaine Kempson reported that only an estimated 4% of creditors attend them. In today’s digital world we have to question whether holding a meeting that few or no creditors attend is effective. If creditors want a face-to-face meeting they will be able to require one to be called. As I have said, they bear the ultimate cost and benefit from any reduction in what have been referred to as eye-watering fees. If our proposals are accepted, creditors will not be required to be in a specific location at a particular time in order to participate in the voting process. Instead, they will have other options available, including making increased use of different sorts of communication technology.
Turning to the individual amendments, I will respond first to Amendment 61ZC. The duty to maximise returns to all creditors is very important, but business rescue is, rightly, the primary aim in administration. In many administration cases, the administrator is not required to consult creditors on the proposals; for example, where there is insufficient property to make a distribution to unsecured creditors other than out of the prescribed part. Amendment 61ZC would extend the power given to smaller creditors and would allow 10% of the total number of creditors to require that they should be consulted on the administrator’s proposals as opposed to 10% by value—so moving from value to number. Allowing a decision procedure to be required by a certain number of creditors would be a significant step, so we cannot take it lightly.
The insolvency industry and other stakeholders will no doubt wish to express opinions on this matter, and I was interested to hear from the noble Lord, Lord Stevenson, that the Federation of Small Businesses has already expressed an interest in a slightly different approach. In view of the various comments that have been made both here and at the very useful open meeting we held, I think that we should give some further consideration to the general issue of thresholds and return to it on Report.
Amendment 61ZD would have a significant effect on the use of deemed consent and decision-making processes. The deemed consent procedure as described in Clause 120 allows officeholders to consult creditors in uncontentious matters without the need for a formal decision-making process. Once notified, creditors must object by a deadline or the proposal will be passed. The amendment would mean that where the insolvency practitioner officeholder had identified that a face-to-face meeting would not lead to an additional cost saving, deemed consent could not be used. The effect of the amendment would seem to stand in the way of the point of this measure, which is about reducing red tape, and I hope that we might be able to find other solutions to deal with the essentially probing nature of the amendment.
Amendment 61CA would prevent the use of the deemed consent process where a liquidator is appointed in creditors’ voluntary liquidation proceedings. In practice, the creditors often nominate the same person as liquidator of the company. As I have said, the deemed consent procedure is intended to be used where decisions are not contentious; uncontroversial liquidator appointments would be a good example. The amendment would mean that even in routine cases an active decision would need to be sought from creditors in all cases. I worry that these amendments would undermine the Government’s—and I think stakeholders’—objective of cutting red tape.
Finally, I will address the question of whether Clauses 119 and 120 should stand part of the Bill, along with Amendments 61ZE, 61DA, 61LA, 61UB and 61XA, which have been suggested to Schedule 9—I think that I am making my noble friend Lord Cope’s case for him here. I have already set out why it is important that the process of decision-making in insolvency proceedings should be modernised. I reassure my noble friend that we are not seeking to abolish meetings but merely to ensure that they are used only where enough creditors want them. Amendments 61ZE, 61DA, 61LA, 61UB and 61XA would prevent the clauses from operating in the various insolvency procedures by removing important changes made by Schedule 9.
Turning to Amendment 61UA, the relevant provisions on representation of corporations are already being amended by paragraph 55 of Schedule 9. The result will be that when a creditor decision is made through any decision procedure, a corporation will be able to authorise others to act as its representative. That seems okay to me. Amendment 61VA is also concerned with thresholds. The risk we see here is that a minority of vexatious creditors might create mischief in a bankruptcy by requiring decisions on the removal of the trustee to be taken, endangering the smooth running of the process. As I have already said, we will revisit our thinking on the question of thresholds, reflect on that and come back. I hope that the noble Lord will feel able to withdraw his amendment and that noble Lords will withdraw their opposition to these important clauses.
Lord Flight
My Lords, I am grateful to the Minister for agreeing to reconsider the thresholds. I say simply that, rather like the AGM of a company, it is healthy to have a physical meeting. The danger of meetings merely on the telephone is that they do not get recorded accurately and the whole process does not get off to a good start. I am quite genuinely concerned that our excellent system of insolvency runs the risk of getting into trouble if you do not kick off with a creditors’ meeting each time.
Lord Stevenson of Balmacara
I thank all noble Lords who have spoken on this group. I think that together we have arrived at a conspectus view, which has persuaded the Minister that a little more thinking on this would be welcome. I am grateful to her for that.
I do not think that we are in any sense trying to be negative about what is being proposed. This is the future—we understand that. I just think that we are not quite there yet and that the sentiment from all sides is that we perhaps need to encourage people to do things in a more innovative way but not lose some of the values in the original proposals. If we can get somewhere along that line, I would be very grateful. I am also grateful to her for her comments about broadband. We are on the same side here and we want this to happen. She made the point herself: if she has to leave her wonderful kitchen in her rural farmhouse to find an internet café in order to participate in the wider world, something is not quite right yet in the Government’s plans.
Baroness Neville-Rolfe
I would like to inform noble Lords that I have broadband. I do not have mobile, which is actually a joy.
Lord Stevenson of Balmacara
Now we know that to be successful in the world of business is to be selective in the use of your technologies. That is a lesson for us all. In the mean time, I would like to withdraw the amendment.
Lord Popat
Lord Popat (Con)
My Lords, this is a group of technical amendments to the provisions in the Bill relating to decision-making in insolvency proceedings, the way in which certain liquidators are appointed and clarifying the operation of the fees power in Clause 136. These amendments are part of the result of detailed discussions with stakeholders and contribute to the Government’s goal of ensuring that insolvency processes, including how decisions are made, are quick and efficient. I beg to move.
Lord Popat
“( ) In paragraph 83(8)(d) omit “98,”.”
“( ) In paragraph 108(1) omit “, 50(1)(b)”.”
“15A In section 92A(1) (members’ voluntary winding-up in England and Wales: progress report to company) for “sections 96 and 102” substitute “section 96”.
15B In section 93(1) (members’ voluntary winding-up in Scotland: company meeting at year’s end) for “sections 96 and 102” substitute “section 96”.”
The Deputy Chairman of Committees (Lord Skelmersdale) (Con)
In calling Amendment 61DA, if this is agreed to, I cannot call Amendments 61E to 61L inclusive by reason of presumption.
Lord Popat
“(4) After subsection (4A) insert—
“(4B) The company’s creditors may in accordance with the rules nominate a person to be liquidator.
(4C) The liquidator must in accordance with the rules seek such a nomination from the company’s creditors.”
(5) In subsection (8), for “this section” substitute “subsections (1) to (4A)”.”
“18 (1) For section 96 (conversion to creditors’ voluntary winding up) substitute—
“96 Conversion to creditors’ voluntary winding up
(1) The winding up becomes a creditors’ voluntary winding up as from the day on which—
(a) the company’s creditors under section 95 nominate a person to be liquidator, or(b) the procedure by which the company’s creditors were to have made such a nomination concludes without a nomination having been made.(2) As from that day this Act has effect as if the directors’ declaration under section 89 had not been made.
(3) The liquidator in the creditors’ voluntary winding up is to be the person nominated by the company’s creditors under section 95 or, where no person has been so nominated, the existing liquidator.
(4) In the case of the creditors nominating a person other than the existing liquidator any director, member or creditor of the company may, within 7 days after the date on which the nomination was made by the creditors, apply to the court for an order either—
(a) directing that the existing liquidator is to be liquidator instead of or jointly with the person nominated by the creditors, or(b) appointing some other person to be liquidator instead of the person nominated by the creditors.(5) The “existing liquidator” is the person who is liquidator immediately before the winding up becomes a creditors’ voluntary winding up.”
(2) In section 96 (as inserted by sub-paragraph (1)), after subsection (4) insert—
“(4A) The court shall grant an application under subsection (4) made by the holder of a qualifying floating charge in respect of the company’s property (within the meaning of paragraph 14 of Schedule B1) unless the court thinks it right to refuse the application because of the particular circumstances of the case.””
“22 For section 100(1) (appointment of liquidator) substitute—
“(1) The company may nominate a person to be liquidator at the company meeting at which the resolution for voluntary winding up is passed.
(1A) The company’s creditors may in accordance with the rules nominate a person to be liquidator.
(1B) The directors of the company must in accordance with the rules seek such a nomination from the company’s creditors.””
Lord Popat
“(a) the company’s creditors under section 100 nominate a person to be liquidator, or(b) the procedure by which the company’s creditors were to have made such a nomination concludes without a nomination having been made.””
“( ) In the entry for section 95(8), in column 2, for “s. 95” substitute “s. 95(1) to (4A)”.”
“(b) for “99(3)(a)” substitute “99(3)”.”
Lord Popat
“( ) for “replacing” substitute “removing”;”
Lord Popat
““(4A) Where the bankrupt’s creditors decide to remove a trustee, they may in accordance with the rules appoint another person as trustee in his place.
(4B) Where the decision to remove a trustee is made under subsection (4), the decision does not take effect until the bankrupt’s creditors appoint another person as trustee in his place.””
Lord Popat
Lord Popat
(a) for the words from “case” to “died” substitute “following cases”;(b) after “hold office” insert “—”
“(3A) For subsection (3)(b) substitute—”
“(2) For subsection (3) substitute—
“(3) The official receiver may ask the bankrupt’s creditors to appoint a person as trustee, and must do so if so requested by not less than one tenth in value of the bankrupt’s creditors.
“(3A) If the official receiver makes such a request the bankrupt’s creditors may in accordance with the rules appoint a person as trustee.””
Lord Mitchell
Lord Mitchell (Lab)
My Lords, I will be dealing with this in place of my noble friends Lord Stevenson and Lord Mendelsohn. I will also address Amendments 61ADB, 61ADC, 61ADD and Clause 126 stand part. Pre-packs have become very much part of the discussions that we are having, and you read in the press about some of the activities that are occurring. The amendments that have already been made to the Bill help considerably but we want to raise some issues.
We want to look particularly at the whole area of bad pre-packs and some of the things that have been happening. At Second Reading I referred to the situation where on Friday afternoon the company is Smith & Jones and by Monday morning it is Jones & Smith; it is the same people running it, with many of the same directors and maybe even the same bank, but the poor old creditors and maybe HMRC and a few other people have just been dumped in the mean time. This is a process that we really have to address. It has become a fixed process where people make these arrangements so that if a company is failing it is possible just to push a button and get rid of all the nasty bits and continue with all the good bits as if nothing had happened. We all know examples of where this has occurred.
When you think about who loses in a pre-pack, it is the creditors most of all, but the creditors are themselves companies and have their own creditors, their own employees and everything associated with those companies. When a company goes down and creates a pre-pack, the trail of creditors and their own creditors that are then affected badly causes a lot of people to lose their jobs. When I hear people saying that pre-packs are a really good thing because they maintain employment and maintain the company, maybe they do—and there are lots of good examples—but there are also the creditors that have been left behind, including HMRC itself, which have to deal with the issue that they are no longer getting the money that is due to them. I may be wrong about this but I believe that if there are parties that have legal claims against companies that then go into a pre-pack, some of those die at that point as well. I am not so sure that that is a good thing either.
When you think about who gains from a pre-pack, first of all the lawyers gain—they always do—and the insolvency practitioners gain, as they always do. What I find hard, as a businessman who has set up lots of companies, is that the rules as I understand them—the rules of free enterprise and the capitalist system—are that if you put your money at risk and you invest in a company and you have shares and it does incredibly well, you benefit; but if it fails, you lose. To me, that is what capitalism is about. To have a situation with some of these pre-packs where the shareholders do not lose, they just come back in another guise, seems wrong. I want the Minister to reassure us that the Bill really offers protection.
Amendment 61ADA aims to clarify that the reforms are targeted solely at pre-packs. Clause 126 gives the Secretary of State a power to introduce regulations to address problems in relation to sales to connected parties in pre-packed administration. Following an inquiry by the BIS Select Committee and the Graham review into pre-packs, the Government intend to create a reserve power under Clause 126(4) that:
“The Secretary of State may by regulations make provision for … prohibiting, or … imposing requirements or conditions in relation to, the disposal, hiring out or sale of property of a company by the administrator to a connected person”,
unless there has been a third-party scrutiny of the proposed sale. This power expires at the end of the period of five years beginning with the day on which the provision comes into force unless it is exercised during that period.
Amendment 61ADB would remove the reserve power granted to the Secretary of State to prohibit pre-packs altogether. Given the sensitive nature of this 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 61ADC would ensure that new regulations made under the clause were targeted only at the bad pre-pack practice to which I have referred, which we all want to discourage, rather than applying more generally to all pre-packs.
Amendment 61ADD digs at the Government’s policy of waiting to see whether the voluntary system works and then legislating for powers. Our amendment asks for the relevant powers to be legislated for within a year of the passing of this Bill. I beg to move.
Baroness Wheatcroft (Con)
My Lords, I speak in support of Amendment 61ADD, which would bring in these powers more quickly. The Graham review did a very thorough job and made its proposals, but surely a year is long enough to see whether the industry is going to take note of what was said and respond. As the noble Lord opposite said, there is no doubt that there have been some highly dubious pre-packs and, although I am sure that our insolvency practitioners are, indeed, the envy of the world, some may not be quite as worthy of envy, apart from in respect of the fees they charge. There is a need to deal with this issue more speedily.
I also have qualms about the definition of “connected persons”. I would be grateful if my noble friend the Minister would explore whether in a certain situation where a company borrows money from the bank and the bank then sells that debt to an organisation, which may eventually end up being part of a pre-pack that buys the business, that purchaser of debt should, indeed, be classed as a connected person. At present, they would not be connected persons. This was recommended by the Graham review, which wanted to keep things very narrowly defined and not bring in debt at all. However, I think there is sufficient evidence to suggest that this is at least worth investigating.
Lord Flight
My Lords, I think there is a consensus that pre-packs need to be cleaned up, as it were. However, it would be a great mistake to get rid of them and I will cite some figures in that respect in due course. I am less than comfortable with Clause 126 as it stands, which enables the Secretary of State to make regulations where approval is required for the sale of an asset to the connected parties, although it does not appear that that is the case now. I would be concerned if onerous obligations were put on an insolvency practitioner to obtain, say, creditor consent, which is likely to take significant time and could impact the deliverability of a transaction, and which would be in the interests of the creditors. Insolvency practitioners are meant to have the expertise and experience to make sound commercial decisions. My concern is that regulation is being put ahead of commercial needs.
In reference to what the noble Baroness has just said, the Graham review made some very sensible pre-pack pool proposals for reviewing and giving either the thumbs-up or the thumbs-down to pre-pack arrangements. I think that these are starting to be adopted and that is a very useful route to go down. As has been said, the current drafting of the clause goes beyond pre-packs and captures all connected party sales in all types of administration. For example, 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 business rescue culture would be undermined.
The Government’s aim is to provide great confidence to unsecured creditors and other affected stakeholders, and a pre-pack represents the best outcome to them. The clause provides the Government with a reserve power to prohibit not only pre-pack administration sales but sales to connected parties, as has been mentioned. The concerns about the clause as it stands relate to the unintended consequences of the wide manner in which it is drafted. The Government have confirmed that the clause is aimed at pre-packs, yet it captures all types of trading administrations, which could include a straightforward business sale. For example, there may be a case in which a company could be put into trading administration and no pre-pack deal is on the table; the administrator conducts open and wide marketing, and there are a number of bids to buy the company. The administrator could be prevented by the clause from selling the business to any of the workforce of the company, because they would be considered to be a connected party. This could mean that the good and best offers cannot be accepted by the administrator, and the creditors would lose out. Jobs would also be lost and the UK’s business rescue culture undermined.
I am certainly opposed to the risk of pre-packs being prohibited. The benefits of pre-packs were identified in the Graham review and previous research. Given the proposed areas of reform to pre-packs to boost transparency and confidence, the clause to ban pre-packs—that is the intention—is greatly mistaken.
The extent of pre-packs is often overstated. There are around 20,000 corporate insolvencies in the UK a year, about 3% of which—between 600 and 700—are pre-pack sales. Yet only a small percentage of all corporate insolvency pre-packs attract public scrutiny over a perceived lack of transparency, but this has obviously affected policymakers.
Pre-packs preserve jobs. In 92% of pre-pack cases, all the employees were transferred to the new company; whereas that happened in only 65% of business sales. Average returns to secure the creditors in pre-packs were 35%, compared with 33% in straightforward business sales. In addition, the Graham review found that pre-packs certainly have a place in the UK’s insolvency landscape, preserve jobs, bring benefits to the UK, and reform would be worth while. I am therefore uncomfortable with Clause 126, which goes too far, and there ought to be a less draconian way in which to tidy up the scope for abuse of pre-packs.
Lord Leigh of Hurley
My Lords, if we cast our minds back some five or six years, all the professions at that time forecast that we would be faced with an unprecedented level of receiverships, administrations and insolvencies. It is worth reflecting—I am sure we would all agree—on the success of the coalition’s long-term economic plan and that the number of administrations has been dramatically less than anticipated by every forecaster, in particular the insolvency profession, which geared itself up for many more administrations than proved to be the case. As my noble friend Lord Flight has said, pre-packs in fact make up around 3% of the total number, which is a small number in itself.
The other great improvement in that recession—to the extent that it was a recession—compared with the previous one has been the role of the banks and accountants. Last time around, banks appointed investigative accountants to look into businesses, but those accountancy firms were the same firms that were appointed as the administrators—and stayed as administrators for many months. In some instances, that lasted years and enormous fees were taken out of companies by the same firm that had been appointed by the bank to investigate whether a business was viable. So it is pleasing to see that the role of the administrator has changed.
The beauty of the pre-pack is that it is extremely quick. I agree with the noble Lord, Lord Mitchell, that it is wholly unacceptable where Smith and Jones turns into Jones and Smith and everyone loses out, except perhaps Smith and Jones or Jones and Smith. I also agree that one needs to focus on the bad pre-packs where it all seems to be a bit cosy and there is no form of review. I welcome the Graham report. Teresa Graham served with me on the council of the Institute of Chartered Accountants in England and Wales and I have spoken to her about her recommendations. I am apprehensive about some of them. I am not convinced that the pooling idea will work, and finding six people at short notice in certain difficult parts of the country to convene and form an opinion would be tricky. I would welcome a speedy assessment of whether her proposals need to be fine-tuned or amended.
I want particularly to say that I have seen pre-packs that have in practice been extremely helpful. I am thinking of where a retailer has ended up with a very large number of branches in areas that have changed, but because of the way UK property law is run, it is impossible to get out of onerous leases by doing it any way other than through a pre-pack. The pre-pack has led to a business being trimmed down and subsequently able to run successfully. In those instances, the only loss has been for the landlord who has a tenant with an inappropriate lease. I definitely would not want to throw out the good with the bad, but I agree that we need to focus on the bad and address how the Graham report recommendations will pan out much more quickly than perhaps is envisaged.
Baroness Neville-Rolfe
My Lords, it is good that Gibraltar has ensured that we can enjoy the experience and comments of the noble Lord, Lord Mitchell, today. Perhaps I may start by dealing with his point about Smith and Jones—or Popat and Neville-Rolfe becoming Neville-Rolfe and Popat on a Monday morning. I think that the answer I am about to give him shows the fine judgments here. As my noble friend Lord Flight said in his last intervention, pre-packs are speedy and can be helpful. The noble Lord, Lord Mitchell, will know that an insolvency practitioner has a duty to sell the business for the best price possible, and if in the example Jones and Smith are making the best—or, as sometimes happens, the only—offer, then the best outcome may be for a sale to the existing management. Jobs can be saved and business can continue as a result. However, I have listened to what he said about pre-packs, and what we are all trying to do is get this important provision right.
Clause 126 creates a power for the Secretary of State to legislate to restrict sales to connected parties of businesses or assets of insolvent companies by administrators. A sale to a connected party is where the insolvent business is sold to a purchaser previously involved with the insolvent business. The most common form of connection is where someone is a director of both the insolvent and the purchasing businesses. A pre-pack occurs where the sale of the viable parts of an insolvent company’s business is arranged before the administration starts. The sale is then executed at, or shortly after, the appointment of an administrator. Perhaps I may respond to a point made, I think, by the noble Lord, Lord Mitchell, about the application of the clause. The clause in fact goes further than pre-packs, as I am sure he is aware. That is because, unfortunately, bad practice is not unique to pre-packing. It also applies to any sale in administration where creditors are not given a chance to hold a meeting to discuss and approve the sale.
Lord Mitchell
I thank the Minister for her reply. We all know what we want in this: to make it work, to make it fair, and to make sure that the bad practice is removed and that there are barriers to it. I thank the noble Baroness, Lady Wheatcroft. The word that stuck in my mind was about “dubious” practice, and we have to make sure that that is removed. I am also grateful for the contributions by the noble Lords, Lord Flight and Lord Leigh of Hurley.
I agree that we always have to be aware of the rule or curse of unintended consequences. I am sure that when the noble Baroness and her team take a look at what we have discussed today, they will come back on Report with all these points incorporated into the Bill—I hope. With that in mind, I beg leave to withdraw the amendment.
Lord Stevenson of Balmacara
My Lords, in moving Amendment 61ADE, I will also speak to Amendment 61ADF, which is in my name and that of my noble friend Lord Mendelsohn, who is sadly still absent. I am thinking in terms of search parties, particularly if my noble friend Lord Mitchell is proposing to stand in his place, which, of course, he is perfectly entitled to do.
As the law stands, in order to receive a dividend in an insolvency, a creditor must first submit a claim to the officeholder, who, where necessary, will request further evidence to verify that claim. Clauses 128 and 129 simplify the process for what the Government term “small debts”, so that in future such creditors do not have to prove their ownership of the debt in the same way. Clause 128 takes care of company insolvencies, while Clause 129 takes care of individual insolvencies. We do not object to the principle behind such moves, but I am quite concerned that the figure of £1,000 that the Government have floated for the prescribed amount is a little too high, and I would be interested to hear how the Government arrived at £1,000. I appreciate that provisions will remain in place for the insolvency practitioner to require further information where they have suspicion or doubt, but the clauses seem to set a dangerous precedent that a business can claim amounts of up to £1,000 without any evidence.
We all know that in the event of a corporate insolvency, or even a personal insolvency, there is a certain amount of chaos around. In the corporate case, 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 careers, looking increasingly vulnerable and unable to do so. Under those circumstances, many normal practices might go out of the window. It is also 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 that they are not on stop with to purchase supplies in order to stay afloat. Purchase order numbers and other systems may well 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 do not need to provide any evidence under the new law, and documentation is not required to show whether the goods were received”.
I understand the thinking behind this, but I am just a bit worried about some of the issues. The particularity of this applies more to personal insolvency, as we are talking about claims up to £1,000, which is obviously quite a significant amount in those circumstances. Again, is it right to remove the need for proof for any bill up to £1,000 in a personal bankruptcy when some of the limits are relatively small, particularly in relation to DROs? It is clear that we should all try to make sure that costs are taken out of bankruptcy administrative processes. Where these are small amounts, there may well be a way that they should be dealt with that does not require too much effort and red tape. However, a bar of £1,000, particularly for individual insolvency, is quite significant. I would be grateful if the Minister could respond to us on these points. I beg to move.
Lord Popat
My Lords, I thank the noble Lord, Lord Stevenson, for tabling these amendments to Clauses 128 and 129.
Clauses 128 and 129 are part of a package of measures designed to streamline and modernise insolvency proceedings and remove unnecessary burdens. Creditors will be the ones to benefit from efficiency savings as lower costs will mean increased dividends.
Clauses 128 and 129 will provide a power to make rules that will allow an insolvency officeholder to pay a dividend to a creditor without the need for the creditor to submit a formal claim. This may be done on the basis that the creditor’s debt has been recorded in the insolvent’s accounting records or statement of affairs. As a safeguard, the officeholder will still be able to require a creditor to provide a claim and, if necessary, supporting evidence, before accepting that a debt is owed and paying a dividend.
During debate in the other place, the Government agreed to undertake further consultation on what the limit for a small debt should be. I would not want to pre-empt that process now by setting the limit before stakeholders have had a chance to put forward their views. We will invite views from stakeholders shortly and will carefully consider the responses submitted before setting out in secondary legislation what the limits will be. The noble Lord quoted a figure of £1,000 for both corporate and personal insolvencies. We believe that draws the right balance between delivering efficiency savings and ensuring that adequate scrutiny is undertaken, but we will, of course, listen to what stakeholders have to say. The stakeholders will give us evidence of what the amount should be. I will also add for the sake of clarity that the small debt limit relates to the amount of the debt and not the actual dividend that the creditor is likely to receive, which is likely to be a significantly smaller sum. It seems inevitable, however, that at some point, whether due to inflation or perhaps something else that is less foreseeable, the limits will need reviewing. Setting the limits in secondary legislation will provide greater flexibility to amend them where it is considered appropriate without needing to amend primary legislation on each occasion.
I hope that the noble Lord has found my explanation reassuring and, on this basis, will withdraw his amendments.
Lord Stevenson of Balmacara
I am grateful to the Minister for his comments. I understand the point that while consultation is going on, obviously it would be premature to come to a resolution on this. However, I suggest that it might be sensible to think about a different approach for the corporate to that for the personal. They are completely different beasts. Presumably we are talking about personal insolvencies at the DRO level and I think that there should be some relationship to the new limits that have been brought in for that, which give us a sense of what the amount—admittedly reduced by the proportion that will be available for reallocation to creditors, which might be as low as 10, 15 or 20 pence in the pound—should be. I understand where the Government are coming from. This is a matter that should be borne in mind but, after those comments, I would be grateful if this amendment could be withdrawn.
Lord Popat
“(2) In section 415A of the Insolvency Act 1986 (fees orders: general), after subsection (1A) (inserted by section 17 of the Deregulation Act 2015) insert—
“(1B) In setting under subsection (1) the amount of a fee in connection with maintenance of recognition, the matters to which the Secretary of State may have regard include, in particular, the costs of the Secretary of State in connection with any functions under sections 391D, 391E, 391J, 391K and 391N.””
“Power to license an approved redress scheme for complaints
(1) The Secretary of State must make provision requiring all regulated persons to be members of an approved redress scheme for dealing with complaints from debtors received in connection with insolvency practitioners.
(2) The Secretary of State may approve a redress scheme to adjudicate on complaints from debtors about insolvency practitioners.
(3) The Secretary of State may by regulation require all insolvency practitioners to be members of such a scheme.
(4) The regulations may require insolvency practitioners to adopt their own complaint handling procedures, with debtor complainants only able to refer their complaint to the redress scheme once the usual procedures are exhausted.
(5) A “redress scheme” is a scheme which provides for complaints against members of the scheme to be investigated and determined by an independent person.”
Baroness Hayter of Kentish Town (Lab)
My Lords, this amendment stands in my name and that of my noble friend Lord Stevenson. I welcome the provision in the Bill which would empower the Secretary of State to designate a single regulator for all insolvency practitioners in place of the current seven regulators. It can only be in the interests of practitioners to have a single system for authorisation, technical standards, training, codes of ethics and conduct, discipline and other matters. It will also be in the interests of consumers as there would be a single standard of practice and, if my amendment is agreed, a single system of handling service complaints from debtors.
At the moment, there is no proper system for dealing with service complaints. Any that are made are handled broadly as disciplinary matters against the practitioner, which may well not be appropriate where there has just been a bit of poor practice, some delay, a lack of communication or similar. Furthermore, there is no system of redress should such a complaint be found to be justified, as the disciplinary committee will be concentrating more on the fitness to practise of the practitioner than on righting any wrongs caused by the inadequate work.
As the Minister knows, the EU directive on ADR requires that there should be an appropriate redress scheme in place for every industry and service. That might cover this issue but, due to legal uncertainty about whether the debtor in this case could be considered a consumer under the directive, it would be good to ensure that any such person can have their complaint heard and considered once it has gone to the practitioner in the first instance.
When I was involved in trying to set up such a system when I was on the Insolvency Practices Council, the challenge was made rather greater by the fact that there were seven different regulators. Given that the Bill enables, albeit perhaps well in the future, a single regulator to be designated, this would be an excellent moment to develop and licence a single ADR scheme, which would be independent of the disciplinary process handled by the new regulator. There is an obvious precedent in legal services, where service complaints had been handled by the various regulators, such as the Bar Council, the Law Society, the Council for Licensed Conveyancers and two others dealing with notaries, I think, and patent lawyers. Once the Legal Services Board was set up to oversee those front-line regulators, the new Legal Services Ombudsman was established to adjudicate on complaints from clients.
In the case of insolvency practitioners, Clause 141(3)(g) allows complaints to be investigated. However, it is unclear whether this would be done in the form of a disciplinary route so that complaints would lead to disciplinary action being taken by the regulator—which of course is completely right and proper. Alternatively, more in the area which I am looking at, of service complaints, the individual will be looking for redress and not for discipline to be taken against the practitioner.
I do not envisage the creation of a new ombudsman, given that perhaps we have too many of them already, but also given the very small number of practitioners and therefore the even smaller number of complaints. However, it would be possible for an existing ADR scheme, which could be the legal ombudsman, to handle these rather than—as we have now done thanks to this House—enabling the legal ombudsman to do that, meaning that they can now take complaints against CMCs. Alternatively, it could be done by the residual ADR scheme which is being set up under the auspices of BIS, thanks to the EU directive.
It is important for there to be a single system of such complaints, given that there will be very few of them. In addition, it might come under the auspices of the new regulator, but it should be independent of it. Handling complaints is very different from being a regulator. As I said, much as I welcome what is in the Bill, it is important that the two are different, as we have seen in various other professions.
Before I move the amendment, I note in passing that there are 2,000 or fewer practitioners who are about to face a complication in their regulation thanks to this very same Government’s rather mad idea of creating two new categories of insolvency practitioner. I note that that is not being handled by the Minister, but it is happening elsewhere in the same Government. At present there is just one type of insolvency practitioner, albeit regulated by seven different bodies. That regulation comes from the fact that insolvency practitioners as individuals emerge out of different professions. Some of them have been lawyers, some accountants, while others have gone straight into being insolvency practitioners, which explains the seven different regulators.
What we now face under the Deregulation Bill—although in this sense it is a regulation Bill—is a different way of cutting and chopping the profession. Instead of having different regulators because of the original profession, the proposal is that we will now have three sorts of insolvency practitioner: those who do only individual insolvencies, those who do corporate insolvencies, and those who do both corporate and individual insolvencies. We will have another split in the profession, albeit done by the type of debtor this time rather than the type of practitioner. I do not expect the Minister to be able to solve that today, but it is slightly nonsensical.
On the main issue, the intention here is to try to tease out the difference of having complaints handled such that the process is independent from the regulator, albeit the ombudsman could come under the auspices of the regulator, as is the case for the Legal Services Board. However, it is very important that any decisions are independent of the regulator and are taken via an independent process. I beg to move.
Baroness Neville-Rolfe
My Lords, I thank the noble Baroness, Lady Hayter, for Amendment 61AF, which proposes an approved redress scheme for debtor complaints about insolvency practitioners. This is an important issue and I am grateful to the noble Baroness for bringing her great expertise on redress to our Committee.
At present, all insolvency practitioners and/or their firms must have a complaints process which debtors and others impacted by their actions are free to access. If the debtor is not satisfied with the response, they can make a complaint to the complaints gateway, which is hosted by the Insolvency Service. All complaints referred to the gateway are reviewed by the Insolvency Service before being sent to the appropriate regulatory body for consideration.
A review of the gateway last summer found that this system works well, and the increased number of complaints suggests that access for complainants has improved. Information captured via the gateway—which is, if you like, a single point of contact for consumers and debtors—enables the Insolvency Service to monitor how complaints are dealt with by regulators.
I note what the noble Baroness said about the ADR directive. Although that is not for this Bill, I will look at how it fits in and the impact of changes to the insolvency practitioners’ profession that she mentioned. I would always share her wish that people understand the system.
Turning to the issue of the single regulator, the measures in the Bill aim to strengthen the current regulatory regime for insolvency practitioners by building trust and confidence without the need for further intervention. However, if that is not the case and self-regulation in this industry does not work as we hope, this would be the point to consider using the power to introduce a single regulator. I agree with the noble Baroness that were that the case, the complaints system, including arrangements for redress, is one of the things that would need to be considered at that time. However, given that we already have a bespoke system for dealing with complaints about insolvency practitioners under the existing system, I hope the noble Baroness would agree that the introduction of an additional scheme such as the one proposed is not necessary at this time. I hope that the noble Baroness has found my explanation helpful and will agree to withdraw her amendment today.
Baroness Hayter of Kentish Town
I thank the Minister for that. I agree with what she said about the complaints gateway. If we could do that for all the other ombudsmen, that would be wonderful. I know that under the other bit of the department attempts are being made to move in that direction. The idea that any consumer would have a single point of entry is excellent.
I am not proposing an additional scheme here. Really, my point is that when we have a single regulator it should be borne in mind that complaints that seek redress are different from those that lead to disciplinary action. I am just flagging that up. I hope at the point that this was to be implemented at some date in future that the need to make the redress part of the ombudsman environment, not simply under the regulator, is what is best. This is very close to that and I certainly do not want to set up any new additional bodies. I hope that those thoughts might be taken into account. With that comment, I beg leave to withdraw the amendment.
“Special review
The Secretary of State shall conduct a special review assessing the needs of high technology small businesses (as defined in section 33(2)) and micro businesses (as defined in section 33(3)) facing challenging trading conditions.”
Lord Stevenson of Balmacara
My Lords, this amendment is in my name and that of my now lost noble friend Lord Mendelsohn. Given that most of his supporters have now left the Room in the vain hope that he might turn up, I think we will stop running this riff—but I am still very worried about him.
This is a probing amendment focusing on small businesses and high-tech businesses, and is intended as an opportunity for a debate on whether there is a case for introducing some elements of the Chapter 11 insolvency regime that exists in the USA, with particular reference to small businesses—perhaps more to microbusinesses—and those specialising in higher-tech areas. I will make a point about that at the end.
It is well known that, in the US, a company experiencing financial difficulty—or its creditors—can file with the federal bankruptcy court under Chapter 7 or Chapter 11. In Chapter 7, the business stops operating and a trustee sells its assets and distributes the proceeds to creditors. However, in most cases Chapter 11 is invoked, where the original management continues to run the business as a debtor in possession, but all major business decisions must be approved by the bankruptcy court.
In most cases the company will try to develop a plan to try to return to profitability, and compromise with creditors at the same time. If a plan is not developed, the company is liquidated. The rescue plan, if there is one, has to be voted on by the creditors and stockholders, and confirmed by the bankruptcy court. Even if creditors or stockholders reject it, the court can still confirm the plan if at least one impaired class of creditors has voted to approve it, and it concludes that the plan treats objecting creditors and stockholders fairly.
Baroness Neville-Rolfe
My Lords, I am glad to have this opportunity to debate Chapter 11, and am only sorry that some other noble Lords are not here to join in that debate—but we did, of course, have a good discussion in our open meeting, which the noble Lord, Lord Stevenson, kindly attended. I think that the conclusion of that was that we could not adopt the process here—and I do not think that anybody is asking for that. There is no hard evidence to suggest that if adopted here, it would produce better outcomes for businesses or creditors than the current procedures. Critics have suggested that its higher costs would make it less successful at rescuing small companies. In a sense, as we are talking about the small business Bill, that is not the sort of thing that we are looking for today.
However, I was glad to hear the suggestions from the noble Lord, Lord Stevenson, about aspects of Chapter 11 that we might take on board. In that spirit, I will look in detail at the specific points that he has suggested. We had our own look, and there are some things that we think could benefit the UK rescue regime. For example, we have recently consulted on widening the list of essential suppliers that must continue to supply the company in administration. That is a key feature of the Chapter 11 model. Previous consultations on other aspects of Chapter 11 have not attracted stakeholder support, but again the key is to find the aspects that are valuable and then one might get a more positive answer.
The noble Lord, Lord Stevenson, was concerned about breathing space for distressed companies. Such companies being rescued, in many cases upstream of formal insolvency, avoids the costs of insolvency. I think that our administration system already provides the breathing space that we need to help companies to restructure. In addition, insolvency legislation already provides a breathing space for small companies considering a voluntary arrangement, which we have not discussed today, but obviously that is another aspect of the overall issue.
The final point that I was going to refer to is one that occurred to us in looking at the noble Lord’s amendment, which is concerned with innovation by smaller micro-tech businesses, and the fact that they are key drivers of growth and economic prosperity for the country. We found in our other discussions on IP that the valuation of intellectual property is a challenge, and obviously it is also important when trading is difficult when you get to administration or indeed insolvency. The Intellectual Property Office is developing a new toolkit to help businesses to better manage their intellectual property, which is going to be launched before the end of this Parliament. Following Second Reading, I encouraged the Insolvency Service and the Intellectual Property Office to get together and have a work programme to engage with the insolvency profession to ensure that, if insolvency occurs, valuable intellectual property assets are recognised and dealt with in the best way possible.
A final area that we could put on our list of good ideas is that where formal insolvency cannot be avoided, our fast, accessible out-of-court insolvency procedures should suit small businesses by avoiding many of the court costs associated with other regimes. I do not know that much about the American regime but I know that there is a substantial legal profession there, so if one were looking for change, that would be another important area.
I am grateful to the noble Lord for this debate; I am sorry that it has been a bilateral one, but I hope that some of the things I have said will reassure him and that he will feel able to withdraw his amendment.
Lord Stevenson of Balmacara
I thank the Minister for those comments. I was indeed hoping that we would be able to have a broader-based discussion, but even bilaterally it is still helpful; it will be in Hansard, obviously, and perhaps it will be read by others. There are some good ideas here, though not for today, and I hope that there will be opportunities to bring these issues forward in future.
The point with which the Minister ended is one that I meant to begin with. The death of this would be to try to graft on the additional oversight that exists in America. We do not have that structure here of specialist courts dealing with this sort of area, and we certainly do not have the inquisitorial judge process that would be required in order to get behind some of the corporate issues that would be raised.
However, I think we have recognised that there are some things here that might have an effect. I was particularly pleased at the idea of a work programme between the IPO and IS; it is a great idea, and I look forward to having some way of accessing it at some point in future. With that, I beg leave to withdraw the amendment.
“Review
Within three years of the passing of this Act, the Government must conduct a review into the process of applying for debt relief orders and consequent application to the Insolvency Service which must include, but is not limited to, an assessment of the impact on charities and non-profit organisations.”
Lord Stevenson of Balmacara
My Lords, I promised when I introduced the last amendment that I would have no truck with any mention of my noble friend Lord Mendelsohn other than the fact that he has put his name to this amendment. Unfortunately, I have received a message from him, or at least I think it is from him because it is not signed and his writing looks suspiciously unlike that which I am used to. If the Committee is as worried about him as I am, he says that he wishes to thank the Committee for the references made to him today and assures the Committee that he is in excellent health and looks forward to speaking to me later.
In moving Amendment 61AH I should declare my interest as the retiring chair of the StepChange Debt Charity. Debt relief orders were introduced in 2009 to help some of the most vulnerable people and make sure that they got relief from their debts. It is a key tool for people with few assets, a low income and a relatively small amount of debt, to obtain what has now become known as debt forgiveness. Unlike bankruptcy, the DRO is an administrative rather than a court-based procedure. Under the Tribunals, Courts and Enforcement Act 2007, people could apply for a DRO only through a debt advice intermediary authorised by an authority whose competence has been verified by the Secretary of State for Business, Innovation and Skills. At present there are 12 competent authorities, many of whom are charities like the StepChange Debt Charity, but also Citizens Advice. One or two commercial organisations do provide DROs to people who need them, but the overwhelming majority—over 80% last year, according to the Insolvency Service—are provided by charitable debt advice agencies.
However, it costs the StepChange Debt Charity more than £2 million a year to support clients through this process. Given the numbers that we have as compared with others, I suspect that the total cost in the charitable sector is probably between £8 million and £10 million, so it is quite a high-cost operation. At the moment, out of the £90 fee that clients must pay to the official receiver to obtain a DRO, the Government via the Insolvency Service remits just £10 to the competent authorities. This comes nowhere near the actual cost of advising and processing a DRO application, which we estimate to be around £250. Clearly, this funding situation is not sustainable in the long term. With the pressure on charitable bodies, it is not possible for us to raise funds to do this because it is not an area which attracts much funding. We are therefore worried about how we will be able to sustain the service in the future. Indeed, it gets worse because the Government have now laid instruments to widen access to DROs and they predict that approximately 3,600 more people each year will now enter into a DRO. We welcome the extension of the reach because it is a good system at its heart, but it is clear that the effect will be to place an even greater strain on the resources of the charitable debt advice sector.
The StepChange Debt Charity would not wish to see an increase in the DRO application fee because that would defeat the central purpose of these orders, which seek to provide an alternative route to debt relief for those who are unable to afford the relatively high bankruptcy fee costs. Clients recommended a DRO by our advisers have on average just £6 a month surplus to save towards the existing fee. Even if they can make it up, it will be about 15 months before they can access the debt solution that they desperately need. Increasing the fee is not the solution. We have argued that the responsibility is on the Government to make a greater commitment to covering the costs of the competent authorities when these are charities delivering their statutory duties. We have suggested that one way of doing that is by looking at the balance of the fee between the Insolvency Service and the competent authorities. We have had a private discussion about this at one of the informal meetings that have already been referred to by the Minister. The point was made and I take it fully that it would be quite wrong not to expect the Government to act on anything other than a cost-recovery basis. However, what is appropriate for these hard-pressed charities? Why can we not also recover our costs in preparing what is an important avenue for a certain group of people?
This amendment signals the urgency with which we think this issue needs to be addressed, but we do not go into the specific details. The amendment would require the Government to review the adequacy of the funding arrangements for DROs to ensure sufficient funding for charities acting as a competent authority in carrying out their function as authorised intermediaries. If the Committee would like my view to feed into this, it is that there is a parallel here with what happens in Scotland. In Scotland, the Accountant in Bankruptcy operates a similar system, but it is conducted increasingly at arm’s length from the AIB, which encourages other bodies to take on the responsibility of preparing and proposing to the authority—in this case the Accountant in Bankruptcy—that a DRO should be ordered. In other words, the burden of responsibilities and the costs come across to the competent authorities, but so does the fee. That is the essence of it.
A broader look at this could involve some engagement with creditors because although there are very small creditors in this system, deliberately, there are always some. There may be a way in which a body such as Citizens Advice or our charity could have a convening power to allow for creditors to make more of a contribution to this area. There are solutions here. I do not think that we are stuck in a cul-de-sac from which there is no escape. It is worth trying to do a little work on it and I offer StepChange Debt Charity as a specialist agency willing to have negotiations with the Insolvency Service, if it would like that, to see if we can come up with a solution. I beg to move.
Baroness Neville-Rolfe
My Lords, I start by paying tribute to the noble Lord, Lord Stevenson, for building up StepChange. I can only express my regret at the news that he will be stepping down. He leaves a great legacy there and I know that he will be much missed. I pay tribute also to the other DRO facilitators, including Citizens Advice.
Turning to the wider subject, last Friday the Government introduced legislation to increase DRO eligibility. This included raising the debt and asset limits to make DROs more accessible for the most vulnerable debtor: those with low levels of debt and limited resources, and for whom bankruptcy is too expensive. The noble Lord, Lord Stevenson, mentioned high bankruptcy application costs. He may already be aware that we will be introducing in 2016 a new debtor petition application process, which will allow a person to pay the application costs by instalments. As part of the announcement last week, the Government committed to fully reviewing DROs again two years after the changes come into effect on 1 October this year. We, of course, consulted on these changes, including on the fee paid to the facilitators of DROs. The majority of respondents, including CAB, which is the largest facilitator, stated that they did not want to increase the fee, being mindful of the need to keep this important service affordable.
The noble Lord, Lord Stevenson, has agreed today that increasing the fee is not the solution. As he pointed out, the Insolvency Service receives £80 for its element of the DRO application process. Unfortunately, as I have explained to him outside the Committee, Treasury rules preclude the Insolvency Service from setting its fee at less than this figure, which represents full cost recovery. It is important that the Insolvency Service works hard to keep its costs as low as possible. The DRO unit has recently undertaken a lean review and is focused on continually improving its service. This service includes verifying DRO applications, providing an advice service to the facilitators and considering creditor objections to the granting of DROs. The Insolvency Service has also committed to an upgrade of the IT system providing the electronic DRO solution, which may help. The upgrade will improve response times and make the system more user-friendly, potentially saving time and resources for DRO facilitators. I must thank facilitators such as StepChange for providing a lot of input into those improvements.
This Government do not feel that there is a need for an additional review. However, we will continue to look at ways to improve the administrative processes, which will be of benefit to the facilitators and affect the underlying costings. I note what the noble Lord, Lord Stevenson, said about good practice in Scotland. More broadly, before I finish, the Government are very keen to ensure that anyone facing debt worries seeks independent, reputable and free debt advice at an early stage. We have put the funding of free debt advice on a sustainable footing through the Money Advice Service. The Government have also commissioned an independent review of the Money Advice Service to make an assessment of the need for debt advice and education. The review, and the Government’s response, will be published shortly. We have had a good debate on this important subject, albeit again a bilateral one. I hope that on this basis, the noble Lord will feel able to withdraw his amendment.
Lord Stevenson of Balmacara
My Lords, I thank the Minister for her kind words about me and my contribution to StepChange. I am sorry to leave it—it is a terrific organisation—but I am sure it will be in good hands after I have gone.
We are edging towards the point where this issue needs more exploration and discussion. As I have said, we are willing to participate, as I am sure many others will be. It costs us £250 per applicant to do something that we want to keep in play and we only get £10 back. That is too big a gap and we need to address that issue. There are other money sources around but it is a hard time out there for charities and it is not easy to see how this can be done on a sustainable basis.
I am glad the points have been raised. I stand ready to discuss these matters, should that be required, and in the interim I am happy to withdraw the amendment.