Lord Stevenson of Balmacara
Main Page: Lord Stevenson of Balmacara (Labour - Life peer)Small Business, Enterprise and Employment Bill
Lord Stevenson of Balmacara Excerpts(9 years, 10 months ago)
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“( ) 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.
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 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 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.
“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.
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.