Baroness Neville-Rolfe
Main Page: Baroness Neville-Rolfe (Conservative - Life peer)Small Business, Enterprise and Employment Bill
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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.
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 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.
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 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 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.
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.
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.
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.