Viscount Younger of Leckie
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Baroness Brinton
My Lords, I, too, oppose these two amendments and support the points that the noble Lord, Lord Howarth of Newport, has made, to which I briefly add two further points.
The rights holders of apparently orphan works very rarely come forward at a later date. This makes court action unlikely in most cases, particularly where use of the works was manifestly for the purposes of teaching or research. However, using works in these ways would require institutions such as universities and libraries to operate outside the law in order to make legitimate use of this material. This is not a satisfactory long-term solution.
It is important that what constitutes a diligent search is sensitive to the intended use and the kind of material. Searching for the author of a commercially published book, where the intention is to republish for commercial gain, should require a higher level of diligence than for the digitisation for preservation purposes of an archive of non-commercial material. It is very important that the Bill is flexible enough to allow regulations to account for these differences. Unfortunately, these two amendments would take it in the opposite direction.
The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills (Viscount Younger of Leckie)
My Lords, I begin by thanking my noble friends for their amendments. They raise important issues.
Turning first to Amendment 84AE, in Grand Committee there was a full and productive debate, as has been mentioned, on the issues around diligent search. I have also subsequently written to the noble Lords who spoke in that debate. I can confirm that, before a work qualifies as an orphan, a diligent search for the all the rights holders in the work must be undertaken. If as a result of an initial UK search there are indications that the rights holders may be overseas, there will be a requirement to expand the diligent search to include relevant overseas territories. However, a balance must be struck between protecting rights holders and making the system cost-effective for users. That is why the orphan works working group is undertaking detailed work to ensure that diligent search requirements reflect current best practice across all sectors. These requirements will be set out in regulations that will be subject to both consultation and the affirmative procedure.
I will answer some questions raised by my noble friend Lord Clement-Jones and the noble Lord, Lord Howarth, about the provision of more detail on the requirements for diligent search, although I am not sure how far I can reassure the noble Lord, Lord Howarth. Diligent search should find rights holders when works are not really orphaned, and it is important to find the right balance between protecting rights holders and making the system cost-effective. Extensive thought has already been given to what should be done in a diligent search for different sectors, including by the European digital libraries initiative. Existing industry databases and registries and bibliographic publications are just a couple of examples of sources of information that could be searched. It is likely that searches would differ across the various sectors, and therefore sector-specific guidance may need to be developed. To that extent, this may help to answer some of the concerns of the noble Lord, Lord Howarth.
Diligent search is being considered with stakeholders through the orphan works and ECL working group. Diligent search guidance will cover the scenario where the work may have originated outside the UK. The noble Lord, Lord Howarth, may know that the Canadian orphan work scheme licenses works, provided that they have a strong connection with Canada. They may be of foreign origin, but with an orphan work this will not necessarily be known.
In relation to Amendment 84AE, my noble friend Lord Clement-Jones was concerned that there might be a loophole regarding sublicensing. The answer to this is that the Bill does not permit sublicensing, if that is a help to my noble friend.
I may well have touched on this earlier, but for clarity, the noble Lord, Lord Howarth, again raised the issue of diligent search and made a fair point about the need to cover every orphan. I believe that he used the analogy of the postcard. I do not think that we can avoid the need to look for a legal owner, but we do not want a search regime that is too obtrusive and costly. This is a matter of achieving balance, and that is why these matters are best dealt with in regulations, where the needs in different sectors can be properly addressed.
Amendment 84AEA would remove the option of licensing a work under the orphan works scheme where it was not known whether copyright subsists. Establishing whether a work is still in copyright will of course be a key part of the diligent search process. Indeed, it is in the applicant’s interest to establish this fact, because if the work is out of copyright they will be free to use it and will not need to apply for an orphan works licence. However, it may not always be possible to establish definitively whether a work is still in copyright. This will particularly be the case with unpublished works, where often key information such as the date of creation or the date of the creator’s death is not known. Having to establish definitively whether a work is still in copyright could, therefore, exclude very many works.
This practice of allowing a licence where there is uncertainty about whether copyright subsists is followed in Canada, which I mentioned earlier, where a scheme has been running for nearly 25 years. In doing so, it provides legal certainty for the user of the work. If we do not include such works within the scope of the orphan works scheme, we could exacerbate the very problem that the proposals are designed to address. I hope that in the light of the assurances that I have provided, my noble friend will not press his amendment.
Viscount Younger of Leckie
My Lords, this group of amendments is designed to incorporate in legislation a series of safeguards regarding extended collective licensing. The Government have publicly committed to many of these safeguards in some form or other. I thank my noble friend for his continued positive engagement with ensuring ECL is a fair system. The Government share those aims, and I seek to reassure my noble friend that we have met them.
As there are a large number of amendments in this group, I will respond to them by reference to a set of themes. Amendments 84AFA, 84AFB, 84AGA, 84AGB, 84AGC and 84AGD are essentially consequential in nature, and so I will not deal with them directly. Amendments 84AEB, 84AEC, 84AED, 84AEE and 84AEF seek to provide clear safeguards against an unwanted extension of the scope of collective licensing, and to define the characteristics of a body which can be authorised to operate ECL schemes.
The need for safeguards is absolutely beyond dispute. A working group which includes creators of photographic, audiovisual, literary and musical works is helping us to develop these safeguards into draft regulations. I gave commitments during Grand Committee on some of the issues the working group would be asked to consider, such as those raised by Amendment 84AED. The Government will consult on these draft regulations before asking Parliament to approve them. The Government feel that regulations can more easily be adapted to keep safeguards effective in the light of market changes. Such adaptability ensures that the scheme continues to protect creators’ interests. Regulations can also more easily be adapted to emerging best practice; this better prevents abuses. The Government’s approach will still allow for a comparable level of safeguards to those found in primary legislation in other jurisdictions.
My noble friend Lord Clement-Jones raised the issue of the Nordic protections which are in primary legislation, a topic also alluded to by my noble friend Lady Buscombe. The UK proposals include similar safeguards, such as the right to opt out and a test of representation, and a different legislative route that has been used to provide future-proofing. However, not all Nordic ECL provision is for specific uses. For example, the Danish Act includes provision for a “general” ECL. Some vital safeguards are on the face of the Bill: the right to opt out and the requirement that ECL can be authorised only for specific types of works and rights. Applications to operate ECL would be authorised only on the basis of significant, demonstrable support for collective management in relation to the specific licence. This would need to include evidence that the applicant—a significantly representative licensing body—has the consent of its members to apply for the authorisation.
My noble friend Lord Clement-Jones raised the issue of ECL. If I have him correctly, he described ECL as potentially dangerous and questioned the description of it as voluntary. Noble Lords have queried our description of our proposals as voluntary, but they are voluntary because the Government will have no power to impose ECL on a sector. This is not compulsory collective licensing; it will be for a relevant licensing body which will require the explicit consent of its members to choose whether to apply. For non-member rights holders, I accept that ECL, where it applies, shifts collective management from opt-in to opt-out. This is why the Government are committed to a series of safeguards to ensure ECL is authorised only when there is a demonstrable case for it, and to make sure that rights holders have the opportunity to exercise their opt-out.
In relation to the advertisement of ECL schemes prior to authorisation, the Government have proposed that an application should be publicised to allow comments from interested parties before a decision is taken. The Government do not propose that new regulations should be laid in relation to each proposed authorisation. With regard to Amendment 84AEF, I confirm that authorisations will apply specifically and solely to the licensing scheme which was the basis of the application.
In relation to Amendments 84AEE and 84AEG, the Secretary of State will decide whether to grant or reject an application and to set the conditions of any authorisation. We therefore consider it appropriate to provide in the regulations that the Secretary of State should also have the power to revoke an authorisation, should that prove necessary. The Government believe that this may be a more efficient process than a referral to the Copyright Tribunal. Following discussions with the working group, I can confirm that the Government intend to make ECL authorisations subject to renewal.
I turn now to the question of the opt-out, and I hope that my subsequent comments on the subject of exclusive licensees will be helpful to my noble friend Lord Clement-Jones. Amendment 84AF focuses on the right to opt out of ECL schemes. In Grand Committee, I made a commitment that the working group on extended collective licensing would be asked to consider whether the right to opt out should be extended to exclusive licensees and their representatives. The Government take the opt-out protection seriously. If it becomes clear that an extension of the provisions to cover exclusive licensees and representatives is necessary, the Government will act on that basis. However, I do not want to pre-empt the work of the working group, given my Grand Committee commitment.
I know that my noble friend Lord Clement-Jones also has concerns regarding due diligence in relation to opt-out. I can confirm that the Government’s intention is that the burden of proof should favour the party seeking to opt out. That seems to us the right and fair thing to do.
My noble friend Lord Clement-Jones raised his concern that the opt-out would be too burdensome for rights holders. However, the responses to the consultation make it clear that rights holders expect to be able to opt out entire collections of work or individual works quickly and with minimal or no cost. It will be the responsibility of the collecting society to operate opt-out schemes which meet the needs of effective rights holders. They will need to demonstrate how they intend to do this when they apply to operate an ECL scheme.
On Amendment 84AEH, the Government believe that licensing bodies rather than users, who may be individuals or small businesses, should accept and process opt-outs. Licensing bodies will be required to publicise any ECL scheme before it comes into effect, giving rights holders every opportunity to opt out in advance.
Subsection (b) of the amendment presents some practical difficulties. “Reasons to believe”, for example, could prove to be a very subjective judgment. It would seem more practical for licensing bodies to address issues of exploitation that the “author would oppose” on a scheme-by-scheme basis through, for example, licence conditions.
On fair treatment and remuneration for non-members, I reiterate my support for the principle. However, I do not feel that it would be appropriate to give non-members of licensing bodies recourse to the Copyright Tribunal that members do not have. I also feel that it is unlikely to be cost-effective.
Codes of practice will require fair treatment for non-members, and ECL will not be authorised unless a suitable code is shown to be in place. If a dispute fell within the scope of a code, a non-member would be able to use the licensing body’s complaints procedure, with appeals going to an independent ombudsman. The Secretary of State would have the power to revoke an ECL authorisation if a code was not complied with. This is in addition to the proposed wider backstop powers and code review system, which includes the ability to impose other sanctions.
Amendment 84AGE would mandate that the regulations provide for a creator’s moral rights to have been assumed to have been asserted. I am happy to confirm that the orphan works regulations will indeed provide for this.
In relation to ECL, the principle is that the licence conditions applicable to the use of member’s works would also apply to the works of non-members. Amendment 84AGE would, however, also remove references to other safeguards. These include the various rights and obligations once a work ceases to be orphan, and the right to withdraw from an ECL scheme once it is up and running. The fact that these matters are specifically referenced in the Bill is an indication of their importance.
My noble friend Lord Clement-Jones and others have made some valuable points, but I can reassure the House that the Government understand the importance of getting the detail right. Fixing the detail in regulations will allow for expert input from the working group, further consultation and parliamentary scrutiny via the affirmative procedure, and will help the Government to keep safeguards up to date and effective. While I appreciate the intention of these amendments, I am concerned that they would hinder us in getting the detail right now and in the future. I therefore ask my noble friend to withdraw his amendment.
Lord Clement-Jones
My Lords, the Minister has been so forthcoming that I almost do not know where to start in thanking him for the assurances that he has given about the nature and content of the regulations in terms of the safeguards that will be similar to those in most of the Nordic legislation—that is, the way in which licensing bodies will need to demonstrate significant support, the way in which the Secretary of State will set out the requirements, and the powers of the Secretary of State in relation to codes of conduct. These schemes will be subject to renewal, which is extremely important. The way in which the Minister expressed these assurances was extremely important, first, in terms of meeting the expectations of rights holders, which is crucial in meeting some of the concerns. Secondly, even more important is what the Minister said about the onus of proof in terms of the ability of rights holders to withdraw from collective licensing schemes. Above all, that will provide more assurance than almost anything else.
I shudder to think how long some of the regulations following on from Part 6 of this Bill will be, since we are putting huge emphasis on secondary legislation following on from the clauses that we are agreeing. However, the Minister has given a very useful route map of what those regulations relating to extended collective licensing are, and to that extent it is extremely welcome. I beg leave to withdraw the amendment.
Lord Stevenson of Balmacara
My Lords, this has been a very powerful debate. In contradistinction to what have been discussing in the immediate run of amendments, this seems to be a situation where the Government are trying to be a little too definitive in primary legislation. My point would be, to support the comments made on this side, to suggest that the Minister might wish to review that.
We have heard that we are talking about hundreds of millions of works, which are—in the words that my noble friend used—underused, understudied and undercelebrated. There is no contention that the repositories in which these works lie are happy to pay for the cost of the administration of the scheme that is to be used to provide access to them. The concern is that by providing a very inflexible approach to this, these institutions will effectively have been taxed to provide funds which will go to the Crown under the bona vacantia rules. This seems extraordinarily unfair and I urge the Government to think again about this issue. I am aware that it has already been the subject of some discussion and debate but, given that we have at least another 10 days until the final stages of this Bill, perhaps there is still time for the meeting or discussion that I might encourage the Minister to have. We would certainly be very willing to meet his timetable in order to progress this.
The point must surely be that there ought to be a way round this that would accept the overall architecture of the structure of the orphan fees arrangement but would not penalise or tax those who have to operate it for the benefit of the public good. We have already had some suggestions that would perhaps include something to do with digital photography, which will always be a difficulty in this area. That might be a step too far. However, there are other ideas around, such as that the escrow account might be not returned to the Crown but made available for cultural work or, more particularly, returned to the original institution if the money is not claimed by a bone fide rights holder.
There might be a case for trying a pilot scheme, which would allow us to test out a number of options. Whatever there is, there is certainly a willingness on our side to see if we can get this right. This scheme is a good scheme. It is one that we on this side want to support, but we find it very difficult to see the right way forward if the Government insist on the present wording of the Bill.
Viscount Younger of Leckie
My Lords, I begin by thanking the noble Lord, Lord Howarth, for his amendment. I do not underestimate the strength of his views on this particular issue and the remuneration for orphan works. I have listened very carefully today to his argument. As he well knows, I listened carefully in Grand Committee and, indeed, outside the Chamber to his views, which are well known.
It is one of the core principles of the Government’s proposals that remuneration is payable for the use of an orphan work. Making payment discretionary would risk undercutting the market. It would also risk rights holders not receiving the remuneration that they would otherwise be due. Therefore, to avoid unfair competition, it should not be cheaper to use an orphan work than a non-orphan work. Where cultural institutions are acting commercially, it seems only fair that they do not receive preferential treatment to other parties licensing in the market.
I can assure the noble Lord that in setting the tariff of remuneration the Government will ensure that, as far as possible, it reflects the appropriate tariff for the same type of use of a similar non-orphan work. Where an orphan work is not being used commercially the licence fee will reflect that. In such cases, the fee could be minimal. My officials are consulting the competition authorities about how tariffs are determined.
I will address a number of questions raised by noble Lords, in particular the noble Lord, Lord Howarth. First, he suggested that excluding digital photographs from the orphan works scheme might be a possibility. A stakeholder working group will be considering the possibility, at least initially, of excluding from the scheme photographs without an analogue context—so photographs merely taken from the internet would not qualify for an orphan works licence.
The noble Lord, Lord Howarth, suggested removing the principle of upfront payment and his views were very clear on that basis. We cannot, however, expect cultural institutions to ride over the rights of creators even in the interests of the public good. Of course we hope that there will not be returning rights holders. We hope that diligent search will identify any such people. However, the principle of upfront payment is an important one. Abandoning the principle of upfront payment is a guarantee to creators that even if their works are missed in the search, they will not be deprived of an income. The fact that rights holders may be content to allow their works to be used is not a reason for trying to reduce their legal rights. In many cases, the payments may be minimal, indeed nominal.
The noble Lord, Lord Howarth, also raised unclaimed licence fees—an issue alluded to by the noble Earl, Lord Erroll. The authorising body will hold unclaimed licence fees in an escrow account. Unclaimed fees could be used to subsidise the cost of running the orphan works scheme, or to pay for preservation costs in public institutions or industry training. There will be further consideration of these options with the input of stakeholders.
The noble Lord, Lord Howarth, raised the issue of a renewable term and the fact that he was not in favour of it. To allow for business certainty, there will need to be some limit on how long an orphan work can be used before a new authorisation would be required. Any returning rights holder would receive remuneration for this period of time and would be able to stop further use at the end of the period if they so wished. The metrics for determining the durations of licences have yet to be decided. In some cases, it might be a period of time; in others, it might be something else such as a print run. Therefore, there will be further consideration of how charges are determined but licence fees will be appropriate to the type of work and use proposed. I hope that, with those reassurances, the noble Lord will not press his amendment.
Lord Howarth of Newport
My Lords, the novelist Edith Wharton has a character in one of her early stories, a woman novelist, who discusses with her former lover what should be done with their love letters. She says:
“A keen sense of copyright is my nearest approach to an emotion”.
Noble Lords may be feeling rather similar by this stage of the proceedings. I am grateful to all noble Lords who have spoken in the debate—my noble friends Lady Blackstone, Lord Howie of Troon and Lord Stevenson of Balmacara, as well as the noble Earl, Lord Erroll—for their very helpful contributions.
The Earl of Erroll
My Lords, we need to move somewhere in this direction, so I support this amendment. The unfairness of copyright law recently came home to me. Someone wanted to publish a book involving some of my ancestors, and asked whether they could use some material that I had at home. I replied, “Certainly, I would be delighted”. Then they said, “We need a release document”. They put a contract in front of me that said that they would have total rights to this material throughout the universe, known and unknown, in media not yet developed, incorporated and not incorporated—this, that and the other. The only thing it did not include was parallel universes. The contract said that I would have to defend the copyright whenever and wherever required, at my cost. I was not receiving anything for this; I was simply trying to be kind and helpful to someone who was making a documentary. I asked someone legal about it who said, “Oh, they probably couldn’t enforce it because it’s an unfair contract”, but apparently it is not because unfair contracts do not apply to copyright. I therefore asked whether other people had signed this, and was told, “Oh yes, they’ve signed them. Don’t worry, I’m sure nothing will happen”.
It is madness for people to sign these things. Something will come home to roost. You have only to look at the chancel repair bills that some people receive as a result of things signed long ago, which come home to roost generations later. This copyright thing would, if I had signed it, presumably have burnt my heirs and successors as well for the period of that copyright. This is potentially quite serious—something that people are ignoring. They think that it will go away and that it does not matter because it is so over the top. I struck through all the relevant clauses in the contract and said, “Right, you can have whatever rights you want to it, but you defend it and look after it”. I never heard any more and they never used the material, which is sad.
This is all part of the previous discussion on orphan works and extended collective licensing. So much is locked up that could help the future, help current understanding of the past and help to disseminate things, yet the big rights holders are so bullying in holding on to this material that they are preventing its dissemination. We have to open up and start being more reasonable, particularly in the digital age. On this amendment, therefore, I definitely support the noble Lord, Lord Clement-Jones.
Viscount Younger of Leckie
My Lords, I start by answering a question that my noble friend Lord Clement-Jones raised at the beginning. Well, it was more of a point, really. He said that he had sent a paper to me on how the issue of unfair contracts could be addressed. I confirm at the beginning that I have received this paper and that we will consider his suggestions very carefully. It is a little early to talk about this as a formal review, but I reassure him that we will certainly discuss this and take it forward.
However, I thank my noble friends for this amendment. I understand that individual creators can be at a disadvantage when negotiating contracts with intermediaries and large organisations. However, I believe that amending the Unfair Contract Terms Act in this way, as intended by this amendment, would not address these concerns. My noble friend Lord Clement-Jones is aware that we have had discussions on this outside the Chamber. This is because the provisions of this part of the Act are limited in scope. Section 3 applies only where one of the parties is a consumer, or is on the other party’s non-negotiated standard terms of business. However, we should also consider the overarching point. Successive Governments have maintained the principle that businesses should be able to contract freely with each other, and that the Government should not unduly fetter or circumscribe this freedom.
My noble friends have raised valid concerns about individual creators. Although I do not consider that the Bill needs amendment in this respect, I would be happy to meet creators to explore these issues further. I hope that in the light of what I have said, my noble friends will not press their amendments.
The Earl of Erroll
Will the Minister clarify something? It sounded as though this amendment would cover the situation in which I found myself. If a creator is a sole trader, will he be covered as a business to consumer rather than business to business? Would that help?
Viscount Younger of Leckie
The noble Earl raises an interesting point. This is very much a technical issue. As noble Lords will be able to imagine, a number of lawyers were involved before I was able to stand at the Dispatch Box today. On that point, I ask the noble Earl to allow me to get back to him with a specific reply.
Lord Clement-Jones
My Lords, I thank the Minister for that reply. I also thank the noble Earl, Lord Erroll, for his comments. He rarely supports one of my amendments, and I have learnt more about his ancestors today than on many previous occasions, so I thank him for his support.
The issue is not whether or not to amend this particular Act. As the Minister says, the Unfair Contract Terms Act does not apply to copyright or business-to-business transactions. Therefore, the essence of this is that, where many of these small creators are small businesses, we need to find a mechanism that will create a more level playing field with some of the larger contractors with whom they want to do business, and to find some way in which those transactions can be reviewed in the way that I suggested.
The Minister did not go quite as far as I would have liked and commit to a review. I think he said that he would meet to discuss how a review might take place. I will take that for what it is. I very much hope that I will be able to persuade the Minister, especially with the paper I sent him, which I confess was drawn up by the Creators’ Rights Alliance, which represents smaller creators and feels very strongly about these issues. I am sure that its members will be only too delighted also to meet the Minister. In the mean time, I beg leave to withdraw the amendment.
Viscount Younger of Leckie
My Lords, Amendment 84AHA returns to the subject of diligent search, something that was discussed in one of the earlier groupings. I understand and sympathise with the intention behind this amendment. However, the Government are not convinced that a failure to obtain an orphan works licence legally should be treated as an aggravating factor over and above any other form of copyright infringement. There are already provisions in the 1998 Act for special damages, but the general principle of law at issue is that civil redress is about compensation rather than punishment. The Government feel that the courts should be in the best place to determine damages in the light of the circumstances of each case. I hope that in this light my noble friend will not press his amendment.
Lord Clement-Jones
My Lords, I thank the Minister for that. I will need to consider some of the points that he has made. I am not sure whether I agree that it should be a matter of pure compensation and not damages, but I am sure that his words will be worth looking over again in the light of day. In the meantime, I beg leave to withdraw the amendment.
Lord Jenkin of Roding
My Lords, I very much support this. I believe that it is a very worthwhile amendment. I cannot understand why somebody who is claiming the right to be the copyright owner of an orphan work should have to assert his right from the beginning. He will not know about this, as it is a requirement that will be hidden in the legislation. I cannot for the life of me understand why he has to do this in advance, as it were. It is an unnecessary restriction and requirement to be placed on the shoulders of an individual, perhaps an artist, writer or musician, who says that they are the author and owner of an intellectual property, only to be told that they have not asserted their right from the beginning. I do not believe that that is right.
I hope that my noble friend will look on this amendment sympathetically and, even if he cannot accept the words, undertake to have a good look at the issue and perhaps meet some of the people concerned, with a view to having something put into the Bill at Third Reading. I think that my noble friend Lord Clement-Jones has made a very sound point in moving this amendment.
Viscount Younger of Leckie
My Lords, the noble Lord’s proposed amendment would make automatic the right to be identified as the author of a work. Currently Section 78 of the Copyright, Designs and Patents Act 1988 provides that moral rights, including the right to be identified or attributed, must be asserted to take effect. The Government appreciate that there is a legitimate debate around the issue of moral rights, particularly the right to attribution. Some stakeholders would like to see the moral rights of creators strengthened further. The Government acknowledge that there are creators who would like to see the right of attribution become automatic and some who would also like it to be unwaivable. We are also aware, however, that other creators take the view that moral rights, such as the right of attribution, can have an economic value. These creators argue that they should be free to decide whether to exploit that value.
As can be seen, this is a complex area on which creators hold strong and often differing views. The economic question of the cost of using works is an important one. Changing the law on moral rights would affect many groups in different ways. It is not an insignificant question and would require a full consultation. I hope that these words help to answer some of the questions raised by my noble friend Lord Jenkin and that, in the light of what I have just said, my noble friend Lord Clement-Jones feels able to withdraw his amendment.
Lord Clement-Jones
My Lords, I thank the Minister for that response, and I thank the noble Lord, Lord Jenkin, for his very valuable support. I appreciate the Minister saying that there is a legitimate debate. There are, of course, a number of aspects of moral rights that are debatable, not only the automatic right stated in this amendment but also the issue of waiver, the question of the economic value of moral rights and so on. This amendment was a way of putting a marker down that this is an area that is somewhat archaic. If we are going to move on, especially when the new exceptions come into play, we must look at further aspects of reform of copyright law, such as the way in which contracts are made with creators, aspects of moral rights and metadata. This is an area that the IPO could very usefully focus on and, in the next round of legislation, look and see whether we can get rid of something that I believe is now not required and is rather out of date and unnecessary. In the mean time, however, I beg leave to withdraw the amendment.
Lord Tugendhat
My Lords, I would like to address the noble Lord’s point about annual approval. I spoke in favour of annual approval on Second Reading, and I am a little surprised to be speaking on it again on Report. I gained the very clear impression from the wind-up speech of the then Minister the noble Lord, Lord Marland, that there would be annual approval. In referring to the noble Lord, Lord Gavron, Lord Marland said:
“He also asked me the frequency of the new binding vote on remuneration policy. The binding vote on future pay policy will happen annually, unless companies choose to leave their pay policy totally unchanged. I think there will enormous shareholder pressure on companies that continue to leave their policy unchanged”.—[Official Report, 14/11/12; col. 1608.]
I strongly agree with the noble Lord, Lord Mitchell, that this matter, like other important issues that come before the AGM, should be dealt with annually. Indeed, it would be eccentric to suggest that any other proposition be put forward. If the Minister really wants us to agree to triennial agreements, he will have to make a powerful case that has not yet been made in this Chamber.
It would be preferable if the Minister cast some light on how he interprets the undertaking of the noble Lord, Lord Marland. If the Minister is saying that any change whatever in executive remuneration is subject to a vote, we will, in practice, have annual votes because it is inconceivable that you would have a group of executive directors whose pay would remain completely unchanged for three years. Indeed, it is pretty unlikely that you would have a group of executive directors who themselves remained completely unchanged for three years. The overwhelming likelihood is that there would be changes in the pay packages and the composition of the executive group. If the Minister can assure me that any change whatever, either in an individual package or in incorporating the arrival of a new executive director, will mean that the matter has to come before an annual vote, I would be able to follow my noble friend. However, if he cannot do that and if he is saying that unlike the report and accounts and all kinds of other things, executive pay should be given special status and subjected only to triennial review, he is diminishing the value of the Bill.
I said on Second Reading that I commend the Government for tackling this issue, and I hold to that position. It was not tackled under the previous Government and it is good that it should happen now. The Government have established the principle that the issue is a matter of public interest, but if that is the case, as is the case in other important areas such as the appointment of auditors and the annual report and accounts, why on earth should it not be dealt with on an annual basis? Or is the Minister going to suggest that the appointment of auditors should be made triennial, quinquennial or at some other interval? He must either try carefully to explain why he puts executive pay into a special category—not just tell us about investors saying something but actually make a reasoned case—or he must convince us that any change whatever will trigger an annual approval.
Viscount Younger of Leckie
My Lords, I wish first to follow on from the comments of the noble Lord, Lord Mitchell, concerning the noble Lord, Lord Gavron. I am sure that everyone on this side of the Chamber would agree that we wish him a speedy recovery. Secondly, I take this opportunity to acknowledge the considerable experience of the noble Lord, Lord Mitchell, in the management of companies and on the ups and downs of fortune. It was helpful to hear about his background.
Lord Lea of Crondall
I am grateful to the noble Viscount for giving way. I would like to check that I have understood. He referred to the words “pay policy”, and an amendment is coming up shortly on the question of top to bottom ratios. If this is now an acceptable form of words, why do the Government not think there is now a need for a top to bottom pay policy, which we will come to in a minute?
Viscount Younger of Leckie
I will come to this in a minute. If the noble Lord will forgive me, I think it is best that we continue with this rather than move on to that particular subject. We can then focus on the noble Lord’s comment during the debate on the next amendment.
I should reiterate that throughout our consultation shareholders with considerable experience in investments research and analysis consistently expressed concerns about the downside effects of annual votes and special resolutions. This was acknowledged by my noble friend Lord Tugendhat. It is a fact, and it is the main point I want to make. Stakeholders have expressed their support for the Government’s proposals. For example, the Association of British Insurers stated that it is,
“pleased the Government has decided to proceed with this with a 50% voting threshold”.
The noble Lord, Lord Mitchell, raised some questions. First, he asked to which year a policy would relate if it were renewed annually. Well, he did not raise precisely this question, but it was alluded to. It is important to provide companies with the flexibility to decide themselves how the timing of the pay proposals will best work for them. Whether a pay policy relates to the current financial year or the following one is a decision for companies and shareholders to take together.
The noble Lord, Lord Mitchell, also raised the issue of the Cox review. I acknowledge this review, and the Government welcome its publication. The review raises some key issues about directors’ pay. I reassure the House that we will consider the recommendations made in the Cox review in the context of the Kay report. The Kay report provides a framework to restore relationships of trust and confidence, and to realign incentives throughout the investment chain. I remind noble Lords that the Government are fully committed to taking forward the recommendations made in Professor Kay’s review that investment in equity markets supports UK companies to deliver sustainable growth.
To conclude, my noble friend Lord Tugendhat raised the matter of annual votes, on which some fairly strong comments were made. I stress that in the end this is about giving companies and shareholders the flexibility to do what is best for them. However, the noble Lord is correct that a vote would be required in the event of any change in policy, so annual changes would lead to an annual vote.
Lord Tugendhat
The noble Viscount used the words “any change in policy”. Am I right to understand him to mean that if there was a change in the remuneration of two or three directors, or even of just one director, during the course of 12 months, the total pay package would have to be put to the AGM that year and could not be held over for two or three years, or whatever was left? Would it have to be voted on immediately or at the next AGM?
Viscount Younger of Leckie
I can confirm that it would have to be voted on immediately, because the change had happened in that particular year, so there would be that trigger for year two, in effect. If I have failed to do so already, I ask the noble Lord to withdraw his amendment.
Lord Mitchell
I thank the Minister for his comments and all other noble Lords for their contributions. I will deal first with the 75% special resolution issue, which was raised by the noble Lord, Lord Blackwell. As my noble friend Lord Wills was saying, it is important for the shareholders to hold the executives’ feet to the fire in some respects. This is a crucial issue. I know there is a difference in this between the ordinary and the special resolution, but that was why we went for the 75%.
The main issue is the annual point. You only have to read any newspaper in this country, and indeed around the world, to see what a vexatious issue this is at the moment. The population is disturbed, and the financial press is disturbed. Not only the popular press but leading newspapers in this country and throughout the world bring up this issue of executive pay. It has got out of kilter. We are going for the annual situation rather than the triennial situation because it should be an automatic consequence and is just as important as the selection of auditors and the approval of the accounts. Three years just seems to us to be too long for such an important issue. I have listened to what the noble Lord has said, but I would like to test the opinion of the House.
Lord Kerr of Kinlochard
My Lords, I understand the general points made the noble Lord, Lord Mitchell, and I have considerable sympathy for them. However, I do not understand their relevance to Clause 71, which is about remuneration reports. The problem with remuneration reports is that the degree of detail now required in them means that they have become rather long and complex. An additional requirement to include a comparison between payments made to two categories of staff, neither of which is within the scope of the remuneration report, would add further complexity without the justification of relevance. Remuneration reports are about the remuneration of directors and senior executives. The amendment calls for the inclusion of factual material on individuals who are neither directors nor senior executives.
Such complexities have costs. Take two plcs with 70 and 100,000 employees across the world in, say, 50 to 85 countries. I am thinking of two examples which I know well. Is it really necessary, for the purposes of the remuneration report, to require them to establish with each of their businesses in each country where they operate which are the lowest pay rates paid, presumably to the most junior, temporary staff of that country, then take appropriate exchange rates and try to work out the unluckiest 10 in any of their operations anywhere across the world? The remuneration report is about the directors and senior executives. The purpose of a remuneration report must surely be to explain to shareholders the company’s remuneration policy and the result that it has produced for the senior individuals that the report is required to cover, and to do so as simply and clearly as possible. Would this amendment assist that? I do not think so.
Viscount Younger of Leckie
Amendment 84AHAA seeks to require that companies report on high and low pay outside the board. Taking high pay first, the issue of high pay outside the boardroom is most relevant in the financial services industry, as was mentioned earlier, where poorly designed remuneration structures can incentivise excessive risk-taking. We remain committed to having the most transparent financial centre in the world and we have already taken significant steps forward. During ongoing negotiations with Europe over new regulations for the banking sector, we have argued strongly for further improvements to the disclosure of pay below board level. As a result, the current EU proposals would require banks to disclose the aggregate pay of senior managers and material risk-takers in bands, as well as further information about how much is paid in total in fixed and variable pay. We await the outcome of these discussions before deciding whether additional UK regulation is necessary.
The noble Lord, Lord Mitchell, raised the issue of disclosure of pay below board level in banks and asked why the UK does not regulate. We argue that it does not make sense to proceed with UK regulations until we know the precise details of the European rules. Once this is confirmed, we will decide whether we need to go further. It is not a major issue in other sectors. In our consultation on this, shareholders were clear that requiring all companies to report on high pay below board level would create an unnecessary regulatory burden and so we will not pursue this. The noble Lord raised the issue of pay below board level in non-banking sectors, which we acknowledge is an issue. In the end, pay reports are produced for shareholders, so they should be designed to include information that they want. We should not clutter them with information that they do not find useful. Shareholders and the Government share the view, however, that high pay below board level is not a major issue in other sectors. In our consultation, shareholders were clear that requiring all companies to report on high pay below board level would create an unnecessary regulatory burden, so we will not be pursuing it. That point was made eloquently by the noble Lord, Lord Kerr of Kinlochard.
One matter that shareholders are increasingly interested in is how board pay relates to that of the wider workforce. That is why companies will have to say more about how they have considered pay across the whole of the company workforce. They will also be required to publish the percentage increase in pay of the chief executive officer compared to that of the workforce. I can directly answer the question raised under the previous amendment by the noble Lord, Lord Lea of Crondall. It is something that investors are asking for and is comparable across companies, but we have no plans to mandate that companies adopt a standardised ratio for top to median pay because it is clear that this measure has limitations. It is difficult to compare between different companies and sectors. For example, an investment bank with many highly paid staff will have a much lower pay ratio than a supermarket.
New regulations will implement these proposals. Noble Lords will have the opportunity to debate these regulations later in the year. I conclude by making an overarching general point about trends in pay. It is pleasing to note, although I acknowledge that there is still much work to do, that in 2012 several firms, including Aviva, WPP, Centamin, Pendragon and Trinity Mirror failed to win majority backing for their pay reports, with several senior executives stepping down in the face of shareholder opposition. Voting results from AGMs in 2012 suggest that the average vote against the remuneration report was 8.9%, up from 6% in 2011. So, there is more work to be done but the trends are going in the right direction. I therefore ask the noble Lord to withdraw his amendment.
Viscount Younger of Leckie
84AHB: Clause 71, page 67, line 36, leave out from “which” to “, and” in line 38 and insert “the company becomes a quoted company”.
Viscount Younger of Leckie
My Lords, the majority of these amendments are minor and technical and designed to improve the clarity of the legislation. Amendment 84AHH is substantive and I shall make the case for it first. It amends new Section 226E of the Companies Act 2006, which would be inserted by Clause 72. New Section 226E imposes a potential liability on directors who authorise an unapproved remuneration or loss of office payment. This amendment will ensure that, as is consistent with other provisions in the Companies Act 2006, a director who acts honestly and reasonably may be relieved of this liability if a court, taking into account all the circumstances, decides that it is appropriate to do so.
Noble Lords will understand the need for there to be legal consequences in the event of a company making a payment to a director which has not been approved by shareholders. In the first instance, the company may seek to recover the unauthorised payment from the director who received it. However, if this is unsuccessful, the directors who authorised the payment can be held liable for any losses incurred as a result. The company or its shareholders may take action to recover these losses from them. These consequences will act as a deterrent to the minority of directors who might deliberately try to pay more than shareholders have approved. However, the Government recognise that directors may make honest and reasonable mistakes, either through misinformation or misinterpretation of the remuneration policy. This is recognised in other parts of the Companies Act, which deal with unauthorised payments and under which directors who act honestly, or take reasonable steps to ensure compliance, are not subject to liability.
Unless we make a similar provision with respect to remuneration payments the risk of liability could hang over remuneration committees and affect the pay-setting process. This risks making remuneration committees heavily dependent on lawyers and overly keen to agree broad, vague policies. More worryingly, there is a real risk that this could deter good people from taking up important and challenging roles on remuneration committees. Case law shows that the courts apply a rigorous test when assessing whether a director has acted honestly and reasonably, particularly when the director concerned is one of a large public company. As such, we are confident that this provision will ensure that those directors who should rightly be relieved may be, while ensuring that those who should be held liable, are not.
We have also proposed a handful of minor and technical amendments which will clarify the legal drafting of the Bill on three issues, which I will speak to in turn. Amendments 84AHB, 84AHC and 84AHK clarify how and when Clauses 71 to 74 affect companies that become quoted after these provisions come into force. Amendments 84AHE, 84AHF and 84AHK make clear the different procedures that should be followed in the event of unapproved payments in the form of shares, property and other undertakings of the company. Finally, Amendments 84AHD, 84AHJ, 84AHL, 84AHM and 84AHN tidy up the drafting by moving some of the provisions in Clause 74 into other clauses so that they may appear alongside the sections to which they apply. I hope that noble Lords will support this. I beg to move Amendment 84AHB.
Lord Mitchell
My Lords, we are very supportive of this amendment. It is clearly needed. I have only one question about whether the words “reasonably” and “honestly” are strong enough. A lot of lawyers would have a field day with this. I just ask the Minister to go away and think about whether we can perhaps have something a little more assertive, which would leave less latitude for a lot of lawyers to make lots of fees.
Viscount Younger of Leckie
I thank the noble Lord, Lord Mitchell, for that, and also for his contribution on this important issue. The proposed amendment to Section 226E ensures that those who should be rightly relieved of liability can be, while those who should be held liable will be. To answer his question about how one can define or further improve on the definition of “reasonable”, the concept of reasonableness has been thoroughly tested by the courts, which are very rigorous in judging directors. A court might take into account what advice a director had sought, what conversations had taken place, and what records were kept. Of course, it remains up to the court to decide and it will vary in each case. The court will take into account, for example, the full context of the situation. Therefore, the expectations of a “reasonable” director of a FTSE100 company with a strong compliance function and ease of access to professional advisers will be much higher than those of a director of a smaller quoted company. I hope that that takes matters forward and helps answer the noble Lord’s question. I also thank noble Lords for their understanding of the need for various minor and technical amendments.
“( ) Subsection (2) does not apply in relation to a quoted company before the first meeting in relation to which it gives notice under subsection (1).”
“(5A) Nothing in section 226B or 226C applies in relation to a remuneration payment or (as the case may be) a payment for loss of office made to a person who is, or is to be or has been, a director of a quoted company before the earlier of—
(a) the end of the first financial year of the company to begin on or after the day on which it becomes a quoted company, and (b) the date from which the company’s first directors’ remuneration policy to be approved under section 439A takes effect.”
“( ) In relation to a company that is a quoted company immediately before the day on which section 71 of this Act comes into force, section 439A(1)(a) of the Companies Act 2006 (as inserted by section 71(4) of this Act) applies as if—
(a) the reference to the day on which the company becomes a quoted company were a reference to the day on which section 71 of this Act comes into force, and(b) at the end of the paragraph (but before the “, and”) there were inserted “or at an earlier general meeting”.( ) In relation to a company that is a quoted company immediately before the day on which section 71 of this Act comes into force, section 226D(5A)(a) of the Companies Act 2006 (as inserted by section 72 of this Act) applies as if the reference to the day on which the company becomes a quoted company were a reference to the day on which section 71 of this Act comes into force.”
Viscount Younger of Leckie
Noble Lords will be aware that the administration procedure is the primary mechanism for effecting business rescues. It is important to recognise that the objective of administration, if the rescue of the company is not feasible, is to provide the best return for creditors. A pre-pack sale is merely a means of achieving that outcome and should therefore always be in the interests of creditors. I am most grateful to the noble Lord, Lord Mitchell, for his helpful description of pre-packs for the benefit of the House.
As the noble Lord said, pre-packs can be an effective way to the best outcome for creditors, enabling businesses to be rescued and preserving jobs, but we recognise that there can be scope for abuse. That scope is greatest where pre-pack sales are to connected parties, such as the directors or their families. Again, I am grateful for the anecdotal evidence given tonight by the noble Lord, Lord Mitchell. That is when most concerns are expressed, and it is vital that everyone involved has confidence that such sales are at fair value. We have been listening carefully to concerns expressed about the use of pre-packs, and Ministers have met with stakeholders to discuss the issue. I am aware that, as the noble Lord, Lord Mitchell, mentioned this evening, he recently met with the Minister for Employment Relations and Business Affairs, Jo Swinson, to discuss the issue. We have also invited those who have complained about the procedure to provide evidence of abuse, so that that can also be pursued.
I reassure noble Lords that work is already under way to improve the transparency about pre-pack sales. There is a statement of insolvency practice, SIP 16, setting out the information that has to be provided to creditors by insolvency practitioners. That is being strengthened to ensure that more information will be disclosed and that creditors will receive that information at an earlier stage. Insolvency practitioners will also have to confirm that a pre-pack sale is in the best interests of creditors. That should provide greater confidence that the pre-pack sale is justified. The Insolvency Service is proactively monitoring information disclosed under SIP 16 reports to establish whether there has been any abuse. Where there is evidence to suggest abuse, it is reported to be relevant regulatory body for action to be taken. Such action can include fines, sanctions and, ultimately, loss of the insolvency practitioner’s licence. The Insolvency Service will report on its findings in this regard.
We therefore already have measures in place to protect against abuse, and continue to monitor the pre-pack process to ensure that it is being used appropriately. However, I share many of the concerns raised by the noble Lord, Lord Mitchell, which I know have been expressed on other occasions in both this House and the other place.
I agree that an independent review into the issue would be beneficial. For that reason, I confirm that we will commission an independent review into pre-pack sales in late spring, once the strengthened SIP 16 is in place and after the Insolvency Service has reported on the findings from its monitoring.
On the review issue surrounding continuation of supply to insolvent businesses, this is now the subject of a Government amendment being debated shortly. We propose to consult on the issue prior to implementing reforms and I am satisfied that this will address the concerns in this area. In view of this assurance to commission an independent review into pre-pack sales, I hope that the noble Lord will agree that it would be unnecessary to introduce a statutory requirement to do so, and will therefore withdraw his amendment. I conclude by thanking the noble Lord, Lord Mitchell, for raising this important issue.
Lord Mitchell
My Lords, I thank the Minister for his words. I remember when we were in Grand Committee, he too had an anecdote on this same subject. I suspect that many other people have as well. I thank him for what he has said and for the Government’s plans for a review of this area. I beg leave to withdraw the amendment.
Viscount Younger of Leckie
My Lords, as I explained in Grand Committee, the idea behind the powers and Midata is simple: to give consumers the right to request their existing consumption and transaction data back from their suppliers in a portable, electronic format. I remind the House that are data already exist. We are not talking about collecting new data here.
In addressing Amendment 84AHNA, I reassure the noble Baroness, Lady Hayter, and the noble Lord, Lord Stevenson, who is speaking to this amendment, that I agree with them both that customers need to be protected from data misuse. Service providers under Midata must comply with all existing data security and protection rules. There are well-established complaint and redress schemes through the Information Commissioner’s Office in the core sectors where ombudsmen already operate. Data controllers must notify the Information Commissioner of data processing under Section 17 of that Act. Failure to do so is an offence.
However, there may be a need for further measures. This is why a consumer protection and trust work stream has been established under the Midata programme. A number of working groups made up of privacy experts, business, regulators and consumer groups are looking at a wide range of consumer issues. They have been tasked with identifying and recommending existing best practices and, where appropriate, new approaches that may be needed to ensure the security of individuals’ data. The groups are due to report in summer and any recommendations that they propose may need to be reflected in enforcement provisions made under these powers.
The role of third parties is important. Where citizens choose to provide data to a third party, or provide authorisation for a third party to request data on their behalf, the Data Protection Act applies. Under that Act, data controllers do not need to comply with a request for data unless they are satisfied that the requesting party has authority to access it. The consumer protection and trust working groups are looking at a wide range of issues that could emerge in a new Midata world and the Government will want to take their advice before acting. Their recommendations might include kitemarks, accreditation processes and complaint handling and redress schemes, as well as other proposals. The Government do not want to pre-empt any recommendations by setting out detailed protection measures in the Bill.
Turning to Amendment 84AHNB, I reassure noble Lords that the aim of our provision is to make data more accessible. We believe that Clause 75(5)(b)(ii) will have much the same effect as the limitation put forward by the noble Baroness, Lady Hayter, and the noble Lord, Lord Stevenson. The Government expect data to be provided back to consumers cheaply, and ideally for free, but businesses may initially incur additional costs in making data available electronically and the power allows businesses to charge to recoup their only cost. Noble Lords may be reassured to know that data that have been so far released under the Midata voluntary programme have been provided to customers free of charge.
On Amendment 84AHNC, I would like to deal with proposed new subsection (6A)(a) first. As I have said, businesses do not need to comply with a request for data unless they are satisfied that there is a valid claim of access under the DPA. Mechanisms that might enable this are being considered in the working groups, so this is still a matter under consideration. However, it is clear from our discussions with data controllers that they will not be willing to release data to third parties unless fully satisfied that it represents a legitimate request from an authorised party. The methodology may vary by sector but the additional measures proposed in this amendment do not appear necessary at this time.
In her proposed new subsection (6A)(b), the noble Baroness, Lady Hayter, has raised an interesting point but the Data Protection Act already affords protections in this area. I recognise the concerns in this respect, particularly around the possible actions of nefarious or rogue operators. However, access to Midata would not alter the current data protection law and any criminal activity could be dealt with appropriately, as it is now. In relation to proposed new subsection (6B), we are working with privacy experts, businesses, regulators and consumer groups in the working groups that I have mentioned. Legislation would be introduced only after a period of public consultation. Scope will exist in any regulations to place conditions on accessing data by authorised persons. Therefore, I believe the specific provisions set out in the amendment to be unnecessary.
Finally, Amendment 84AHND would extend the Information Commissioner’s powers of compulsory entry and audit to the private sector for the first time. This is primarily a matter for the Ministry of Justice and I am not convinced that such a major departure from current policy can be justified here. Its most likely effect would be to stifle innovation. As a result, services that help people to analyse their data will not be developed or may be withdrawn. The ICO already has investigation powers to require information from the private sector; we believe that these are sufficient in this case.
I would like to come back to the noble Lord, Lord Stevenson, on his assertion about claiming compensation through the courts. I think he deemed that to be unrealistic, but the power does provide for a non-court redress route. This could include empowering the ICO to address Midata complaints, if that helps the noble Lord. In the light of my responses, I ask the noble Lord, Lord Stevenson, on behalf of the noble Baroness, Lady Hayter, to withdraw the amendment that she tabled.
Lord Stevenson of Balmacara
I thank the Minister very much for that full response. I am glad that he recognises the issues we raised. We are probably pulling in the same direction on this. In particular, the work streams to which he referred are obviously very helpful and seem to be widely inclusive. I am glad to hear that they will report in the summer, at the point where they can inform any regulatory steps that are to be taken in consequence of this Bill. I think we were very glad to see a couple of other points but I will read them in Hansard and come back if there are any further points we need to make.
My concern is that there were a couple of times in the Minister’s response where he made great play of the fact that he felt that the companies to which requests for access to data are being made would have sufficient ability to determine whether the request was bona fide and therefore to be relied on, without having to have any other cross-regulatory approvals. I hear what he says on that but would like to read it in Hansard to be sure that I am right on it. At this stage, I would say only that that sounds a slightly unlikely premise on which to run what will be a very large amount of personal data, if this works, and be very widely spread across a number of possible providers and users. In that sense, it will therefore raise all the sort of concerns that the public have about how their data are being kept and looked after. At this stage, I would not like to push the amendment any further and I would like to withdraw it.
“(3) A statutory instrument containing (whether alone or with other provision)—
(a) regulations under section 75 which make provision by virtue of section 75(2)(d), or(b) regulations under section 76,may not be made unless a draft of the instrument has been laid before, and approved by a resolution of, each House of Parliament.(4) A statutory instrument which—
(a) contains regulations under section 75, and(b) is not an instrument to which subsection (3) applies,is subject to annulment in pursuance of a resolution of either House of Parliament.”
Viscount Younger of Leckie
My Lords, I now turn in more detail to the Government’s own amendment in this area by addressing Amendment 84AHP. I am grateful to have received the advice of the Delegated Powers and Regulatory Reform Committee. Following that advice, I have put forward an amendment to Clause 77 so that any enforcement measures made under the power provided in Clause 76 would be subject to the affirmative resolution procedure. I have also made changes to allow provisions relating to core sectors under Clause 75 to be introduced using the affirmative resolution procedure. This would apply only when regulations under Clause 76 or those applying to non-core sectors are simultaneously proposed. I have undertaken this because there will be times when instruments tabled under both clauses will probably be necessary. Enabling the instruments to be considered together and using the same procedure—the affirmative procedure—ensures efficient use of parliamentary time.
Having these provisions in the Bill will help to progress the Midata programme and deliver economic benefits in terms of consumer empowerment and growth. We continue to seek progress on a voluntary basis. However, we are continuing to discuss the potential enforcement regime and appropriate levels of funding with the Information Commissioner and other relevant regulators so that should the power in the Bill prove necessary, we will be in a position to provide protection to consumers. We believe that the Government’s amendment strikes the right balance between providing the flexibility to tailor enforcement appropriately and ensuring adequate parliamentary scrutiny.
“Power to add to supplies protected under Insolvency Act 1986
(1) The Secretary of State may by order amend section 233 of the Insolvency Act 1986 so as to add to the supplies mentioned in subsection (3) of that section any of the following—
(a) a supply of gas, electricity, water or communication services by a specified description of person;(b) a supply of a specified description of goods or services by a specified description of person where the supply is for the purpose of enabling or facilitating anything to be done by electronic means.(2) The Secretary of State may by order amend section 372 of that Act of 1986 so as to add to the supplies mentioned in subsection (4) of that section any of the following—
(a) a supply of gas, electricity, water or communication services by a specified description of person;(b) a supply of a specified description of goods or services by a specified description of person where the supply is for the purpose of enabling or facilitating anything to be done by electronic means.(3) The power to make an order under this section includes power to make incidental, supplementary, consequential, transitional or saving provision, including doing so by amending any enactment.
(4) An order under this section must be made by statutory instrument.
(5) A statutory instrument containing an order under this section may not be made unless a draft of the instrument has been laid before, and approved by a resolution of, each House of Parliament.
(6) In this section—
“enactment” includes—
(a) an enactment contained in subordinate legislation (within the meaning of the Interpretation Act 1978),(b) an enactment contained in, or in an instrument made under, an Act of the Scottish Parliament, and(c) an enactment contained in, or in an instrument made under, a Measure or Act of the National Assembly for Wales; and“specified” means specified in the order.”
Viscount Younger of Leckie
My Lords, these amendments respond to points raised by the noble Lord, Lord Stevenson, in Grand Committee. I am most grateful to him for raising this important issue. It is relevant to this Bill because it will help businesses, especially those needing to be rescued, and as such supports the Bill’s themes. The amendments contain powers that, when exercised, will assist businesses in insolvency procedures by increasing the chance of business rescue. Alternatively, where there is no chance of a rescue they may help to achieve a better return for creditors than would be delivered by an immediate liquidation or bankruptcy.
Amendments 84C to 84E contain powers to render void contractual terms that allow an essential supplier in the utility and IT sectors to withdraw supply from an insolvent business. These powers would also prevent suppliers in these sectors taking advantage of the insolvency by unfairly and unreasonably increasing charges for that supply. Some have described such demands as “ransom payments”, saying that where they are made, that supplier gains an unfair advantage over other creditors in the insolvency. They can act as a barrier to rescue and may force businesses to close down, causing unnecessary job losses.
Amendment 84B provides an enabling power relating to IT suppliers and those that provide or sell gas, electricity, water or communication services that are essential to business. By communication services, we mean services such as telephone, fax or broadband access that may be provided to a business. The amendment would add such supplies to an existing list of essential suppliers who must continue to supply and who may not demand payment of a pre-insolvency debt as a condition of that supply. They may, however, seek a personal guarantee from the insolvency practitioner as a condition of continuing to supply the insolvent business.
Lord Stevenson of Balmacara
I start by warmly welcoming the amendments tabled by the Minister, which respond in a very positive fashion to the amendment that I moved in Committee. I had no idea I was being so persuasive. That was a trick I should learn in other places. I clearly have something that I did not know I had. The points that the noble Viscount went on to make are also well taken. Even so, there are a couple of things that we would like to suggest are also taken into account.
For the reasons outlined, the necessity of IT equipment to the continuity of a business in difficulty cannot be overstated. Frankly, without this, there is no chance of any continuation, or of selling on, and thus of maintaining economic activity and jobs. IT is today as central as supplies of water and utilities. Therefore we also welcome the Government’s amendments to add on-sellers of utilities to the list of supplies that must continue. Given our desire to enhance business rescue, especially in these difficult times when banks are less than helpful, this change to prevent certain suppliers withdrawing services to struggling businesses is a significant step forward. We are delighted that the Government heard this plea.
The one area that we wish to raise, covered in the amendments that have been tabled, is the new mandatory requirement for a personal guarantee from the office holder—the insolvency practitioner—to cover essential supplies. Subsection (3) of government Amendment 84C permits the supplier to terminate the supply unless an insolvency office holder personally guarantees any charges arising from the continuation of the supply. This is a move away from the current legislation, which provides for an optional personal guarantee.
Although Section 233 of the 1986 Insolvency Act contains an optional guarantee in subsection (2)(a), when the Bank of England, FSA and HMT introduced equivalent provisions to protect financial institutions, this optional guarantee provision was removed, and there are now no provisions for such personal guarantees. This position for financial institutions is right, as we see no case for a personal guarantee from an office holder, since an insolvency practitioner should not be subject to personal liability when acting as the agent for the company.
Contrast the situation affecting directors, who are not mandatorily subject to such personal liability even though they have a similar relationship to their company. Such a requirement for a personal guarantee appears particularly inappropriate in respect of certain types of insolvency, such as for a supervisor in a voluntary arrangement who has no control over the business. The mandatory guarantee requirement in the government amendment is therefore a backwards step, and our amendments are to align the provisions with the recent regime for financial institutions, by removing the requirements for mandatory personal guarantees from office holders.
Our first two amendments also take this opportunity to amend the 1986 Insolvency Act to remove the optional guarantee from Section 233(2)(a) so that the provisions for essential services in the 1986 Act are brought into line with the protection regime for financial institutions. It is hard to understand the requirement for a personal guarantee, as there is no reason why insolvency practitioners should be subjected to personal liability when acting as the agent of the company. There is a real danger that such a requirement would reduce use of this tool with a real threat, therefore, to business rescue.
The existence of a mandatory personal guarantee would be particularly detrimental in CVAs where the management retains control of the business with the insolvency practitioner acting as supervisor. Given the limited control insolvency practitioners have over the business, with no control over the assets, they would be exposing themselves to significant risk by providing a personal guarantee. It is very unlikely that any insolvency practitioner would, in fact, go down this route. I should add that the proposed 28-day maximum credit period in subsections (2)(c) and (3)(c) of the new clauses is a reasonable compromise. Thus the demand for an additional personal guarantee seems excessive. We know the Government share our desire to maximise company rescues—often with the role of an insolvency practitioner as key. We trust they will not undermine their otherwise welcome amendments by the introduction of this counterproductive measure. I beg to move.
Viscount Younger of Leckie
My Lords, these amendments seek to amend the powers being introduced by the government amendments, to remove an important protection for suppliers. That protection is provided in the Government’s amendment by allowing suppliers to require a personal guarantee from an insolvency practitioner where they are prevented from exercising a contractual right to terminate supply. Not only does the amendment put forward by the noble Lord remove the protection provided by the government amendment, it also seeks to take away the right of a supplier to a personal guarantee in situations where it already exists in legislation.
I should make clear that essential suppliers who may be required to supply the insolvent business are very likely to be owed money within the insolvency. They are most unlikely to be repaid any more than a small proportion of that claim through realisations within the insolvency. Therefore the Government think it is only right that where such suppliers are obliged to continue supplying the insolvent business, they do so knowing that they will be paid.
The new powers do include other safeguards for the supplier, but none of these guarantees payment of the post-insolvency charges. We do not expect that a supplier will always require a personal guarantee, but we do think that, as is the case as the legislation currently stands, they should be entitled to one where they feel it necessary. It should be noted that the right to request a personal guarantee from the insolvency practitioner is a protection that utility providers have had since 1986, where they are requested to continue supplying the insolvent business.
Removing this right at a time when we are extending the requirement to provide supplies may send the wrong message. However, noble Lords will be aware that the powers do contain the ability to provide for exceptions to the right to request a personal guarantee. While it is anticipated that this would only be exercised in certain limited circumstances, it does provide for some flexibility in the matter.
There is a balance to be struck here. The powers provided by the government amendments will prevent essential IT and utility providers making ransom demands upon insolvency professionals. This can only help the chances of insolvency practitioners being able to rescue struggling businesses. However, they do interrupt normal contractual rights and, as such, we believe it is right to provide safeguards, of which the right to a personal guarantee is one of the most important.
I thank the noble Lord, Lord Stevenson, for his contribution. I am grateful for his comments and reassure the House that the Government take these issues very seriously. The government amendments demonstrate that the Government are committed to seeking improvements to the insolvency regime where there are clear reasons for doing so. However, the Government consider that the amendments suggested by the noble Lord would unfairly remove necessary protections for suppliers. I therefore hope that the noble Lord will agree to withdraw his amendment.
Lord Stevenson of Balmacara
My Lords, I agree that the Government are making good steps in this area. I do not want to in any sense take away from them the change that they are introducing through their substantive amendment. I agree that the insolvency processes in the UK generally are very good. They may be slightly better in Scotland, which is moving ahead with another Bill, and I hope that the lessons that Scotland is going to teach us are learnt in the processes in England and Wales.
It is really a question of whether it is appropriate to expose those who are trying to help companies get back on their feet and continue to operate to having to give a personal guarantee. On a very superficial level, it seems to be completely at variance with the overall process that we are trying to introduce. The fact that it may exist in legislation at present does not make it right. Given that the Government have legislated to make sure that these personal guarantees no longer exist in financial companies, it seems slightly odd that we are requiring them for SMEs and smaller companies, which often go into voluntary administration or some other form and then come out again. To hamper that by curtailing the willingness of an IP to get involved does not seem to be right.
However, there is a balance to be struck. I ask the Government to think very carefully about this and to look at it again. I am very happy to have further discussions if that would be helpful. At this stage, I beg leave to withdraw the amendment.
“Corporate insolvency: power to give further protection to essential supplies
(1) The Secretary of State may by order make provision for insolvency-related terms of a contract for the supply of essential goods or services to a company to cease to have effect where—
(a) the company enters administration or a voluntary arrangement under Part 1 of the Insolvency Act 1986 takes effect in relation to it, and(b) any conditions specified in the order are met.(2) The order must include provision for securing that, where an insolvency-related term of a contract ceases to have effect under the order, the contract may be terminated by the supplier if—
(a) an insolvency office-holder consents to the termination,(b) a court grants permission for the termination, or(c) any charges in respect of the supply that are incurred after the company enters administration or the voluntary arrangement takes effect are not paid within the period of 28 days beginning with the day on which payment is due.(3) The order must include provision for securing that, where an insolvency-related term of a contract ceases to have effect under the order, the supplier may terminate the supply unless an insolvency office-holder personally guarantees the payment of any charges in respect of the continuation of the supply.
(4) The order may provide for exceptions to the right of a supplier to terminate a supply under provision made by virtue of subsection (3).
(5) The order must (in addition to the provision mentioned in subsections (2) and (3)) include such other provision as the Secretary of State considers appropriate for securing that the interests of suppliers are protected.
(6) A contract for the supply of essential goods or services is a contract for a supply mentioned in section 233(3) of the Insolvency Act 1986.
(7) An insolvency-related term of a contract for the supply of essential goods or services to a company is a provision of the contract under which—
(a) the contract or the supply would terminate, or any other thing would take place, because the company enters administration or the voluntary arrangement takes effect, (b) the supplier would be entitled to terminate the contract or the supply, or to do any other thing, because the company enters administration or the voluntary arrangement takes effect, or(c) the supplier would be entitled to terminate the contract or the supply because of an event that occurred before the company enters administration or the voluntary arrangement takes effect. (8) In this section, “insolvency office-holder” means—
(a) in a case where a company enters administration, the administrator;(b) in the case where a voluntary arrangement under Part 1 of the Insolvency Act 1986 takes effect in relation to a company, the supervisor of the voluntary arrangement.”
“Individual insolvency: power to give further protection to essential supplies
(1) The Secretary of State may by order make provision for insolvency-related terms of a contract for the supply of essential goods or services to an individual to cease to have effect where—
(a) a voluntary arrangement proposed by the individual is approved under Part 8 of the Insolvency Act 1986, and(b) any conditions specified in the order are met.(2) The order must include a condition that ensures that an insolvency-related term of a contract for the supply of essential goods or services to an individual does not cease to have effect unless the supply is for the purpose of a business that is or has been carried on by the individual or with which the individual has or had another connection of a kind specified in the order.
(3) The order must include provision for securing that, where an insolvency-related term of a contract ceases to have effect under the order, the contract may be terminated by the supplier if—
(a) the supervisor of the voluntary arrangement consents to the termination,(b) a court grants permission for the termination, or(c) any charges in respect of the supply that are incurred after the voluntary arrangement proposed by the individual is approved are not paid within the period of 28 days beginning with the day on which payment is due.(4) The order must include provision for securing that, where an insolvency-related term of a contract ceases to have effect under the order, the supplier may terminate the supply unless the supervisor of the voluntary arrangement personally guarantees the payment of any charges in respect of the continuation of the supply.
(5) The order may provide for exceptions to the right of a supplier to terminate a supply under provision made by virtue of subsection (4).
(6) The order must (in addition to the provision mentioned in subsections (3) and (4)) include such other provision as the Secretary of State considers appropriate for securing that the interests of suppliers are protected.
(7) A contract for the supply of essential goods or services is a contract for a supply mentioned in section 372(4) of the Insolvency Act 1986.
(8) An insolvency-related term of a contract for the supply of essential goods or services to an individual is a provision of the contract under which—
(a) the contract or the supply would terminate, or any other thing would take place, because the voluntary arrangement proposed by the individual is approved, (b) the supplier would be entitled to terminate the contract or the supply, or to do any other thing, because the voluntary arrangement proposed by the individual is approved, or(c) the supplier would be entitled to terminate the contract or the supply because of an event that occurred before the voluntary arrangement proposed by the individual is approved.”
“Sections (Corporate insolvency: power to give further protection to essential supplies) and (Individual insolvency: power to give further protection to essential supplies): supplemental
(1) The power to make an order under section (Corporate insolvency: power to give further protection to essential supplies) or (Individual insolvency: power to give further protection to essential supplies) includes—
(a) power to make different provision for different cases;(b) power to provide for a person to exercise a discretion in a matter;(c) power to make incidental, supplementary, consequential, transitional or saving provision;(d) power to make any provision that may be made by the order by amending the Insolvency Act 1986 or any other enactment.(2) An order under either of those sections may not be made so as to have effect in relation to contracts entered into before the order come into force.
(3) An order under either of those sections must be made by statutory instrument.
(4) A statutory instrument containing an order under either of those sections may not be made unless a draft of the instrument has been laid before, and approved by a resolution of, each House of Parliament.”
(5) In this section, “enactment” has the same meaning as in section (Power to add to supplies protected under Insolvency Act 1986).”