House of Commons - Trade and Industry

Select Committee on Trade and Industry Second Report

SECOND REPORT

The Trade and Industry Committee has agreed to the following Report:—

DRAFT INSOLVENCY BILL

I INTRODUCTION

1. In January 1977 a wide- ranging review of insolvency law and practice was set up by the then Secretary of State for Trade and Industry, Mr Edmund Dell, under the chairmanship of Sir Kenneth Cork. Its terms of reference included consideration of "less formal procedures as alternatives to bankruptcy and company winding up proceedings in appropriate circumstances." Its magisterial Report, published in June 1982,[1] included proposals for two new or revised procedures:

administration, under which a company in trouble could seek an Order from the court for the appointment of an external "administrator" to manage the company, whether with a view to rescue of the business, its disposal as a going concern, or disposal of its assets, so as to provide creditors with a better return than would be obtained under liquidation:
company voluntary administration (CVA), whereby a company, whether or not insolvent or facing insolvency, could make an arrangement with its creditors and members for satisfying its debts, on the basis of acceptance by creditors of a proposal made by the directors. The company would be able to continue to trade under the control of the directors and the general supervision of a "supervisor". A CVA could have the same purposes as an administration, including a liquidation, but would need Court sanction.

Both schemes were implemented in the 1985 Insolvency Act, subsequently consolidated in the 1986 Insolvency Act, and implemented in detail by the 1986 Insolvency Rules.

Moratorium

2. Administration was conceived as an essentially temporary measure. Its main function was to impose a freeze, or "moratorium", on the enforcement by unsecured creditors of their rights. An administration order is granted by a court on the basis of a petition normally from a company or its directors and an independent report on the company's position. Although a secured creditor can in practice prevent the Order by appointing an administrative receiver,[2] once an Order is made neither secured nor unsecured creditors can enforce their debts, so that the prospects of sale of the company as a going concern or its reorganisation cannot be undermined by the actions of a single creditor. Such a moratorium was not available for companies entering "cold" into a CVA; to obtain the benefits of a moratorium therefore requires the expense and relative complexity of administration, to provide the shield of a moratorium behind which efforts can then be made to bring forward proposals to put to a creditors' meeting. As one expert academic commentator has put it -

1992-1993 working party

3. In November 1992, as part of a wider review of company law, a working party was set up by the Insolvency Service to explore why these new company rescue provisions brought into effect by the 1986 Insolvency Act had been so little used, although with apparent success when they were used. The working party identified eight barriers to the greater use of these provisions.

Lack of a moratorium on creditors' rights in reaching a CVA

Difficulties in raising new money to fund continued activities while a CVA is being negotiated, giving rise to the idea of statutory super priority for such lenders

The power of secured creditors (generally banks) to put in an administrative receiver to recover the value of their security, giving rise to the proposal that secured creditors should also be bound by the proposed moratorium and so be unable to appoint a receiver, and in addition have to give seven days notice of an intention to appoint a receiver, so that the directors would be able to prevent it by filing for a CVA

Ignorance of the existence of the rescue procedures, among directors and insolvency practitioners; half of the CVAs launched up to 1993 had been supervised by just 4 insolvency practices

Association of rescue provisions with "insolvency" law and practice

The rescue being attempted too late

Taxation issues

The possibility of "distress" being levied against a company, leading to the proposal that this should be explicitly ruled out during a moratorium

October 1993 proposals

4. In October 1993 the Insolvency Service set out some proposals intended "to ease companies' entry into rescue procedures", including in particular the introduction of a short moratorium on creditors' actions to give time for a CVA to be put together.[4] The principal proposal was for a moratorium, to be brought into effect following a statement by an insolvency practitioner to be described as a "nominee" that there was a reasonable prospect of a successful CVA. The proposed moratorium would bind all creditors. It would last initially for no more than 28 days and then either be extended by agreement of the creditors for a maximum of another two months or be in effect converted into a CVA. If there were no agreement the company could be put into liquidation or administration or receivership. As an additional response to the barriers identified in the working party's deliberations, secured creditors would be obliged to give 7 days notice of their intention to appoint a receiver. A number of other issues were consulted on , including the possibility of super-priority to be given to creditors during the moratorium or subsequent CVA.

April 1995 proposals

5. In April 1995 the Insolvency Service published revised proposals, together with a summary of the responses to the October 1993 paper.[5] The 7 day notice of the intention to appoint a receiver was reduced to 5 working days. Provisions were proposed to prevent disposal of assets or other abuse by directors during that period of notice, and during a moratorium, in response to the banks' concerns that the assets over which they might hold charges would be dissipated. It also provided that a meeting of creditors could not approve a proposal which would affect the rights of secured creditors without their creditors' concurrence. The idea of statutory super-priority was dropped. In other respects the 1995 proposals broadly followed those set out 18 months earlier. The proposals were published in 28 numbered paragraphs, with a detailed commentary on each, while also raising detailed points for further consultation, such as the choice of the nominee and the rights of secured creditors to challenge or change the appointment. Responses were sought to 23 specific Questions, with the warning that representations would be treated as a matter of public record. No further proposals were published however; nor were the results of the further consultation apparently made public. The subject seems to have been shelved, leaving some puzzlement among those consulted as to why there had been no outcome.[6]

Draft clauses

6. In December 1998 the Competitiveness White Paper restated the new Government's commitment to "legislate for a stay on creditors' action to allow a business in difficulties up to three months to come to an arrangement with its creditors",[7] alongside two reviews into company rescue and the stigma of bankruptcy. The first public indication of the draft legislation was not however until late September1999, when the Insolvency Service circulated to a dozen or so professional organisations "draft clauses" accompanied by brief explanatory notes headed "Proposed Insolvency Bill." We procured a copy of the Clauses and sought copies of the responses from those consulted. The clauses cover not only the moratorium and associated measures, including powers to impose a period of notice of receivership, but also a new procedure for disqualification of company directors and two measures tidying up other aspects of insolvency law. The accompanying letter described the process as being "a short technical consultation". Responses were sought within 4 weeks, by 19 October. On 6 October the Chairman sought from the Permanent Secretary at the DTI an explanation of this way of proceeding, seeking assurance that it was not intended to be a means of circumventing or discouraging Committee scrutiny of draft bills. The Permanent Secretary assured us on 20 October that this was not the case: explained that the first draft of the Clauses had only been produced in "late July/early August": and that neither the Government as a whole nor departmental Ministers had reached decisions on the timing of the Bill. He also confirmed however that it was "Ministers' hope" to be able to introduce an Insolvency Bill "at a relatively early stage in the 1999/2000 session".[8] On 17 November the Queen's Speech announced a bill to "assist the rescue of viable businesses in short term difficulties, and improve the procedure for disqualifying unfit company directors".

7. We are left with in some unease at the way this draft legislation has been handled. If draft clauses were available in "late July/early August" they could have been put out then for proper consultation, however inconvenient the timing from Parliament's point of view. We noted in our recent Report on the draft Electronic Communications Bill, itself produced on 23 July with virtually no notice, that "draft legislation published with little or no notice...creates unnecessary obstacles to Committee scrutiny".[9] We have the impression that the department would have been more than content if we had not examined this piece of draft legislation. The partial consultation was not only brief but inevitably left some of those affected excluded. A number of respondents felt that the proposals in effect constitute a draft bill and so should have received wider circulation and been given a longer period for responses.[10] If the Government is serious about exposing draft legislation to parliamentary scrutiny, it is time that it recognised that such scrutiny is likely to be more useful the more time and notice is given: and that Committee scrutiny can assist the process of legislation at later stages.

Reviews

8. The two broader reviews initiated by the Government into company rescue and personal bankruptcy are due to be completed soon. The company rescue review, which was originally scheduled to be completed by July 1999,[11] published a consultation paper in September 1999 seeking responses by 12 November 1999. The report to Ministers is now due by the end of December 1999, and Ministers have given an undertaking that a further consultation document, presumably containing specific proposals, will be published thereafter.[12] There has been some partial revelation of selected morsels of outline proposals — on bankrupts' retention of assets for house purchase or amendment of the law on exclusion of bankrupts from various public offices, for example. This is not helpful in providing for proper scrutiny of the full context of proposals. We recommend that the full reports of both the company rescue and bankruptcy reviews be published, together with the results of commissioned research.

Committee inquiry

9. We heard oral evidence on 10 November 1999 from a number of the bodies directly consulted by the DTI's Insolvency Service — the Society of Practitioners of Insolvency (SPI), the British Bankers Association (BBA), the Institute of Chartered Accountants of England and Wales (ICAEW), the Law Society, and the Confederation of British Industry (CBI) — as well as an independent expert, Professor Julian Franks of the London Business School, and from the Insolvency Service itself. The written submissions from these and other bodies are printed with the evidence. We are grateful to those witnesses who appeared before us at relatively short notice and responded in some detail to the draft clauses circulated by the Government.

10. We have not sought to set out all the detailed points made by the respondents. We publish all the responses of which we are aware, which set out a number of detailed points which a Standing Committee will no doubt wish to pursue. Nor have we reprinted the draft clauses in full, although we are aware that they have not been fully published by the department. They run to 43 pages, excluding the accompanying notes, which we have published,[13] and the draft regulatory impact assessment. For ease of reference we set out below our descriptive list of the provisions.

It would be of assistance if the Government made available a paper following presentation of the Bill of the changes it has made from the draft.

Clause 1	is a paving provision for Schedule 1, which sets out the detailed provisions for a moratorium, principally under paragraph 4, which inserts a new Schedule A1, of 43 paragraphs, in the 1986 Insolvency Act.
Clause 2	is a paving provision for Schedule 2, which amends provisions on company voluntary arrangements.
Clause 3	is a paving provision for Schedule 3, which amends provisions on individual voluntary arrangements.
Clause 4	seeks to amend the 1986 Insolvency Act to allow the Secretary of State to recognise bodies whose members may act as a nominee or supervisor.
Clause 5	makes minor amendments to the 1986 Company Directors Disqualification Act.
Clause 6	provides for the introduction of a system under which the Secretary of State may accept disqualification undertakings from the Secretary of State equivalent to a disqualification imposed by a court.
Clause 7	facilitates the extension of Clauses 5 & 6 to Northern Ireland.
Clause 8	is a paving provision for Schedule 4, which makes a number of minor amendments.
Clause 9	amends the provisions in s.218 of the 1986 Insolvency Act in relation to the reporting by insolvency practitioners of suspected offences.
Clause 10	gives the Secretary of State power to make an order requiring the giving of a warning notice by a secured creditor of appointment of an administrative receiver.
Clause 11	makes an amendment to the law on the insolvent estates of deceased persons.