HC Deb 19 October 1981 vol 10 cc111-7 '(1) In section 293 of the 1948 Act (meeting of creditors) the following subsection shall be inserted after subsection (5):—

  1. "(5)(A) No resolution passed by the company shall be valid unless endorsed by a meeting of the creditors held in pursuance of subsection (1) of this section."

(2) In section 293(6) for the words from "the company, directors or director" to the end of the subsection there shall be substituted:—

  1. the company shall be liable on conviction on indictment to a fine; and on summary conviction to a fine not exceeding one thousand pounds; and
  2. the director or directors, as the case may be, shall be liable on conviction on indictment to a term of imprisonment not exceeding two years or a fine, or both; and on summary conviction to a term of imprisonment not exceeding six months, or a fine not exceeding one thousand pounds, or both".'.—[Mr. Clinton Davis.]

Brought up, and read the First time.

Mr. Clinton Davis

I beg to move, That the clause be read a Second time.

Mr. Deputy Speaker

With this we shall discuss new clause 32—Minimum notice of meeting for voluntary winding up.

Mr. Davis

New clause 5 deals with the esoterically entitled centerbinds. We are seeking to deal with an abuse which has continued for a considerable time. I concede that it is the subject of detailed investigation by the committee led by Sir Kenneth Cork. I am sure that he will not take offence if we make some progress. I do not believe that we would be pre-empting his conclusions in any material way.

Something must be done to remedy an abuse which has gained some attention, particularly in the "Checkpoint" programme in the last year.

I wish to deal briefly with how the abuse developed. It originated with a case called Re centerbind Limited which came before the Chancery Division in 1966 and was dealt with by Mr. Justice Plowman. I read the headnote of the case in Committee. I think it important for the sake of completeness to read it again. It said: The shareholders in a company, who were three in number, accepted short notice for an extraordinary general meeting of the company to be held on the following day, when an extraordinary resolution for winding-up was passed and the applicant was appointed liquidator. No declaration of solvency had been made; and no meeting of creditors had been held, but a creditors' voluntary winding-up was contemplated. The applicant forthwith launched a motion for an order staying further proceedings on a distress levied by the respondents, the Commissioners of Inland Revenue. On the question whether the applicant had locus standi to bring the motion or whether his purported appointment as liquidator was a nullity by reason of section 294 and section 293(1) of the Companies Act 1948, it was held that the applicant having been nominated or appointed liquidator by the members of the company became liquidator and, the creditors not having brought his appointment to an end, he had locus standi to bring the motion".

The result of that case led to the development of the technique of centerbinding.

There is a penalty to deal with the abuse set at a maximum of £1,000 on summary trial, but that has been the case only since 1980. Before that it was £100. The abuse is represented by the fact that, if 95 per cent. of the shareholders of a company call an extraordinary general meeting of shareholders, they can declare a creditors' voluntary liquidation—although, significantly, no creditors are present—but cannot call a members' voluntary winding-up as that would require them to make a declaration of solvency. That is why they do not do that. The shareholders can appoint a liquidator at once and ask him to liquidate the company.

It is true that the 1948 Act requires a creditors' meeting to be called within 24 hours, and failure to do so carries a maximum fine of £1,000 on summary trial. As far as I know, there are no examples of any trials on indictment. The person appointed liquidator still remains in that position, even if a breach of the criminal law has been committed. The mischief is that he can dispose of whatever assets he wishes at whatever price he thinks appropriate, and that is that. That can include, and has done in past practice, the selling of the principal assets to associates of the shareholders. A new company is established in exactly the same premises, with the same directors and other personnel who were behind the original company. Although it is true that any subsequent creditors' meeting, if one is called, can overthrow the appointment of the liquidator, the damage has already been done. It is a sad state of affairs that large private banks have condoned such action in consideration of the settlement of a secured loan. It represents a means to advance ahead of Crown preference and other creditors. It does not reflect well on the banks that have been involved in such a practice.

I understand that the Department of Trade has carried out some investigations into a well-known centerbinder, Mr. Maurice Sidney Caplan, who is known as Hissing Sid. His company, Chancery Lane Registrars Limited, proclaims to be a liquidation specialist. It is run by Mr. Caplan and two associates, Mr. Paul Davies—a solicitor—and a gentleman who purports to be something of an accountant, Mr. Stephen Willard Pepler. These gentlemen have some extraordinary qualifications to be involved in affairs of this sort.

Mr. Caplan was involved in nine business ventures which ended in bankruptcy. He personally has been bankrupt. He has served two prison terms for handling stolen goods and for defrauding his creditors. I suppose that that qualifies him uniquely to carry on such a form of business. 9.45 pm

Mr. Pepler was involved in the David Lion mortgage and finance group, which came to an ignominious end. He served 18 months' imprisonment for defrauding five banks.

Mr. Davies does not emerge all that well. He has been fined £1,000 for uttering a forged document.

I gather from some inquiries made by The Sunday Times that all three gentlemen assured a reporter of The Sunday Times that they were now going straight. There we have it. The interesting feature about Hissing Sid is that he claims that he has all the answers to these problems. He says that he knows his way round the Bankruptcy Act. His firm's speciality is the centerbind version of the creditors' voluntary liquidation.

The clients that it acquires are usually provincial family businesses. It is fair to say that they have welcomed the attentions of Mr. Caplan—Hissing Sid and his associates. Once Chancery gets in, it checks the books. If it finds that the client is insolvent, it warns him that he is committing a criminal offence by continuing to trade and urges him to convene an immediate meeting to declare a creditors' voluntary liquidation and to appoint Chancery Lane Registrars Ltd. as the liquidators.

Mr. Caplan says that everything is legal and above board. He is reported as saying that he knows the insolvency laws backwards and that they are so loose and flexible that his firm can drive a coach and horses through them.

That sort of conduct must end. A great deal of damage is being done by those who have rejoiced in the abuse of company law and of the laws on insolvency. I know that the Government have some hesitation about new clause 5. I hoped that they would be prepared to be more ambitious. However, I have reason to believe that they will be prepared to support new clause 32. We must be thankful for small mercies.

I hope that the Government will ensure that when the Cork report is published—I hope that will not be too long now—they will embark on legislation. There are many abuses beyond those which I have catalogued which need to be dealt with urgently. I hope that the Government will make a better shot at that legislation than they have in the Bill. However, I must not be churlish, because I believe that they are prepared to accept new clause 32.

The clause overcomes some of the difficulties to which I have alluded. It would require a company to give at least seven days' notice of the meeting at which the winding-up resolution was to be proposed, and failure to comply would represent a criminal offence. The effect would be that the creditors would receive at least seven—possibly eight—days' notice of the meeting. That should give them time to consider whether they wish to nominate a liquidator or to attend the meeting.

It is possible that some difficulties could arise from opting for that course, but we must look at where the greatest benefit lies. I am convinced that the new clause would provide greater benefit and protection to creditors. I hope that the Government will accept the clause and that the Minister will be able to give us the assurances about the broader aspects of insolvency law that I requested a moment ago.

Mr. Eyre

The hon. Member for Hackney, Central (Mr. Davis) has set down two new clauses which propose alternative methods of strengthening the powers of creditors in a creditors' voluntary winding-up. It is sensible to deal with both at the same time. In Committee I said that it would be preferable to await the outcome of public discussion of and consultation on the recommendations of the Insolvency Law Review Committee before considering changes in the voluntary liquidation practice.

The hon. Member for Hackney, Central emphasised the complexity of these matters when he referred to the activities of Hissing Sid. That complexity makes effective change essential. Like the hon. Member, I look forward to the report of the Insolvency Law Review Committee under the chairmanship of Sir Kenneth Cork. An intensive period of consultation will follow because it is essential to get those matters right. We will then certainly wish to deal with those matters in a proper and comprehensive way. I said that in the meantime I would look favourably on any procedural improvements that were proposed.

The principle of the Companies Act 1948 provisions is that creditors should have immediate notice of the company's intention to wind up and appoint a liquidator. Section 293 requires the company to advertise the convening of the creditors' meeting to take place on the day or the day next following the members' meeting. Section 294 provides for the creditors' nominee to be appointed as liquidator in the event of the creditors and the members appointing different people. I recognise that problems arise when the company resolves to wind up at short notice, and there is concern about possible abuses of this procedure.

The difficulty with the new clause 5 approach is that if creditors fail to endorse the company's resolutions or nominate their own liquidator, the company would be left in a state of limbo, which would defeat the object of the exercise. New clause 32, however, solves the problem of short notice by requiring the company to give at least seven days' notice of the meeting at which the winding-up resolution is to be proposed. I am glad to accept it.

I share the concern of the hon. Member for Hackney, Central about defaulting directors, but I cannot go so far as to recommend imprisonment as a penalty for directors who fail to comply with the provisions for calling meetings. However, I trust that the publicity generated by the discussions here and in another place will make creditors aware of their rights and company directors aware of the financial penalties which they may suffer if they fail to carry out their statutory obligations when holding those meetings.

Mr. Clinton Davis

I accept what the Minister says about imprisonment being an inappropriate sanction. In the overwhelming majority of cases it is simply a breach of duty in failing to call a meeting. Would not the Minister consider that all the circumstances must be taken into account and that where a fraudulent purpose has been demonstrated perhaps imprisonment would not be an inappropriate sanction?

Mr. Eyre

I agree with that, but the hon. Gentleman knows that it would be necessary to establish the element of fraud and to incorporate it in the definition of the offence. These matters are complex and ought to be dealt with comprehensively. That is one of the major purposes of the Cork review and I look forward very much to dealing with this problem properly.

Mr. Clinton Davis


Mr. Eyre

I saw Sir Kenneth and he tells me that the committee will be reporting very shortly. I ask the hon. Gentleman, in the light of my remarks, to ask leave to withdraw new clause 5. He has made a very useful contribution by the argument that he has developed on new clause 32, and I recommmend the House to accept that clause. I assure the hon. Gentleman of my earnest desire properly to get to grips with the problem in an approach based on the Cork committee's report.

Mr. Trotter

Does my hon. Friend appreciate that if the law is changed in this way, on a one-off basis, without waiting for the Cork report, there may be some cases where the creditors of the company will suffer? There are cases where it is very much in the interests of the general body of the creditors for the company to be put into immediate liquidation. The law at present does not provide for that, and the new clause would bring in, under clause 32, a delay of seven days rather than the present 14 days.

There will be cases where the ability in future to bring a company into immediate liquidation will cause loss to the creditors, and I would have hoped that it could be considered in a more leisurely way in the light of the general findings of the Cork committee, because it is a very technical insolvency matter. I know that the House is seeking to avoid cases where shady business is carried out so speedily that the assets have disappeared from view before any proper hold on them can be obtained by the properly appointed liquidator. These cases are very rare, but there are at least as many cases where there is a need for immediate action if the assets of the company are to be saved. I hope that my hon. Friend will bear that in mind.

Mr. Eyre

The remarks of my hon. Friend the Member for Tynemouth (Mr. Trotter) illustrate the difficulties of these matters. As one sits at the center in the Department, receiving advice from people such as my hon. Friend, who are experts in the subject, one finds that there is a conflict of opinion and of evidence. I have noted what my hon. Friend said on behalf of those companies which need to take speedy action to allow them to go into voluntary liquidation quickly in order to preserve something for the creditiors. I am inclined to the view that cases where seven days' notice is too long will be so few that it would be wrong to reject these new proposals to protect creditors' interests in order to preserve a right that will need to be used only infrequently.

I ask my hon. Friend to bear with me, because I have considered very carefully all aspects of this matter. I know that I cannot please everyone, but that is the balance that I propose to take. I think that it is fair and reasonable. I ask hon. Members to take account of these arguments, because we are in very deep waters here and I am trying to find the right balance.

Mr. Trotter

One of the practical effects is that the Inland Revenue authorities rather than the ordinary creditors can get their hands on the assets. Whether that is what the Opposition are seeking I very much doubt, but that would be the practical effect of the new clause. I suggest that the cases in which assets disappear improperly through this sort of action are at least as infrequent as the cases in which speedy action is needed.

Mr. Eyre

I hesitate to differ from my hon. Friend, because I know of his great practical experience in these matters, but these cases have been carefully reviewed. I have to strike the best balance that I can in the public interest. I assure my hon. Friend that, difficult though it is, I have tried to do that. There is no perfect solution. We need a comprehensive review, but the balance of advantage, in the public interest, is the one that I have indicated, and I ask my hon. Friend to accept that I have given very careful consideration to the point that he made

Mr. Clinton Davis

Unlike his hon. Friend the Member for Tynemouth (Mr. Trotter), I am prepared, although I could think of a better verb, to bear with the Minister on this. It is indeed a question of balance. The Minister, with his officials and others, has clearly looked at the nature of the abuse and has had to balance it against the possible harm that could flow to, I believe, a very small number of people. I believe that the Minister has made the correct judgment. Certainly, it is one that I support. Moreover, so far as I know, no strong representations have been made by the accountancy bodies against the proposal since it has been on the Amendment Paper.

It being Ten o'clock, the debate stood adjourned.

Ordered, That, at this day's sitting, the Companies (No. 2) Bill [Lords] may be proceeded with, though opposed, until any hour.—[Mr Brooke.] Question again proposed, That the clause be read a Second time.

Mr. Clinton Davis

Having said that, I beg to ask leave to withdraw the new clause.

Motion and clause, by leave, withdrawn.

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