§ 5.16 p.m.
§ The Minister of State, Department of Trade and Industry (Lord Strathclyde)
My Lords, I beg to move that this Bill be now read a second time.
Before I undertake an explanation of the Bill's proposals, I should first outline as a matter of necessary background the circumstances which have led to it being brought forward as an emergency measure.
The Insolvency Act 1986 contains two procedures which are used frequently to rescue financially troubled companies or save viable parts of their businesses. These are administration and administrative receiverships. In Scotland the latter is known simply as 623 "receivership". I hope that it will be less confusing if I refer simply to "administration" and "administrator" and "receivership" and "receiver" where the context does not require me to be more precise.
Putting together a rescue package for a financially troubled company and seeing it through to, hopefully, a successful conclusion often takes several months of intensive care, if not longer. If the business is to be rescued or sold it has to be kept going and to do this the administrator or receiver will almost certainly need to keep on at least part of the workforce. The legislation allows him a period of grace of only 14 days before he has to decide whether to adopt their contracts of employment.
In the case of administration, the effect of adoption is that in practice the obligations under the contracts of employment become expenses of the proceedings. In an administrative receivership, however, there is an additional consequence. The receiver also becomes personally liable under the contract. The 14-day grace period will seldom be long enough for the administrator or receiver to effect a sale of the business. It will rarely, if ever, be long enough to put in place a rescue procedure, with all that that involves.
Administrators and receivers were clearly worried about the implications of adopting contracts of employment right from the time the legislation came into force at the end of 1986. In February 1987 the receivers of a company known as Specialised Mouldings Limited obtained directions from the High Court that it was possible to avoid adopting such contracts but to continue to employ the employees. From this, receivers developed what appears to have become a common practice of sending letters to those employees whom they wished to retain saying in essence that, although they were not adopting their contracts and they accepted no personal liability, they would continue to pay wages, salaries and pension contributions as before. In due course, this seems to have become standard practice in cases of administration too, although I have to say that the legislation does not actually provide for an administrator to have personal liability.
Matters proceeded on that basis for more than six years. But in July last year a decision of the High Court in the case of Paramount Airways Limited (No. 3) doubt on the effectiveness of this disclaimer, if I may call it that. In February this year the Court of Appeal upheld the decision of the High Court.
Now, the Paramount case concerned an administration order. However, the judgment raised such serious doubts about the effectiveness of this disclaimer in receivership cases that since then the general perception has been that it is no longer safe to place any reliance on the use of disclaimers and that, if employees are not dismissed within the 14-day grace period, their contracts will be held to have been impliedly adopted.
Of course, the Paramount case was decided on its facts. It is important not to lose sight of that. However, it has clearly established that contractual rights arising from the termination by administrators of contracts of employment which they have adopted, even unwittingly, constitute a priority charge on the company's assets.
624 Insolvency practitioners—one has to be an insolvency practitioner to act as an administrator or administrative receiver—concluded that the effect of this might be to place such a burden on the company's already fragile finances that there would be no substance left upon which to base an effective rescue package. They were even more alarmed at the prospect of incurring substantial personal liability in cases where they acted as receivers. The result was likely to be that they would resort to wholesale dismissal of employees unless the business could be sold within 14 days, with, what I am sure your Lordships would agree, would be unacceptable consequences.
Those consequences were not acceptable to the Government. Accordingly this Bill proposes that, with effect from 15th March 1994 (which is the day after the President of the Board of Trade made a Statement on this issue in another place) administrators and receivers will be able to adopt contracts of employment with more restricted effects than at present. In that way, there will be no need for them to feel impelled to dismiss employees simply because of the fear of extensive liabilities which may be incurred—in the case of receivers, extensive personal liabilities—as a result of the adoption of contracts. Under the Bill only qualifying liabilities (which I shall describe shortly) would be incurred.
I shall now proceed to deal with the Bill's specific provisions and I hope I may be brief. Clause 1 of the Bill contains proposed amendments to Section 19 of the Insolvency Act 1986. Those provide that, in administration cases, only qualifying liabilities would in future be covered by the statutory priority charge over the company's assets. Qualifying liabilities are defined broadly as wages or salary or contributions to an occupational pension scheme in respect of services rendered after the adoption of the contract. This would also cover rights to holiday pay and sickness pay arising after adoption.
I think I should say at this stage that there has been a question as to whether the wording which is used in the Bill is possibly not apt to cover contributions to a pension scheme referrable to a period of service, rather than in respect of services rendered.
By way of example, paragraph (2A) (c) in Clause 3(4) provides that one of the conditions which a liability must meet in order for it to be a qualifying liability is that it is:in respect of services rendered",wholly or partly after the adoption of the contract. Similar wording is used in Clauses 1 and 2 and in Schedule 1 to the Bill. I consider that the words:in respect of services rendered",are apt to cover payments to a pension scheme. It is the Government's intention that the words should cover such payments.
Clause 2 proposes amendments to Section 44 of the Act to give effect to the proposals in cases of administrative receivership. These amendments also restrict a receiver's personal liability, and consequently his statutory right of indemnity from the company's assets, to only qualifying liabilities, as I have just described them.
625 Clause 3 makes provision for amendment of Section 57 of the Act. That introduces the limited personal liability of the new scheme into the Scottish system of receivership.
Clause 4 and Schedule 1 to the Bill then provide for its effects to be brought about in Northern Ireland by amendment of the relevant provisions of the Insolvency (Northern Ireland) Order 1989.
I think it right that I should indicate to your Lordships that the proposed amendments do not disadvantage an employee whose contract is terminated by an administrator or receiver. Liabilities, other than qualifying liabilities, arising from a contract of employment will remain, but they will be treated as an unsecured claim against the company. Moreover, the proposals will not affect the employees' position under employment law.
I should also make it clear that this is not a measure to overturn the decision in the Paramount Airways case, which may yet go to appeal. As I said earlier, it would apply only to contracts which are adopted on or after 15th March 1994. Any contract adopted before then will not be affected by these changes.
I do not think there can be any doubt that, if these proposals are adopted, it will prove possible more often to return companies to viability or sell their businesses as going concerns. In that way, more employees will keep their jobs and, of course, those employees will not be affected by the proposals because their contracts of employment will not have been terminated.
I am aware, of course, that a number of amendments have been tabled and your Lordships will proceed in due course to consider them in Committee. However, I hope it may be helpful if at this juncture I make some comments to indicate the Government's position regarding any widening of the scope of the Bill.
When the President of the Board of Trade made his Statement in another place, he indicated that he intended to bring forward legislative proposals as an emergency measure. The purpose of the legislation would be to enable administrators and receivers to adopt contracts of employment with more limited effect than is presently the case. The legislation would have the limited effects which I have outlined and it was made very clear that it would affect only contracts of employment adopted on or after 15th March. There was to be no retrospection beyond then.
The measure is one for the future conduct of administrations and receiverships. It does not pretend or purport to address the past. Nor do I think it should. That is not to say that we do not recognise the problems which the decision in the Paramount Airways case has created; we do. But those are not matters for this Bill. I am convinced that, if we sought to go beyond the limited scope of the President of the Board of Trade's Statement, we should be abusing the goodwill which has been shown on all sides of this House and another place, which is vital if these urgently needed measures are to be put into force without delay.
I welcome this opportunity to introduce the Bill to this House. I commend it to your Lordships.
§ Moved, That the Bill be now read a second time. —(Lord Strathclyde.)
§ 5.27 p.m.
§ Lord Peston
My Lords, I thank the Minister for the clarity and completeness of his introduction to the Bill. Due to the pressure of other business on 14th March, the Statement made in another place was not repeated in this House. However, I am happy to repeat at the outset the assurances given then by my honourable friends that we shall give the Bill a fair wind.
That does not mean that I am entirely happy with the Bill, but there is a need for immediate action, and that is so even though the number of companies in trouble and the number of insolvencies have diminished as we come out of recession. The number is still high and it will not be very long before the next recession begins.
My anxieties are as follows. First, I am always unhappy with legislation taken on the hoof, so to speak. I am sure that the draftsmen have done the best that they can in the time available, but we should not be over-confident that they have it right. After all, they and government Ministers must have thought that the 1986 Act, which took a lot of parliamentary time, was all right.
Secondly, the problem has been recognised to some extent for a few years. I refer to the intervention made by the honourable Member for Tynemouth in the other place at col. 29 of yesterday's Hansard. If there were not doubts about the law, why did the receiver in the Specialised Mouldings Limited case go to a judge for an answer to the central question?
Thirdly, is it possible for this piece of legislation to be used for other purposes connected with bankruptcy and insolvency for which it is not intended? That question was raised in another place by my honourable friend the Member for Bolsover at col. 25 of Hansard. I am not sure that the Minister's answer was as reassuring as it might have been.
I know that the Minister has referred already to this matter, but has he any more up-to-date information about the likelihood that the Paramount Airways case will be considered on appeal by the House of Lords? Let us suppose that the House of Lords were to say that the Court of Appeal had got it wrong. What would then happen to this piece of legislation?
I shall speak again briefly on retrospection in regard to the amendments, but perhaps I may make two points now. Like many honourable Members in another place, I am doubtful about retrospection. That is as much to do with principle as with the practical point made by the Minister in the other place that we could not be certain about who may benefit and who may be disadvantaged. My honourable friend the Member for Middlesbrough made a fundamental and logical point; namely, if the defect that we seek to rectify lies at the heart of the 1986 Act, a case may emerge for retrospection to that date. I hope that the Minister will take that extremely seriously, even though we are unlikely to be able to do anything about it now.
The essence of the economics of insolvency is that a business may become insolvent as a result of past decisions and events, but is viable in the future. That is 627 why it makes no economic sense simply to allow a bankrupt firm to disappear. I hasten to add that I do not make the same point about bankrupt governments. Receivers have many interests, not least to creditors; but, most of all, they must act to save economic life, especially the jobs of the workforce. That is the reason we support any attempt—and, indeed, this attempt—to rectify the problem that has arisen and to make insolvency law as effective as we originally imagined it to be. However, I am fairly confident that there may be more problems here than are apparent at first sight. That is a topic to which we shall be obliged to return.
§ 5.30 p.m.
§ Lord Ezra
My Lords, I, too, should like to support the intention behind the Bill. When the Insolvency Act 1986 was introduced to the House with the intention of saving as many businesses as possible that had found themselves in difficulty, it seemed to us to be a very forward-looking move. As a result of the case of Specialised Mouldings Limited, it was clear, to the extent that the workforce continued in employment, that there was a limit on the liability of the administrator or the administrative receiver in their regard in order to enable the business to be saved. However, that has been overturned by the subsequent Paramount Airways case which has opened the whole issue of how far the administrators or administrative receivers can act to save companies. As a legal issue, it will possibly be taken to the House of Lords but, in the meantime, I believe that the Government were right to introduce the present proposals.
The Minister expressed grave doubts about retrospection. However, as it appears, the judgment in the Paramount case is itself likely to be retrospective. Therefore, if a judgment is retrospective—which we are trying to correct so as to enable the intention of the original legislation to be carried out—I do not quite see why the corrective legislation could not go back to the time at which the intention of the legislators was made clear in the original legislation. Of course, we shall return later to that matter when we deal with the amendment which the noble Lord, Lord Reay, has proposed.
There is also the question of whether such provisions should be extended to cover other types of receivers, especially those operating under the law of property who have similar problems. While the present legislation has been hurriedly put together and, therefore, has addressed itself to the major issues, we should, nevertheless, seize the opportunity to consider other aspects of receivership which may be involved. That, too, will be discussed when we deal shortly with the amendments.
I fully support the Government's intention to bring forward the legislation. I believe that it could be made more effective if the amendments which we shall subsequently consider are fully taken into account and absorbed within the Bill
§ 5.35 p.m.
§ Lord Reay
My Lords, the CBI supports the Bill and has commended the President of the Board of Trade for the speed with which he acted to amend the law of insolvency following the decision of the Court of Appeal in July last year to put an interpretation on the 1986 Act which reversed the court's previous interpretation of 1987 (the Special Mouldings Limited case) and which effectively changed the law from what everyone thought it had been into a new law which threatens all kinds of undesirable social consequences.
If the Bill is not passed, not only will a large number of jobs be at risk, as administrators and receivers are forced to dismiss employees of firms whose future they have not yet had a chance to secure for fear of creating a new prior charge on assets, but will also, as a result, so the Government's whole strategy successfully promoted by the 1986 Act of doing as much as possible to rescue firms in trouble—the so-called, "rescue culture". The encouragement to dismiss employees within 14 days, which the Paramount ruling in effect gives, is of course reinforced in the case of administrative receivers by the personal liability to which the Act exposes them.
I suggest that the Government of the day are open to criticism for having put an Act with unclear provisions on to the statute book, although it must be said that the accountancy profession at the time sought many assurances over the precise meaning of the term "adopted". For over six years, administrators and receivers have relied on a court ruling as the basis for many successful rescue operations of companies. The Paramount ruling has now exposed how shaky that reliance was and revealed just how vulnerable to claims, including personal liability claims in the case of administrative receivers, are insolvency practitioners.
The Paramount case may come to appeal in this House and noble and learned Lords may then reverse the Paramount judgment. However, the Government have decided that they cannot wait for the outcome of such an appeal so far as concerns future contracts of employment to be adopted by administrators. Of course, it is future contracts of employment which will preserve, or their non-adoption which will threaten, future jobs. All contracts of employment already adopted, or which were adopted in the past, do not threaten future jobs in the same way. The Government have not felt obliged to cover the intervening years since 1986 in the current legislation.
However, I believe that the Government are making a mistake in not seeking to extend the protection offered to administrators and receivers by the Bill to those who were responsible for adopting contracts of employment in the years 1986 to 1994. In equity, surely that is indefensible. Firms of accountants should not be left to shoulder professional and personal liabilities of an unquantifiable magnitude for carrying out government policy because they happened to do so between two dates on which two contradictory legal rulings were made, the second of which overrides the first with immense retrospective effect.
629 The CBI has estimated that accountancy firms face claims of up to £1 billion as a result of the Paramount judgment—enough to cripple, even bankrupt, some smaller or medium-sized firms. Many other firms who rely on accountants would be adversely affected by such a development. Those who would benefit are unlikely to be the ordinary mass of employees who lost their jobs and their chances of redundancy pay from their firms when those firms collapsed, although I suppose that there could be mass claims organised by trade unions. However, more likely to be affected are directors who missed their golden handshakes, and their lawyers. Already, three Olympia and York directors (of Canary Wharf fame) have filed claims for £10 million against the administrators. Those claims consist of bonuses which were promised to them by their firm's founders.
The Bill solves the problem only partially. I support it as far as it goes, but I have an amendment (with which we shall deal shortly and to which the noble Lord, Lord Ezra, has also attached his name) which would apply the provisions of the Bill from 1986. My noble friend the Minister made an obscure reference to my amendment, which, I must say, I did not quite follow. He seemed to be saying that it would abuse the good will of another place if, in our dealings with the Bill today, we went beyond what the President of the Board of Trade announced in his Statement on 14th March. I am not quite sure what my noble friend meant. However, last night in another place, his honourable friend, Mr. Neil Hamilton, said:I cannot foretell the circumstances in which the House or another place might amend the Bill".—[Official Report, Commons, 21/3/94; col. 25.]Plainly my honourable friend contemplated the possibility of an amendment here today and I do not therefore understand what my noble friend meant. However, we shall discuss that matter in a moment in Committee. I support the Bill in principle.
§ 5.40 p.m.
§ Lord Donaldson of Lymington
My Lords, I apologise to the House and to the Minister for having failed to put my name down by the witching hour of noon, as I was completely unaware of that fact. With the indulgence of the House I wish to make it clear that my special interest in this Bill arises out of the fact that I am the part-time chairman of the Financial Law Panel, which is an organisation sponsored by the Bank of England and the Corporation of London, with the purpose, among other things, of identifying and assisting in removing uncertainties in the law which affect the United Kingdom financial markets. In that context, I and the legally qualified chief executive of the panel have been looking at this Bill and the problem which it addresses.
In my judgment the Paramount Airways case demonstrates widespread misunderstanding of the law rather than any uncertainty of the law. In view of what has been said in the House this afternoon I should perhaps say that, according to my information, no one has ever been able to find a transcript of any judgment in the Specialised Mouldings Ltd. case and it seems 630 highly likely that the learned judge—I believe it was Mr. Justice Harman—never gave a ruling at all. It was indeed a test case, or was intended as a test case. The judge was asked to authorise a particular course of conduct in that case and he said, "Yes, go ahead". It is by no means clear that he was giving his mind to the general question and the general matters of policy on which the insolvency profession appeared to rely in the following years. Therefore it is not quite accurate to say that the law was clearly laid down by the High Court, and then—however many years later it was—was reversed by the Court of Appeal. However, we have a situation with which this Bill is intended to cope.
The two misunderstandings which emerged from the Paramount case are the following. First, it was apparently genuinely thought that Section 19 of the 1986 Act had the effect which it will have, if and when amended by this Bill. There is a clear need to remove that misconception. I welcome the Bill although it is surprising to find in operation what I think my classical friends would describe as communis error facit lex.
However, there is a second misunderstanding which I venture to think is of much greater importance in the long run. It appears to have been believed by the insolvency profession that by means of what Lord Justice Dillon castigated as a ritual incantation, it was possible in effect both to adopt and to disclaim contracts of employment. The Bill does not address this point at all. As I understand it, the Minister in another place said that adoption means that a person procures the performance of a contract. The adoption may be by words—that is to say, express adoption—or it may be by conduct (that is to say, implied adoption). With all that I respectfully agree. That is the law and the law is absolutely clear. But the uncertainty arises when one tries to apply that law to a factual situation, as is demonstrated by many cases. It seems to me that employees need to know where they stand. They need to know whether their contracts of employment are being adopted or disclaimed. They cannot afford to wait until there is some dispute in the courts long afterwards and then be faced with a confusing story of conduct which at one time seemed to adopt the contract but at another time seemed to disclaim it, and so on and so forth.
I have suggested to the Minister, and through him to the Secretary of State, that this could be dealt with in this Bill if one amended Section 19(5) of the 1986 Act by adding to the second paragraph some such words as,within seven days of the expiration of this period"—that is to say this 14-day period—each employee of the company shall be notified in writing by the administrator of whether he is adopting or disclaiming the employee's contract of employment".That would make it wholly clear and employees would have no reason to fear that at some future date they would become embroiled in a dispute as regards their contractual status. Unfortunately, I am told that that is not acceptable to the Secretary of State. No doubt if I were to table the amendment I would be immediately voted down. However, that would not be an entirely novel experience. I refrain from pursuing this matter simply because, like the noble Lord, Lord Peston, I am 631 not convinced of my ability to amend Bills on the hoof. I would have preferred a few days in which to discuss this matter.
I am bound to say that I do not understand why this is being rushed through at this rate. For my part, I cannot understand why, once the Secretary of State had announced that as from 15th March the law would be amended, an extra week could not be taken to get that amendment right.I welcome the Bill but I regret the omission to deal with this major problem of what constitutes adoption. However, I shall refrain from referring to that again in Committee.
§ 5.47 p.m.
§ Lord Strathclyde
My Lords, I have listened to the comments of noble Lords who have spoken with considerable interest. I listened with particular interest to the learned comments of the noble and learned Lord, Lord Donaldson.
It would be with some trepidation that I would seek to engage in a detailed discussion of the deep legal niceties of much of what has been said but I wish to address the questions that have been posed. The noble and learned Lord, Lord Donaldson, certainly in his introductory remarks, made a useful exposition of the Paramount case and of the legal implications of what has been done. The noble and learned Lord then criticised certain aspects of the Bill. He said that there needed to be a definition of the meaning of the word "adopt" in the context of this legislation and for there also to have to be a positive act of adoption. The noble and learned Lord had the good sense to warn me that he might raise this issue on Second Reading and I have therefore been able to prepare a reply.
I can fully understand the desire that there should be certainty in these matters. Without any doubt it would be possible to provide a definition. However, what I am not convinced of—nor are my advisers—is that that definition would create certainty and remove all doubt. I am afraid that it is often in the nature of such matters that they tend to spawn further argument. We have preferred to approach the matter from a rather different angle. What this legislation would do would be to make it easier for an administrator or receiver to adopt a contract of employment. This means removing the present uncertainty about what it is he is letting himself in for. In future he will know precisely what it is he will have to pay. It will be the wages, salaries and occupational pension contributions of those employees he keeps on. He will also know that the liability extends only to services rendered by the employee during the course of the procedure. In this way he will be able to assess the costs of continuing to employ the employees, as well as his potential exposure to personal liability, if he is an administrative receiver. We believe that that is the better way forward and that it will enable administrators and receivers to make sound judgments about the viability of the companies and businesses they are appointed to administer.
It is clear from what the noble and learned Lord said that he does not entirely accept the view of the 632 Government. I was able to write to him shortly before the debate took place and he replied in his Second Reading speech.
Perhaps I may turn now to some of the points raised by other noble Lords. The noble Lord, Lord Peston, asked about the status of the Paramount appeal and whether the House of Lords would be giving its opinion at some stage. We are not aware whether a petition for leave to appeal to the House of Lords has been lodged. Any decision made by the courts in the case will not affect these changes.
The noble Lord, Lord Ezra, made an excellent speech, which also dealt with the question of retrospection. That is an issue which we shall be dealing with in some detail in a moment in Committee. Likewise, my noble friend Lord Reay made a hard-hitting speech about retrospection. It will come as no surprise to him that I disagree with much of what he said.
Perhaps I may clarify one point that I made in my introductory speech about abusing good will. It is entirely appropriate that we should have these discussions about retrospection. My point was that in bringing forward these emergency provisions we have of necessity had to ask for the good will of both Houses and to work with other parties in order to achieve a basic agreement that this is the right way forward. If we open up a whole variety of extremely complicated legal questions about retrospection we run the risk of abusing that good will. That was the point that I made, but of course it is right that we should debate these issues fully.
I have already indicated to your Lordships the circumstances which have caused the Government to act so quickly. The purpose of the proposals is to enable viable businesses and companies to be saved along with the jobs which they provide. On the basis of the public utterances which have been made by many commentators outside Parliament, I venture to suggest that the proposals have enjoyed unanimous support.
It is understandable that there may be those who wish us to do a little more, but I have already indicated this afternoon that that little more is not appropriate for this Bill. I am sure that there would be righteous indignation if the opportunity which has been granted for this legislation were lost because we had attempted to do too much.
These are extraordinary circumstances. This is an emergency piece of legislation. In that spirit I hope that the House will agree to a Second Reading.
§ Lord Richard
My Lords, before the noble Lord sits down perhaps he can help me to follow this argument. It is not an area of the law with which I am very familiar.
As I understand it, in the Paramount case the Court of Appeal declared what the law is. That did not accord with what everybody thought the law was under the judgment which cannot now be discovered and to which the noble and learned Lord, Lord Donaldson, referred. The Government take the view that the law should be different from that which the Court of Appeal declared it to be. They have therefore introduced this Bill to correct the decision. I can understand all that.
633 I should be grateful if the noble Lord could help me in regard to one aspect which I do not understand. For the past six years administrators and receivers have acted on the basis of what everybody, including the Government of the day, assumed the law to be. Therefore, are they not at risk and vulnerable in respect of their acts during that six-year period? I do not understand why, in those circumstances, the Government dismiss the idea of retrospection quite so conclusively and all-embracingly. If the Government believe that there is a legitimate case for changing the law, the law having now been determined by the Court of Appeal to be what the Government did not intend it to be or believe it to be, then perhaps further thought should be given to this issue.
I do not suggest for a moment that the Bill should be held up. Nor do I suggest that the amendments should be carried. But I think that the noble Lord could go so far as to say that the Government will actively consider the question of whether or not the Bill should be made retrospective so that those who are now at risk will be given at least some comfort.
§ Lord Strathclyde
My Lords, the noble Lord the Leader of the Opposition has pre-empted the debate that we are about to have. However, his comments were useful because he has gone neatly to the nub of the whole issue of retrospection. With the leave of the House, before we reach the Committee stage I should like to deal with the matter.
First, the Government are not setting their face entirely against retrospection. I shall go into that point more fully when we reach the Committee stage. The point is this. The Court of Appeal has voiced an opinion about the status of the law as it stands. There may or may not be a further appeal to the House of Lords. We shall have to wait and see. There is thus certainty as to where the law stood prior to 15th March 1994. Once this Bill has passed there will be a new certainty as to where the law stands.
When the Court of Appeal made its decision it effectively gave a new set of rights to a whole range of people who hitherto did not realise that they had any rights. If we were to legislate now retrospectively in the way that has been suggested
§ Lord Richard
My Lords, perhaps I may intervene briefly. The Court of Appeal has not given them new rights. It has declared that they always had those rights, even if they did not know it.
§ Lord Strathclyde
My Lords, this is where the noble Lord's legal training is so invaluable. The noble Lord has explained the position correctly.
If we were to legislate retrospectively as my noble friend and the noble Lord, Lord Ezra, suggest in their amendments we could remove those rights from people who have not had a chance to consider whether they would like to do something with those rights.
I said at the beginning of my reply to the noble Lord that I am not setting my face against retrospective legislation. This is a matter which requires further 634 consideration. That is the line that I shall take in response to the amendment. I hope that the House will agree to give the Bill a Second Reading.
§ On Question, Bill read a second time, and committed to a Committee of the Whole House.
§ Then, Standing Order No. 44 having been dispensed with (pursuant to Resolution of 21st March), House resolved into Committee.
§ [The BARONESS SEROTA in the Chair.]
§ 5.57 p.m.
§ Clause 1 administrators: priority of liabilities under adopted contracts of employment]:
Lord Reay moved Amendment No. 1:
Page 2, line 26, leave out ("15th March 1994") and insert ("30th December 1986").
§ The noble Lord said: The amendments in my name seek to apply the provisions of the Bill not from last week but from the date when the Insolvency Act was passed in 1986. They thereby seek to ensure that what everyone thought the law was since that time, and what a judge said that the law was (or is generally accepted to have said the law was even if there is no proof today that that is what he said) actually was the law.
§ Of course, the amendments would be retrospective in their effect. But then the Paramount ruling was retrospective in its effect. For six-and-a-half years from February 1987 everyone had to act on the basis of what a judge said in that month, or was reported to have said, the law was. In July 1993 another set of judges said that all along the law had been something else. That is retrospective law making and its effects can only be undone by retrospective legislation. I argue that that is what should be done.
§ I said a moment ago at Second Reading that the CBI estimates that accountancy firms, often small and medium sized firms, face claims totalling hundreds of millions of pounds from those who have now been told that the law entitled them to claim against the assets of firms which passed through the hands of receivers. If the law had been known to be what judges now for the first time say that it was, administrators and receivers would never have exposed themselves to such claims—in most cases probably by avoiding making any serious effort to rescue the companies with which they were involved. In truth, of course, if we had known sooner what we learned last July, the statute law would have been changed that much sooner.
§ I am sure the Government realise that something must be done to address the issue. I suspect that they wish to be seen to be reluctant to introduce retrospective legislation. If an appeal to this House in the Paramount case results in a reversal of the Paramount judgment, perhaps they feel that they may be able to avoid further legislation altogether.
§ The Government have argued that estimates of claims likely to be made against insolvency practitioners are "speculative". My noble friend appears to want to wait to see the result of those claims. I agree that we do not yet know what they will amount to. The Paramount judgment has pitched us into a fast-moving 635 situation which the Bill has simply speeded up. If this House in its judicial capacity decides to hear the appeal which, according to my information, has been lodged today, and decides to overturn the Paramount judgment, then maybe no further action is required. But in my judgment further legislative action is certainly required if the Court of Appeal upholds the judgment in the Paramount case.
§ My noble friend has hinted already that he may be able to say that the Government will continue seriously to consider the matter. If he is able to state in his reply that the Government accept the case for extending legal protection to administrators and receivers who were responsible for adopting contracts of employment between the years 1986 and 1994, but that before taking legislative action the Government wish to await the outcome of the appeal lodged in this House, then in those circumstances I would be willing to consider withdrawing the amendment. I beg to move.
§ Lord Ezra
I wish to support the series of amendments for the reasons that have already been clearly stated by the noble Lord in introducing them, and by the intervention of the noble Lord, Lord Richard.
It seems to me that in the past six years or so, a large number of companies in difficulty were rescued by the procedures introduced by the 1986 Act. Indeed, the President of the 13oard of Trade in a Statement in another place indicated that of the 3,000 firms which go into receiverships in a year, about half are rescued in one way or another as a result of the legislation introduced in 1986. It is quite obvious that that would not have occurred if the legislation had been interpreted in the way in which the Court of Appeal decided the Paramount case. Administrators and receivers would have been most reluctant to have taken the steps they then took which have saved so many companies. Those receivers and administrators acted on a reasonable interpretation of the 1986 legislation, buttressed by what they understood to be a view taken in a test case. It is inequitable that they should now believe that their actions during that period of six years could be subject to serious doubt and that in some cases they could be rendered personally liable. It seems wrong to allow such a situation to arise. I therefore very much hope that since we seek to correct a situation, we should do so from the time at which the 1986 Act took effect and not from the time that this legislation was introduced; otherwise, the whole situation could be placed in serious disarray.
I hope that the Minister will accept the amendment, or at least will state that the Government are conscious of the problem that the issue raises and will give the matter serious consideration.
§ Lord Barnett
I hesitate to intervene in the debate. However, I do so by declaring an interest as a former senior partner in an accountancy practice. I upset many of my partners and other accountants with the complex finance Bills which I introduced over the years, and I should like to make amends if I can.
Let me make crystal clear at the outset that in principle, and for many reasons, I am opposed to retrospective legislation. It would help some people, but not all those who might otherwise be helped. However, 636 generally speaking, I do not like the idea of going back on legislation that has already been passed. But some things which have been said, in particular by the noble and learned Lord, Lord Donaldson, worry me. Let us suppose that the law now finds that between 31st December 1986 and 15th March 1994 the position is not quite as was understood; and the law then says that administrators and receivers were quite wrong to make all the people redundant whom they made redundant. If that is the case, all those former employees would be able to sue those small, medium-sized and large firms of accountants, who tend to have most of the administrations in receivership, for a lot of money in redundancy pay and whatever else. The large firms are well insured and would be able to cope, although given what they have had to pay out recently I am not sure that that would be the case.
I should like to hear from the Minister whether such action is a possibility. I know that none of us can be aware of what will happen when the Paramount case goes to appeal, whether to the House of Lords, or wherever. However, it would be a disaster if the law were found to be as it was always understood to be—as the noble and learned Lord, Lord Donaldson, said—and there clearly would then have been a case for going back to 30th December 1986. That is the strongest argument for at least reconsidering the issue.
The question has already been asked: why are we rushing the Bill? I understand that it is an emergency. Something needs to be done. Quite rightly, the Secretary of State considered the possibility of introducing legislation and moving it through both Houses quickly —that has been done in the past on other occasions. But if the legislation is only to be from the date on which he made the statement on 15th March 1994, and not earlier, then as the noble Lord, Lord Peston, and the noble and learned Lord, Lord Donaldson, pointed out, there is no need for such a rush. If the legislation is only effective from 15th March 1994 we have time to consider whether this measure is the right way to proceed, and whether other amendments need to be looked at. I refer, for example, to a provision which allows employees the right to know and for administrators and receivers to circulate all their employees on the situation and how it affects them. That seems a perfectly reasonable provision, but if we are rushing the measure through today we shall not be able to get such an amendment into the Bill.
Those are the only reasons for a delay. I agree with the need to introduce legislation. The Minister was absolutely right in stating that administrators and receivers cannot decide in 14 days, for fairly obvious reasons, how the company in receivership can be managed. That is quite impossible. Consequently they make all the employees redundant to save themselves a potential burden on whatever assets will be administered for distribution to employees as well as to shareholders. In those circumstances, the Government are absolutely right to introduce legislation. However, for the reasons I have indicated, I am still more than a little worried that, while I am against retrospection, there could in this instance be a case for it on the grounds I have given.
§ Lord Donaldson of Lymington
I have no objection to the Minister saying that the Government will think about the matter. I should have the strongest possible objection if the result of their consideration were to agree to the amendment or anything like it. It needs to be borne in mind that while I have considerable sympathy for the insolvency profession, which, after all, is a sub-branch of my own profession, it is a powerful lobby which is pessimistic by nature. The figures which are bandied around are almost certainly greater than those which would come to pass in fact. I say that not on general principles but because I am told, probably correctly, that the Department of Employment has laboured under the same misapprehension as the insolvency practitioners ever since the 1986 Act was passed. In consequence, they have been picking up the tab for the redundancy payments where no assets were available to the company or to the receivers, whichever it may be.
Even if those people who achieve redundancy payments from the Department of Employment were now to sue for those payments, they would be told: "You can't have them because you have already been compensated". Technically they might be entitled to the payments, but equally the Department of Employment would almost certainly be entitled to be repaid. On the grounds of avoiding security of action, I suspect that the courts would sensibly dismiss the claims. That gets rid of the vast bulk of the potential liabilities of the insolvency practitioners. There remain some esoteric directors with even more esoteric contracts who may be able to sue.
The point of principle is the following and I can illustrate it in the starkest possible manner by reference to the Paramount case. It has already been said that, if the House of Lords, in its judicial capacity, allows the appeal, there would be no problem because it would be declaring that the law is and always has been what the Bill will make it, or it will confirm that that is so. That is not a clear statement, but I hope that my meaning is clear.
If, on the other hand, the House of Lords in its judicial capacity were to affirm the Paramount decision —and it would be most improper for me to express any view as to whether or not that is likely—what should one do about the successful claimants in the Paramount case? The House of Lords, in its judicial capacity, having said that the claimants are right and entitled to perhaps a great sum of money, is it then to turn round in its legislative capacity and say: "We are very sorry, we are taking all that back. You can't have your money."? That would produce a major constitutional clash between the courts and the legislature. I do not suggest that the legislature is not entitled to do that: it is supreme. In that sense, it would be constitutional. But in terms of our unwritten constitution, I think it would be an abomination.
Then one has to ask: "Are you to make an exception for Paramount Are you going to make an exception for any other case where action has been brought or threatened and a settlement reached? Will you make an exception for that?" Then we get into difficult territory. Although there may be some hardship for the 638 insolvency profession, I hope and believe that it is grossly exaggerated at the moment. There may be some hardship for it, but that is a sacrifice which, regretfully, it will have to make on the altar of principle. Retrospective legislation in such a matter affecting the individual rights of private citizens would be the greatest possible mistake.
§ 6.15 p.m.
§ Lord Peston
As an academic economist I am, of course, above such sordid considerations as the financial viability of accounting firms or any others. We are having a rather bizarre debate on the amendment because the Minister covered the matter in reply to me and my noble friend the Leader of the Opposition on Second Reading. I read the speech on this or a similar later amendment in the other place only yesterday. I should like reassurance from the Minister, I read that his honourable friend in another place showed a kind of sensitivity to further questions which I understand the Minister to repeat now and which he has repeated in response to my noble friend the Leader of the Opposition.
Essentially, I interpret the Government as saying: "Look, there is a need for immediate action and we are taking it". There are other considerations such as retrospection and the point which the noble and learned Lord, Lord Donaldson, raised and points arising from other possible professions in the later amendment. All I want is a reassurance, which I believe I have received from the Minister, that, once we have done all that, his department will consider it carefully. If it thinks that something satisfactory could be done and if further problems arise, the Minister says that he will come back to the House of Lords or the other place and say, "We've got to go further". I hope that I am right and that the Minister has already given us the kind of assurance which should enable his noble friend to withdraw his amendment.
§ Lord Strathclyde
This has been an interesting debate on the whole issue of retrospection, which is important, and it is quite right that we should have the debate. I was only sorry that both my noble friend Lord Reay and the noble Lord, Lord Ezra, did not mention the mini question and answer session that I had with the noble Lord the Leader of the Opposition at the end of the Second Reading debate. It neatly encapsulated the kind of issues with which we aredealing.
I very much understand the concerns of my noble friend Lord Reay and the noble Lord, Lord Ezra, in seeking to make the application of the limitation of liability effective, not from 15th March 1994 but from 30th December 1986—that is, immediately following the implementation of the main provisions of the Insolvency Act 1986. That change is sought because of the possibility that employees whose contracts might be deemed to have been adopted by administrators and administrative receivers and who were subsequently dismissed by them might, in the wake of the Paramount judgment, be able now to make claims for liabilities arising from the termination of their contracts.
639 As my noble friend suggested, various people have mentioned substantial sums which could fall on administrative receivers. That could be difficult. I reiterate that this is an important issue, not only from the point of view of administrators and administrative receivers but also from that of employees. In considering the amendment, therefore, account has to be taken of the wider implications.
In his statement in the other place on 14th March, my right honourable friend the President of the Board of Trade was quite clear in his view that the provisions of the Bill should have effect only in relation to any contract of employment adopted after 14th March.
It would not be appropriate to speculate on whether any claims in respect of contracts of employment terminated before 15th March 1994 would succeed and in what sums. Each case would have to be considered on the facts of the case. In many cases, of course, rescues have been secured with the company emerging intact or with the viable parts sold on and the employees' position protected without the likelihood of claim. But, for other employees, we have come to the conclusion that it would not be right to affect entitlements acquired before 15th March 1994.
My own inclination is against retrospective legislation and I am sure that that inclination is shared by many Members of the Committee. No clearer indication of that was given than by the speech of the noble and learned Lord, Lord Donaldson, with whom I am in absolute agreement on the point. I hide behind the noble and learned Lord's words. He put the matter very much better than I should have been able to do. This is not my amendment. It is the amendment of my noble friend Therefore 1-.e has to respond to the case put forward by the noble and learned Lord, and indeed to some of the points that I have made.
In reply to the noble Lord the Leader of the Opposition, I said that I was not setting my face against retrospection, and indeed I am not. The Government will look very carefully at the situation as it develops. Of course we shah be prepared to take note of any developments that may come to fruition in this area in the near future. I have explained in some detail the purpose of this Bill. I very much hope that my noble friend can leave it at that.
§ Lord Barnett
Do the remarks that the noble Lord just made mean that, if it goes through this Chamber today, then that is the end of the Bill—which has already gone through the other place? Does he mean that he will then introduce another emergency Bill if he finds that some of the points that have been made in this debate unfortunately turn out to be true?
§ Lord Strathclyde
I am neither saying that nor not saying that. I am simply saying that we shall look at the situation and at how matters develop. We hear what has been said in this Chamber and in another place. I could certainly not be drawn to be more explicit than I have been on whether or not there would be a future Bill.
§ Lord Reay
My noble friend began his reply to this debate by regretting that neither the noble Lord, Lord Ezra, nor I made any reference to the exchange that my 640 noble friend had with the noble Lord, Lord Richard, towards the end of the Second Reading debate. Perhaps I can make amends for that omission and say that completely endorse everything that the noble Lord, Lord Richard, said in that exchange. He encapsulated perfectly the argument for this amendment.
My noble friend used rather a curious argument in his reply to the noble Lord, Lord Richard. He said that, if we acted along the lines of this amendment, we would be removing rights from people who have not yet decided what they want to do with those rights, implying that that would be a rather hasty way to act. That seems to be a rather curious argument. It would seem to imply that one should wait to see if they are going to claim their rights and, if they show any sign of wishing to claim them, then we should legislate to remove that right. I would have thought that it would be kinder to legislate now. I take my noble friend to mean that he wants to wait and see how matters develop, if claims are made and what their magnitude is, and on the basis of that decide whether it will be worth bringing forward further legislation.
This Bill is plainly being taken at speed. I do not want to over-burden the Bill or the goodwill which has been necessary to get it through Parliament. I do not in any way want to act precipitately, and plainly the arguments of the noble and learned Lord, Lord Donaldson, deserve careful further study. I note that my noble friend has not set the Government determinedly against acting retrospectively if they consider that the case warrants such action. I note that they will look carefully at the situation as it develops. That does not go very far towards meeting the demands of the amendment. However, in the circumstances, I do not think that I wish on this occasion to press the amendment. Like my noble friend, I shall follow matters closely and we shall decide what to do in the future. I beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ Clause 1 agreed to.
§ Clause 2 [Administrative receivers: extent of personal liability on adopted contracts of employment]:
§ [Amendment No. 2 not moved.]
§ Clause 2 agreed to.
§ Clause 3 [Receivers (Scotland): extent of personal liability on, and agency in relation to, adopted contracts of employment]:
§ [Amendment No. 3 not moved.]
§ Clause 3 agreed to.
Lord Ezra moved Amendment No. 4:
After Clause 3, insert the following new clause:
(" —(1) Section 37 of the Insolvency Act 1986 (personal liability of receiver or manager appointed under powers contained in an instrument for certain contracts) shall be amended as provided by subsections (2) and (3) below.
(2)in subsection (I) (a) (liability for contracts of employment adopted by him in performance of his functions) after "provides) and" there shall be inserted ", to the extent of any qualifying liability,".
(3)After subsection (2) there shall be inserted—
(4) This section shall have effect in relation to contracts of employment adopted on or after the 15th March 1994.").
§ The noble Lord said: I beg leave to move this amendment. It introduces a new section to the Bill and extends the relieving provisions of the Bill to cover receiverships, including Law of Property Act receivers who are not administrative receivers and whose appointment is therefore governed by Section 37 of the Insolvency Act 1986 rather than by Section 4.
§ That would apply in cases when single assets were being recovered, such as, for example, hotels, office blocks or apartments. It has been suggested that, as those receiverships are sometimes handled by surveyors who may not be qualified insolvency practitioners, it would be inappropriate to extend the legislation to include them. But the 1986 Act made no such distinction, nor have the courts when these matters have come before them. If this clause is not accepted, it will open up a distinction that does not exist in practice between property receiverships and business receiverships.
§ The effect could be serious. If a hotel or property company went into receivership with different properties secured to different finance companies, if it was not possible to get an overall receiver to deal with the issue there would be no incentive for a property receiver to keep the individual properties as a going concern because he could then be exposed to the risks which have now been revealed. I am advised that there are many property receivers who would now be in that situation. Therefore a number of properties which could be rescued would not be rescued. I therefore feel that there is a very strong case for applying the same provisions as are proposed in this Bill for business receivers to property receivers. I beg to move.
§ Lord Reay
I should like to support the amendment of the noble Lord, Lord Ezra. If the Bill is not extended to cover Section 37, receivers appointed under particular chartered surveyors would be, in my view and in that of the CBI, unfairly discriminated against. They would 642 still be subject to personal liability in the future from employees who were kept on beyond the statutory 14 days. I do not see why the Government propose to legislate in this discriminatory fashion.
I might add to what the noble Lord said that the law of property receivership frequently involves hotels or industrial buildings where a considerable number of people are involved. We are therefore talking about substantial potential liabilities. I hope that my noble friend will accept the noble Lord's amendment.
§ Lord Strathclyde
As I said earlier during the course of the debates on this Bill, the Bill was introduced quickly to deal with potential problems for administrative receivers and administrators when rescuing businesses. Receivers or managers to whom Section 37 of the Insolvency Act 1986 applies are in a different position.
An administrative receiver is a receiver or manager of the whole, or substantially the whole, of a company's property appointed by the holder of a charge which, as created, was a floating charge. A receiver or manager can be appointed over any part of a company's assets. He can be given the power to manage in the charge document but will not necessarily control all the company's assets or businesses. Such people do not have to be licensed insolvency practitioners or necessarily have any qualifications and do not have the same powers and duties as administrative receivers.
Receivers and managers can be appointed in a wide range of circumstances (not just Law of Property Act receiverships) and the situation is very different, as I have already outlined. Therefore extending the new arrangements to receivers or managers would need careful consideration, which has not so far been given.
However, the noble Lord, Lord Ezra, makes a point which deserves a certain amount of consideration. We do not want to lose sight of the point. Therefore, we shall reflect further in the context of a consultative document issued by my honourable friend Mr. Hamilton, who has a departmental interest in these matters—it is a consultative document on company voluntary arrangements and company rescues—when these points will be dealt with, perhaps more effectively than could be done at this time.
The amendment proposed by the noble Lord goes beyond the very narrow purpose of the Bill, as I have outlined. On that basis I invite him to withdraw it.
§ 6.30 p.m.
§ Lord Ezra
I am disturbed at the thought that property receivers who have been operating for the past six or seven years within the scope and framework of their understanding of the 1986 Act should now be faced with a different situation and should not even have the protection, non-retrospectively, that the Bill would offer to business receivers. That is a distinction which should not be made. Therefore I cannot quite understand why the Government are reluctant to accept the amendment at this stage.
However, I am relieved that the matter will be looked at and that there is to be a consultative document. I hope that I am right in supposing that, among other things, it 643 will address this specific issue—the noble Lord nods his head and so I must be correct—and that as a result of that consultation and consideration this gap in the legislation in due course might be closed. With that in mind, I beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ Clauses 4 and 5 agreed to.
§ Schedule 1 [Corresponding provision for Northern Ireland]:
§ [Amendment No. 5 not moved.]
§ Schedule 1 agreed to.
§ Remaining schedule agreed to.
§ House resumed. Bill reported without amendment; Report received; Bill read a third time, and passed.