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Melanie Johnson MPSpeech to the Insolvency Lawyers' Association |
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I am delighted to be invited here to speak at the annual dinner of the Insolvency Law Association. In particular, I would like to thank Mark Phillips, for inviting me on your behalf. I know that Mark has a particular interest in the changes we have made in the Enterprise Act. It is particularly fitting that we are meeting in the Natural History Museum as its origins coincide with those of our insolvency law. Until 1883 the natural history collection was housed in Bloomsbury - home these days, of course, to The Insolvency Service. 1883 was also when Parliament approved the Bankruptcy Act of 1883, which formed the basis of bankruptcy law for the following hundred years. The 1883 Act formed the basis of the modern bankruptcy system and was designed to ensure that an independent and impartial examination took place into the causes of each bankruptcy, as well as into the conduct of each bankrupt. It recognised that bankruptcy should be regarded as a public matter, affecting the community at large. The public official responsible for the examination process was to be the Official Receiver. The general thrust of the 1883 Act was that the debtor, by the very fact of becoming bankrupt, was not someone in whom society could place its trust or confidence. In 1977, the Government initiated a review of insolvency law - both companies and individuals. It was this review - chaired by Sir Kenneth Cork - that first recognised the importance of a company insolvency regime that focussed on rescue and the benefits of encouraging the continuation of a debtor's business as a going concern where possible. In individual insolvency the review commented that the 'stigma' associated with bankruptcy was motivated in the 19th century by a desire to maintain acceptable standards of conduct in the commercial community. The Insolvency Act 1986 followed up on some of the review's recommendations through the introduction of a general automatic discharge for bankrupts after three years. The Act also introduced measures to streamline and simplify the process. The statutory framework for company insolvency set out in the Insolvency Act 1986, started to move the focus towards company rescue. This was achieved through the introduction of administration and Company Voluntary Arrangements - CVAs. Dispite the introduction of these new procedures, their take-up during the late 1980s and early 1990s was - while on an increasing trend - disappointingly low. INSOLVENCY ACT 2000 That brings me to the Insolvency Act 2000, which made several important changes in the area of insolvency law; and particularly to company voluntary arrangements and directors' disqualification. Company Voluntary Arrangement Moratorium The 1986 Act introduced the company voluntary arrangement procedure as a means of rescuing companies. However, the recession of the early 1990s demonstrated that it was not particularly appropriate for a small company in financial difficulty. Because there was no stay on creditors' actions, before an arrangement could be agreed, creditors were able to take individual recovery action - such as levying execution on the company's goods. As a result the company could, for instance, lose its stock in trade and so simply be unable to continue in business. That rendered any proposed voluntary arrangement unworkable and the rescue attempt liable to almost certain collapse. So, a stay on creditors' rights was clearly needed for occasions when a company's management wanted to put a rescue plan to creditors. Also of concern was an understandable reluctance on the part of management - particularly owner/managers - to use the administration procedure because they knew they would be displaced by the administrative receiver if the bank exercised its effective veto or by the administrator if the court appointed one. There were also cost issues. The Insolvency Act 2000 offers one solution to this problem and was the next step in the move towards emphasising company rescue. The Act provides a small company's management with the option of a short moratorium. This will prevent creditors taking enforcement action, initially for a period of up to 28 days while the proposed voluntary arrangement is put to creditors. However, in addressing one problem we needed to be careful not to create difficulties elsewhere. It became clear that a carve out from the new provisions was needed to cover companies formed specifically for securitisation and bond issues, the structured finance market and for Public Private Partnership Projects. Drafting that proved a considerable challenge for both officials from the Insolvency Service and the City of London Law Society who kindly assisted in devising appropriate text. I am very pleased to let you know that the new voluntary arrangement provisions (which have waited on getting this right) will come into force on 1 January 2003 not just for companies but for partnerships too. Disqualification Undertakings The power to disqualify directors guilty of corporate misconduct is an important safeguard for business and the public alike. It is essential that those who abuse the protection of limited liability and use companies to cheat creditors be disqualified if confidence in the market is to be maintained. However it became evident that the procedure in sections 6 and 8 of the Company Directors Disqualification Act 1986 often took a long time, involving, as it did, a court hearing on every occasion. It could also be very expensive for all those involved. Only 10% of disqualification proceedings were contested and went to a full hearing, whilst 60% were unopposed and in the remaining 30% of cases directors consented to the making of the order. This suggested a procedure, not involving the courts, was required where directors were willing to accept that they should be disqualified. Indeed that suggestion received influential support from Sir Richard Scott when he was Vice-Chancellor and it is what the Insolvency Act 2000 provides. Where there is agreement between the Secretary of State and the director, disqualification can be achieved without the involvement of the courts. The Act also provides that a breach of the terms of an undertaking has the same criminal and civil consequences as breach of a disqualification order. So there is no lessening of protection for business and the public. Where agreement cannot be reached the case will go to court. It is evident from the number of disqualification undertakings accepted by the Secretary of State, that the procedure is a success. In the first 17 months of the procedure being available, 1,621 undertakings have been accepted and 756 disqualification orders made. That compares with 2,070 orders in the preceding 17 months. Clearly the disqualification process has been speeded up - offering earlier protection for both business and the public - the courts are not clogged with undisputed applications and there have been consequential savings for all of those involved. This seems to be one of those rare reforms, which benefits nearly all parties concerned! ENTERPRISE ACT That brings me to the Enterprise Act, which received Royal Assent on 7th November. The insolvency provisions in the Act will modernise the insolvency regime to make it more supportive of enterprise. In company insolvency we will move the focus strongly in favour of company rescue and a new, streamlined administration procedure. In individual insolvency we will reduce the duration of bankruptcy to a maximum of one year for the majority of bankrupts. This will allow a fresh start for those who have failed through no fault of their own. At the same time, we are introducing a new Bankruptcy Restrictions Order regime for the minority of bankrupts who abuse their creditors and the public. Abolition of the Crown's preferential right to recover unpaid taxes along with modernisation of the financial regime of The Insolvency Service will make up to £115 million available to estates. In addition to the insolvency provisions, the Act deals with competition and consumer affairs. The Act will create a strong, effective competition regime that tears down barriers to enterprise as well as strengthening consumer protection. The insolvency provisions support, rather than stifle, the development and growth of new businesses while at the same time, helping to reduce the stigma of failure. Company Insolvency Let me now talk in more detail about the corporate insolvency provisions in the Act. First, they will help ensure that companies facing financial difficulties do not go to the wall unnecessarily. In order to do this, the Act restricts the use of administrative receivership. The fact that an administrative receiver is accountable only to his or her appointer effectively puts control over the company's future in the hands of a single secured creditor. This has been the cause of widespread concern that administrative receivership does not balance the interests of all creditors and may not provide adequate incentives to maximise a company's value. Equally importantly, it does not provide transparency for other stakeholders in a company - in particular unsecured creditors. We believe that administration, where the duty is to all creditors of a company, provides a better way forward. This is because the role of an administrator is to find the best result for all creditors - often through rescuing the company. Additionally, creditors may challenge the decisions of the administrator by virtue of section 27. As with the 2000 Act we have provided exceptions to the prohibition on administrative receivership in certain defined circumstances relating to capital markets and securitisation transactions. While administration has been recognised as an important rescue procedure, it has been criticised as being slow, inflexible and expensive. Unlike administrative receivership, where a creditor may appoint a receiver very quickly, and the receiver may begin work equally quickly, any application for administration must be made to court. The Act streamlines the administration process and puts company rescue at its heart. But this will not mean simply saving the legal entity of a company - an "empty shell". Value maximisation is clearly the aim. Where, in line with this approach, the rescue of a company as a going concern is clearly not the best option, the objective will be to achieve a better result for a company's creditors as a whole. Nevertheless, it is important to recognise that the duty to creditors as a whole will often be served in the long term through a rescue of the company, and the Act ensures that this will be considered. I know that this was an area where some insolvency lawyers expressed concern that amendments made during the passage of the Bill to clarify this point might undermine our objective company rescue. I can assure you that they do not and Lord McIntosh made that point clear in the House of Lords. A key element of the streamlined administration procedure will be the out-of-court entry routes. These will be available to qualifying floating charge-holders as well as to the company and its directors. They will be able to appoint an administrator of their choosing without the bureaucracy and costs of a court application. Additionally, the requirement for a Rule 2.2 Report is being removed - something that will significantly reduce the bureaucracy and costs associated with an administration. Finally, the Act provides clearer timescales to balance the need for successful completion with the requirement administrators act as quickly as reasonably practicable so that cases are not drawn-out at the expense of companies and creditors. We believe that these changes to the administration procedure will result in its wider use as a rescue vehicle, and encourage smaller companies to make use of administration not simply as a last resort, but before their financial situation becomes terminal. Individual Insolvency Turning to individual insolvency, the Act will remove the "one-size-fits-all" approach that characterises our current insolvency regime. Under the current system, all bankrupts are largely treated the same, regardless of their conduct. Their assets are dealt with in the same way and in most cases they are discharged after the same amount of time. The result of this approach is that the stigma associated with bankruptcy is applied equally to the unfortunate, the irresponsible, the reckless and the dishonest. One result of this stigma is a fear of failure amongst entrepreneurs and would-be entrepreneurs. People willing to take risks are essential to economic growth. In the UK 31.5 per cent of people say that fear of failure would prevent them from starting a business. In the United States, that level is only 21 per cent (Global Entrepreneurship Monitor 2001 Executive Report). We feel the fear and consequences of failure should not be so disproportionate that they act as a disincentive to responsible risk-takers. The reforms will encourage business start-ups and give confidence to those who have failed through no fault of their own to start again. Yet, at the same time, the measures will strike a strong balance between the interests of debtors, creditors and the public. The Act introduces a fairer system that takes into account individual circumstances. We are reducing the period before which a bankrupt is discharged from restrictions to a maximum of 12 months for the majority of bankrupts. We will also remove many irrelevant and outdated restrictions that currently apply automatically to all bankrupts. By way of a counterbalance we will introduce a new Bankruptcy Restrictions Order regime to take action against those whose behaviour poses a threat to the public and commercial interest. The official receiver will look at the facts of individual cases, including facts provided by third parties, so as to be able to report to the Secretary of State who will decide whether it is in the public interest to bring a Bankruptcy Restrictions Order application. The court will then decide on the facts of the case whether an Order should be made. Where the bankrupt agrees instead to a binding undertaking, this will have the same force as a Bankruptcy Restrictions Order. I want to stress that bankruptcy is not, and under our proposals, will not be, an easy option. Indeed, we firmly believe that bankruptcy should be seen as a last resort. This is why trustees in bankruptcy will continue to be able to realise the same assets as now. We are making it easier to do so by introducing income payments agreements and amending the procedure for applying for suspension of discharge. Where bankrupts are able to make a contribution from their income they will still be required to do so. And income payments orders and agreements will commonly extend beyond discharge to run for three years from the date of the Order or Agreement. These measures will apply to all bankrupts, both consumer and business. Finally, the Act includes reforms that abolish the Crown's preferential right to recover unpaid taxes and modernise the financial regime of The Insolvency Service. In the context of corporate insolvency, in abolishing Crown preference the Act provides for a prescribed part of the company's assets to be "ring-fenced" for unsecured creditors, to ensure they benefit. The extent of the prescribed part will be set out in secondary legislation, on which we are currently consulting. The financial reforms will bring increased transparency and simplicity to the fee structure of The Insolvency Service, and changes to the Insolvency Services Account will ensure the maximum possible investment return goes to insolvent estates. Together, these measures will make up to an extra £115 million a year available for distribution to all creditors. In preparing the Act we consulted widely and had extensive discussions with interested parties including insolvency lawyers and practitioners, the lending community and business both large and small. We received responses from many organisations, including the ILA. We listened to the suggestions and concerns and have taken them on board wherever possible. The result has attracted wide support. This consultation process was recognised; to quote the British Bankers' Association on the introduction of the Enterprise Bill into Parliament, "We have enjoyed a dialogue with your Department in which we have had the opportunity to explain how banks attempt to rescue businesses in severe difficulty... The Enterprise Bill published today reflects that dialogue." And in a letter to Insolvency Service Officials, lending organisation the Factors and Discounters' Association commented: "...the Enterprise Bill is a clear sign of the Government's intention to develop an entrepreneurial culture in the UK." Over the next few months we will be finalising the secondary legislation necessary to implement the Act and we will be consulting as widely as possible on it. Subject to Parliamentary approval of the necessary secondary legislation, the company and Crown preference provisions should come into force in the first quarter of the financial year 2003 while the individual and financial regime provisions should come into force early in the 2004 financial year. INTERNATIONAL PERSPECTIVE There is increasing recognition that insolvency regimes are more than just mechanisms for dealing with debt at the national level. They are part of the wider international framework needed to encourage investment and stimulate economic growth. To ensure the strength of this framework, it is important that there are effective mechanisms to deal with cross-border insolvencies. The EC Regulation on insolvency proceedings came into force at the end of May this year, following many years of sometimes-tortuous negotiation. The Regulation aims to improve the efficiency of insolvency proceedings with a cross-border dimension by providing for mutual and automatic recognition across the EU Insolvency office holders should now be able to deal more easily with assets located in other EU states. Creditors with claims against debtors located elsewhere in the EU can expect to receive information about insolvency proceedings taken there and have a right to submit a claim in those proceedings. There have already been instances where the Regulation has delivered results that would probably not have been achievable had it not been in existence. Whereas fears that the Regulation would lead to jurisdictional problems and the potential for forum shopping have not materialised. The Commission have also established a best practice working group to look at the interaction between insolvency and entrepreneurship in member states. Officials from the Insolvency Service who represent the UK have found that several of the conclusions of the group are similar to those we are putting in place through the Enterprise Act. To facilitate interaction with insolvency proceedings not affected by the EC Regulation, the Insolvency Act 2000 included a power to enact the UNCITRAL model law on cross-border insolvency - which itself is modelled largely on the Regulation. Of necessity, that has had to take a bit of a back seat while we devoted our attention to the demands of the Enterprise Bill. However, once that work has been completed, we shall be turning our attention to this issue. There is also growing international interest in insolvency through initiatives from bodies such as the IMF and World Bank who are undertaking assessments of individual country's insolvency regimes against internationally agreed codes for insolvency and creditor rights. Gordon Brown recently announced that the UK will be putting itself forward to be assessed. The UK will be the first major industrial country to do that. The prohibition on the use of administrative receivers and the streamlining of the administration procedure in the Enterprise Act coupled with the moratorium in company voluntary arrangements in the 2000 Act will reinforce the importance of company rescue at the heart of corporate insolvency law. Companies and their directors, as well as creditors will be able to choose the most suitable route with protection offered by moratorium. And the interests of all creditors will be considered. In individual insolvency, the changes in the Enterprise Act will help facilitate more business start-ups, whilst, the new Bankruptcy Restrictions Order regime, coupled with the provisions on disqualification of company directors will ensure adequate protection from those who pose a threat to the public and commercial community - whether they are consumers, businessmen or directors. Taken together, the provisions of the Insolvency Act 2000 and the Enterprise Act will not only create for the this country an insolvency regime suitable for the 21st century but also place us internationally in the vanguard of insolvency practice. We have put in place a framework for the future. We look to you and other insolvency professionals to use it well. |
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Other speeches by Melanie Johnson MP
(the following are available from the archive) |
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