My Lords, I thank my noble friend Lord Flight for his arresting figures on the strength and success of the insolvency industry, returning more money to creditors—£4 billion a year—than most other similar regimes, as well as a job-saving role. That is a cameo of success that we can only support. Indeed, I would be delighted to meet representatives from R3, as my noble friend Lord Flight has suggested and the noble Lord, Lord Stevenson, has supported. I reassure the Committee that R3 representatives met officials during the course of the Bill, and clearly they have met opposition Peers, but it would make a great deal of sense for us to try to fit in a meeting before Report. In the mean time, I will try to deal with some of the concerns which have been raised.
Clauses 116 and 124 concern corporate insolvency, and primarily administration. These measures are part of ensuring that the administration procedure, which is critical to the success of distressed companies in the UK, remains fit for purpose. Clause 116 is technical and relates to the order of priority for the payment of claims in a corporate insolvency. Generally speaking, after payment of the expenses and preferential creditors such as employees, any debts secured by a floating charge—bank debt is often a floating charge—are paid, and only thereafter are the ordinary unsecured creditors paid. However, the proceeds of a wrongful trading claim do not follow this order of priority. Such a claim is where a court has ordered that the directors should pay money to compensate creditors for their loss, having knowingly caused the company to trade while insolvent, such as where the directors have caused an insolvent company to take customer deposits for orders that they ought to have known could not be fulfilled.
Case law has established that these proceeds are not treated as assets belonging to the company prior to the insolvency. They are therefore not assets of the company at the time that the floating charge crystallises at the onset of formal insolvency. This means that the proceeds are not paid to the floating charge holder. Instead, they form part of the sums available for payment to unsecured creditors. I hope that I will be forgiven for explaining all this, but I found it very helpful myself.
It has been suggested that it is unfair that such proceeds are not available to the holder of a floating charge because the actions of the director which led to the claim may have worsened the position of the floating charge holder. Of course, a bank whose debt is not fully paid by floating charge realisations will rank alongside other unsecured creditors in respect of that part of the outstanding claim and may still share in those assets as an unsecured creditor. Furthermore, it would be open to the floating charge holder to give up its priority and claim for the entire debt as an unsecured creditor.
I would also highlight that the claims to which this clause relates are a very narrow band which have arisen primarily where assets have been sold or transferred for less than their worth, where favoured creditors have been paid off shortly prior to the insolvency, or where the directors have caused the company to trade wrongfully or fraudulently. Those claims will almost always be against the directors or persons connected
to them. The intention of this clause is merely to put the existing legal position in respect of wrongful trading into statute. This will provide clarity and remove the risk of future challenge.
Clause 124 extends the period for which an administration can be extended by creditor consent, and I would stress “creditor consent” as this is not an automatic extension for the administrators. As my noble friend Lord Flight explained, an administrator complained that they can be too leisurely about a case, which is not what we want to happen. Administration automatically ends after a year, but there are times when not all matters can be concluded within this period. For example, selling a company’s property, particularly in difficult market conditions, may take longer.
Creditors can currently consent to extend an administration by up to six months. Usually this is enough time to finalise matters, but not always. Administrators must therefore apply to the court for any longer or additional extensions, a costly process that is ultimately paid for by the creditors. Insolvency Service data show that around 12% of administrations last for between 18 months and two years. That equates to around 300 cases per year where, in future, court applications costing around £5,000 will not be required, which will mean a substantial saving to creditors. If creditors are content to allow an administration to continue, they should be able to agree to that. If not, they can refuse consent. In setting the maximum period to which they can consent we have drawn a balance between making sure that the administrator tends to matters quickly and efficiently, and saving the unnecessary costs of applying to court.
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I now turn to Amendment 61AJ. This Government made an early priority of controlling legal costs because they had become unsustainably high. We made changes to the law on how conditional fee arrangements operate, following recommendations by Lord Justice Jackson. It is notable that he believed that his proposed reforms should apply to all aspects of civil litigation. The Jackson reforms were enacted in Part 2 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012—the LASPO Act that has been mentioned. The reforms apply across civil litigation and generally came into force in April 2013, but we agreed to delay implementation in respect of proceedings on behalf of an insolvent estate until April 2015. That limited delay was to give interested parties sufficient time to adjust to the changes. The reforms will control legal costs on both sides and help to curb the compensation culture by removing incentives and excessive litigation. Meritorious cases can and will still be brought.
That said, I note the concerns that litigation brought on behalf of insolvent estates has some differences in principle to other types of litigation. I also note the concerns about the potential impacts on litigation practice on behalf of insolvent estates. The noble Lord, Lord Flight, asked about the impacts. In April 2011 the Government published an impact assessment in relation to the reforms set out in Part 2 of LASPO. That explained that while there may be a reduction in
the number of cases brought where no-win no-fee conditional fee agreements are used, overall the LASPO reforms will tackle excessive cost. At the moment we are not planning to update that impact assessment in relation to insolvency proceedings.
I have heard what has been said and, if I may, I will take this amendment away and consider it urgently with colleagues in the Ministry of Justice in time for Report stage. I hope that my noble friend will take some reassurance from that and feel able to withdraw his amendment and his opposition to the clauses.