My Lords, it is good that Gibraltar has ensured that we can enjoy the experience and comments of the noble Lord, Lord Mitchell, today. Perhaps I may start by dealing with his point about Smith and Jones—or Popat and Neville-Rolfe becoming Neville-Rolfe and Popat on a Monday morning. I think that the answer I am about to give him shows the fine judgments here. As my noble friend Lord Flight said in his last intervention, pre-packs are speedy and can be helpful. The noble Lord, Lord Mitchell, will know that an insolvency practitioner has a duty to sell the business for the best price possible, and if in the example Jones and Smith are making the best—or, as sometimes happens, the only—offer, then the best outcome may be for a sale to the existing management. Jobs can be saved and business can continue as a result. However, I have listened to what he said about pre-packs, and what we are all trying to do is get this important provision right.
Clause 126 creates a power for the Secretary of State to legislate to restrict sales to connected parties of businesses or assets of insolvent companies by administrators. A sale to a connected party is where the insolvent business is sold to a purchaser previously involved with the insolvent business. The most common form of connection is where someone is a director of both the insolvent and the purchasing businesses. A pre-pack occurs where the sale of the viable parts of an insolvent company’s business is arranged before the administration starts. The sale is then executed at, or shortly after, the appointment of an administrator. Perhaps I may respond to a point made, I think, by the noble Lord, Lord Mitchell, about the application of the clause. The clause in fact goes further than pre-packs, as I am sure he is aware. That is because, unfortunately, bad practice is not unique to pre-packing. It also applies to any sale in administration where creditors are not given a chance to hold a meeting to discuss and approve the sale.
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There was a good deal of discussion of these issues at Second Reading. The noble Lord, Lord Bilimoria, highlighted the concerns that had been expressed over a number of years. It was for that reason that the Government commissioned Teresa Graham, who has been mentioned, to conduct her independent review into the processes. The review found that pre-packs were a valuable part of the insolvency framework, but
that the process was not without faults, particularly in relation to sales to connected parties. I was glad to hear from the noble Lord, Lord Flight, of his support for Graham and for the fact that we implicitly have had an input through her having been consulted on these provisions.
As noble Lords will know, the Graham review proposed a number of voluntary measures. The two key recommendations were aimed at sales to connected parties only: first, the creation of a pool of people with experience in business to consider the pre-pack sale and increase creditor confidence in the deal, and secondly, the use of a viability review for the new company, drafted by the connected party to focus attention on its future success and to counter the high failure rate of connected party sales. These reforms are being implemented by the insolvency industry and should all be in place in the spring—which I hope will be welcome to the noble Baroness, Lady Wheatcroft. She asked us to look more speedily at the issue of bad pre-packs. I would say in response that we need time for Graham’s recommendations to bed in, but there will need to be a review well in advance of the sunset power in this Bill to ensure that confidence in pre-packs has improved as a result of the Graham review. The noble Baroness also mentioned issues around purchases of debt. Debt purchase is not an uncommon practice but of course should not affect the functioning and outcome of the insolvency process.
Regulations made using the power in Clause 126 could prohibit sales to connected parties or permit them to proceed, subject to meeting certain conditions. These conditions could include requiring the approval of the court, of creditors, or even of an independent person. I know that some noble Lords are concerned that obtaining external approval for such sales would unnecessarily delay them. However, I believe that it is vital that creditors have confidence that the sale represents the best outcome. Regulations that we would make would be subject to affirmative resolution in both Houses. The Delegated Powers and Regulatory Reform Committee has reviewed the use of an affirmative power without comment.
I now turn briefly to the amendments, because it is helpful in our further discussions of this Bill to comment on each one. Amendments 61ADA and 61ADC are designed to restrict the scope of Clause 126 to pre-pack sales only. The clause as drafted covers all administration sales. These amendments could potentially lead to dishonest individuals delaying a sale out of administration to avoid any conditions imposed by new regulations we make on pre-packs. The Graham review recognised this risk and specifically recommended that all potential sales out of administration to connected parties should be captured. The Government agree with this approach.
Amendment 61ADB proposes that the power to ban all sales in administration to a connected party be removed. It is the intention that this power would be used only if the reforms recommended by Graham are not successful in reforming the market. Although it is unlikely that the Government would seek to ban such sales, it is important that the ultimate sanction is available. The Government will of course consult stakeholders on any changes before regulation is introduced.
I now turn to Amendment 61ADD. I was reminded last week by the noble Lord, Lord Stevenson, that a lot of changes are being made to the insolvency framework. As noble Lords have already said, in the UK we have an insolvency regime that is very highly regarded. The measures include ensuring that meaningful information about the likely fees and costs of a case is provided up-front to creditors.
We are also looking at the best way to ensure that essential supplies—such as broadband and utilities, which we mentioned earlier—are still available to companies while they get a rescue package agreed to. That is one aspect of the US Chapter 11 process which is a good fit here. Changes to debt relief orders will also improve access to debt relief for financially vulnerable people.
We believe that Clause 126 gives us the powers we need to improve insolvency procedures, as and when we need to. To respond to the question of the noble Lord, Lord Mitchell, I believe that, overall, this Bill and the other changes we are making will give us the protections we need. I hope, in the circumstances, that the noble Lord will feel able to withdraw his amendment.