Motion to Approve
That the draft Regulations laid before the House on 2 March be approved.
My Lords, I hope I have the right speech. If I may, I will take a few moments of your Lordships’ time to set these regulations into context. They make consequential amendments and savings provisions to legislation that refers to the Insolvency Act 1986—as it will be amended by the Deregulation Act 2015 and the Small Business, Enterprise and Employment Act 2015 on 6 April 2017—and to the Insolvency Rules 1986, which have been repealed by the Insolvency (England and Wales) Rules 2016. These amendments will come into force on 6 April 2017.
The insolvency reforms will initially be adopted by the mainstream insolvency processes and it is anticipated that departments responsible for special insolvency regimes will update their legislation in due course.
Regulation 4 is a savings provision. It provides that the Insolvency Act will not be amended and will continue to apply as it does now for certain purposes or certain insolvency regimes. This provision will ensure that these other insolvency regimes remain operational in the interim period.
These regulations make amendments to various pieces of primary and secondary legislation. The most significant changes by volume update the Administration of Insolvent Estates of Deceased Persons Order 1986, which is the procedural framework that deals with the administration of the insolvent estates of deceased debtors, and the Insolvent Partnerships Order 1994, which deals with insolvent partnerships.
Over the last two years, the Government have introduced a series of reforms to modernise and streamline the insolvency process. They have achieved this through the Deregulation Act 2015, the Small Business, Enterprise and Employment Act 2015 and the new Insolvency (England and Wales) Rules 2016. The policy impetus for these measures was to remove unnecessary burdens and enable greater use of technology to reduce the cost of administering insolvency proceedings. It was part of the Government’s Red Tape Challenge, which asked stakeholders for views on how unnecessary regulation could be reduced and how procedures could be modernised, simplified and made more efficient. The responses produced a package of measures aimed at reducing costs and improving returns to creditors. The changes, which commence in April 2017, will deliver a net benefit to business of £22 million per year.
The key policy changes to which these consequential amendments apply include, first, changes to the way in which decisions are made; secondly, the abolition of final meetings; thirdly, the ability for creditors to opt out of receiving correspondence; fourthly, measures to increase the use of electronic communication and websites; and, fifthly, the removal of a requirement to formally file claims for small debts.
With regard to changing the way in which decisions are made, in the past, to begin some insolvency proceedings and make decisions in all insolvency proceedings the officeholder was required to call a physical meeting of the creditors of the insolvent person. Feedback from stakeholders was that this process was more expensive and cumbersome than was really necessary. In response to that feedback, changes have been made to the way in which officeholders will engage with and seek decisions from creditors. Physical meetings will no longer be the default mechanism for making decisions in insolvency proceedings. In fact, an officeholder will not be allowed to hold a physical meeting unless 10% in value of the creditors, 10% of the creditors in number or 10 individual creditors request that a meeting is held. This puts control back into the hands of creditors, and it is anticipated that this move alone will result in savings of more than £6 million per year. In many cases, an officeholder will be able to use a process of “deemed consent”, where they write to creditors with a proposal and, provided they do not receive objections from more than 10% in value of creditors, the proposal will be deemed to have been approved. Alternatively, officeholders can use an online virtual meeting, a telephone meeting or an electronic voting system, or seek decisions by way of correspondence.
With regard to the abolition of final meetings, currently an officeholder must hold a face-to-face meeting with creditors in order to lay his or her final report on the outcome of the case. These meetings were in fact rarely attended by creditors. Going forward, the officeholder will simply send a final account of the case to creditors, but this will not reduce the creditors’ rights to challenge any actions of the officeholder.
With regard to opting out of correspondence, previously in insolvency proceedings the officeholder was required to send all notices, all reports and all other documents and communications required by legislation to all known creditors, even where a creditor did not want to receive such information. It is inefficient for an officeholder to have to send such documents where they are not wanted. Under the new regime, creditors with no further interest in an insolvency process will be able to opt out of receiving further routine correspondence and reports from the officeholder. This will not include correspondence about the payment of a dividend, as the officeholder will still have to notify all creditors if a dividend is proposed.
With regard to the increased use of electronic communication, where, before the commencement of insolvency proceedings, parties have customarily corresponded electronically with one another, it is government policy that this should be allowed to continue without onerous regulatory burdens as to the means of communication. The reforms remove the need for the officeholder to obtain permission from each creditor to communicate electronically after the commencement of the insolvency proceedings. This will encourage e-communication, which is generally cheaper and speedier than traditional post. With regard to the use of websites, under the current rules an officeholder must obtain a court order if he or she wants to put all future communications with creditors on a website. This considerably restricts the use of technology. The requirement for a court order has therefore been removed.
With regard to no need to formally file claims for small debts, where a creditor is owed up to £1,000, new provisions will allow an officeholder to rely on information contained in a company’s or bankrupt’s records and to pay a dividend without the need for the creditor to submit a formal claim.
It is fair to say that as business practice has developed, particularly through new technologies, corresponding changes to insolvency law have been slow to follow. Users have not always been able to take advantage of the quickest, most cost-effective or most convenient methods of engaging with the insolvency process. The changes coming into force on 6 April modernise the insolvency process by encouraging the use of electronic communication and decision-making processes fit for the 21st century. These changes will increase creditor engagement through more convenient methods of interaction, as well as reducing the costs of seeking decisions. In particular, amendments enabling modern methods of communication and decision-making to be used in place of paper communications and physical meetings will be introduced. This will increase creditors’ engagement in insolvency cases by encouraging the use of decision-making processes fit for the 21st century.
The insolvency reforms have been informed by extensive consultation and engagement with a range of parties affected by insolvency, including the insolvency profession, creditor representatives, insolvency regulators and public bodies. I hope that gives a full explanation of these regulations and I commend them to the House. I beg to move.
My Lords, I thank the Minister very much for that detailed explanation. I welcome the streamlining and digitising of the system, which is well overdue.
I raise two points, which I hope the Minister can answer. On the European Convention on Human Rights, the Minister for Small Business says:
“In my view, the provisions of the”,
“are compatible with the Convention rights”.
Can the Minister be a little more definite on what legal opinions the Government have taken on these regulations post-Brexit, which is around the corner? The Minister for Small Business just gives her view rather than the legal view, which the House is entitled to hear.
The other points I take up with the Minister are the non-requirement of creditors meetings and the streamlining of methods. That is absolutely ideal and it is the way to reduce the costs, but there is no mention in this legislation or the Minister’s introduction of the statutory instrument of the not insubstantial insolvency fees coming out of the carcass of an insolvency. I am a registered chartered accountant, though I have never been an insolvency practitioner, but I have seen, sadly, many of my clients being subject to bankruptcy and insolvency. The one thing that I have always thought a little worrying was that the insolvency practitioners’ fees—with all insolvency practitioners—come out of the carcass of that insolvency before anybody else gets a dip into it. By streamlining it in the way we have, I wonder whether the Minister and the Government’s civil servants have looked at the attitude of creditors to the size of and, sometimes, lack of change in the level of insolvency fees. It tends to happen in smaller bankruptcies that, after the insolvency practitioner has charged their fees—at a not insubstantial hourly rate, particularly in London—there is not much left.
My Lords, I too thank the Minister for her very full introduction to this. I was involved in the passage of the Deregulation Bill 2015 and the Small Business, Enterprise and Employment Bill 2015, so I have some background and previous on this. I do not think the noble Lord, Lord Palmer, was involved, but he might be advised to read Hansard for both those Bills because extensive discussion of the points he raised took place on the primary legislation. It is not irrelevant for him to be referred to that because a number of very important points were made along the lines of the ones he made. Good responses were given by the Government at that time, which I recommend to him.
There was one point in what the noble Lord said that it would be useful to put on the record again. A lot of the Minister’s statement was concerned with making the case that these changes, which are in practice quite narrow, will make a huge difference to the insolvency arrangements. At the end of my remarks I will come to a couple of points on the broader picture here.
In truth, the main debates we had on the Bills that led to this statutory instrument were about the rule of 10. A lot of weight and some cost savings were put on the idea that control of the liquidations and insolvencies mentioned in the statutory instrument had passed too far away from creditors across to insolvency practitioners. Indeed, the question of fees still needs to be addressed. The arguments used and the decisions that came up did not back up that assertion.
Ultimately, the proposal was to abolish the meeting of creditors, at which some exercise by creditors could be played out in full. The point was made by so many people around the business and many insolvency practitioners that the creditors’ meeting was really the meat of any insolvency. I am sure that the noble Lord, Lord Palmer, would say the same, even though he is not a direct practitioner: it is only when you get the creditors around the table with the IP person that you get the chance to work out exactly what will come and how much will be paid to each of them.
There was also an assumption behind the Bill that was not borne out in practice, which is that all creditors are equal, that somehow the decisions would always be accepted by a group of creditors if they were brought together and that that could therefore be replicated in a virtual space. That is not the case. In most small business insolvencies there is usually a major creditor—usually a bank—that is completely intransigent. The problem is not one of trying to resolve how much is divvied up between them, but trying to get the bank to agree to terms that do not freeze out the smaller creditors, many of whose businesses will suffer if they cannot get the proceeds from the insolvency.
The compromise position that we came up with of a rule of 10 was that you could have a meeting if it was 10% by value of the creditors, 10% of the number of creditors or 10 creditors. It was an uncomfortable compromise. I am sure that the Box would agree that we did not find a very good position on this, but it was the best way of trying to balance those competing issues that I have identified. The overbearing behaviour of the single big creditor, the difficulty of trying to reach out to the smaller creditors and the position of the insolvency practitioner as the person who ran this all play against the creditors being in control. We should not underplay that point.
It is true that the new technologies will help. The noble Baroness did not mention the change in the language, but it is quite striking in these regulations, with a move away from “meetings must be held” to “processes may be carried out”—from the negative, “You are in problems if you do not do it this way”, to the permissive, “If you do it this way, there is a recognition of how it will happen”. That will prove more beneficial in the long run than much of what we have been talking about. Nevertheless, we broadly support what has happened. These are the natural consequences of the discussions held during the passage of the Small Business, Enterprise and Employment Bill and the Deregulation Bill. They are appropriate and I am extremely grateful to see that they will be brought in on 6 April.
I thank both noble Lords for their contribution to this debate. To respond first to the noble Lord, Lord Palmer, on his question of whether legal advice is obtained by the Government before making the ECHR statement, the answer is very much yes. Ministers are advised by government legal advisers before expressing such a view. Further than that, or on what happens post-Brexit, I would not like to comment.
My experience of insolvency goes right back to the Insolvency Act 2000, when I was in the same position as the noble Lord, Lord Stevenson of Balmacara, is now. The language of regulations and primary legislation in those days was very different but ever since then I have been able to understand where the noble Lord, Lord Palmer, is coming from with regard to the not insubstantial fees of the insolvency process. The question, of course, is what the Government are doing, if they can do anything, to interfere in the marketplace with regard to who charges what fees. In October 2015, the Government introduced the need for officeholders to provide a fees estimate, which creditors are asked to agree. These rules will be reviewed and possibly revised, depending on how effective they are proving. I hope that is helpful. I absolutely understand why the question was asked.
I thank the noble Lord, Lord Stevenson, for helpfully expanding on where we have come from in terms of the rule of 10, as, yes, on the face of it, these appear quite narrow changes. It was also helpful of him to suggest to the noble Lord, Lord Palmer, that on the question of expenses and so on, we should look back in Hansard to when these issues were discussed in much more detail then they can be in relation to the regulations before us.
The proposal to abolish meetings of creditors is important. It struck me when I first looked at it because, as the noble Lord suggested, of course some people want to be at the insolvency meeting to put forward their case, particularly the smaller creditors involved. I am advised that research shows that physical meetings are very poorly attended by creditors and, as a result, are not an effective means of engaging with them. They do not reflect modern methods of communication that are available and could be used to seek decisions from creditors. There are better ways of seeking a view, such as using video or telephone conferencing or online voting methods, and officeholders are now being given the flexibility to identify and use the most appropriate of these. We very much hope that these new provisions will give more scope for creditors to actively participate in making case-related decisions.
I am reminded of a debate on a recent order before your Lordships’ House, when the noble Lord, Lord Mendelsohn, talked about the need to find more savings in regard to the cost to business. We estimate that this will be a £22 million saving, which is one small contribution to that difficult process. There is always the possibility of unintended consequences when trying to make things more streamlined, effective, efficient or 21st century—whatever that can mean. We have to be very careful that we do not compromise people such as the small creditor who is having to push his or her weight against the larger creditor, who can take his or her place more aggressively—if I may use that term.
I am glad that the noble Lord, Lord Stevenson, referenced the change of language. I agree that it really does help. It is important that we think about language when drafting legislation in areas such as this—the change from “must” to “may” is a good move in that sense.
I thank noble Lords for their consideration of the regulations and for their valuable contributions to the debate. I hope we can agree that these regulations will bring important benefits from updating the legislation to ensure that it is efficient and effective, delivering the best returns possible for those affected by insolvency. I commend these regulations to the House.