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Insolvency Law

Expert guidance on all aspects of corporate and personal insolvency

25 SEP 2009

HOBS: The Insolvency Act 1976 - some illumination from a Sassenach

The speech of Mr Clinton Davis MP (Hackney Central), which was delivered in the House of Commons on the 3 March 1976, is worth revisiting. It outlines the position of English, Welsh and Scottish insolvency law at a time before the Cork Report had wrought its massive changes to insolvency law and policy. Indeed, the Justice Report of 1975 and the Blagden Committee of 1957 were then the hot topic amongst insolvency law reformers. Davis' speech is worth recounting in full. He noted:
"I beg to move, That the Chairman do now report to the House that the Committee recommend that the Insolvency Bill [Lords] ought to be read a Second time. I ought to say at the outset that, regrettably, I propose to take some little time in dealing with the Bill because it is a complex matter although it covers only 10 clauses. Before coming to the clauses, I want to say something about the general background against which the Bill was introduced in the Lords and is now being considered in this Second Reading Committee.

The present system of bankruptcy law in England and Wales was established in 1883. In the meantime three different committees have considered the legislation. The Bankruptcy Acts of 1914 and 1926 followed directly from two of the reports. The third committee, the Blagden Committee, reported in 1957. It found that bankruptcy law was generally satisfactory and well suited to its purpose. It did, however, suggest amendments designed to remove as far as possible certain administrative difficulties and irregularities in bankruptcy law. Unfortunately, no Government since 1957 were able to find time to introduce the legislation suggested by Blagden—a sad but hardly unprecedented reward for a hard-working committee of this character.

I am conscious of the need for more far-reaching changes in insolvency law than is proposed in this Bill—although I hope that I shall be able to satisfy the Committee that changes which enactment of this Bill would secure would be timely and significant. It is right that I should inform the Committee that the Department has started on a review to achieve this wider objective. There can be no doubt that this is a major and daunting task. It is a task which must take into account our EECcommitments and, in particular, the draft EEC Bankruptcy Convention, at present under general consideration by the member States.

The Bill is concerned with bankruptcy, winding-up of companies and also sequestration in Scotland. Its most important object is to bring certain monetary limits into line with present-day values. It is expected that, as a result, the workload of theInsolvency Service will be brought more into line with available resources. The Bill is also expected to result in a reduction of about 100 to 150 staff over the next three years, leading to a total saving of up to £750,000 a year. As I have already indicated, effect is also given in the Bill to a number of other changes in insolvency law, which are long overdue.

In Scottish law, the term "bankruptcy" has connotations shrouded fairly heavily in mystery for us poor Sassenachs. It can mean insolvency, notour bankruptcy, as well as sequestration. I had hoped that we might have the benefit of certain views this morning from a Scottish National Party Member of Parliament, namely the hon. Lady the Member for Moray and Nairn (Mrs. Ewing), but she must be talking about fishing. Perhaps I shall get into trouble for having said that. I am informed that the term "notour bankruptcy" has nothing to do with the denial of a right of free passage, but it defines the condition of one who had retired to the sanctuary of the Abbey of Holyrood for the purpose of avoiding imprisonment for debt. His insolvency, I am told by the Lord Chancellor, thereby became "notour" or, as we would put it, notorious. I understand that there are no tours to the Abbey now available.

The basis of the present law in Scotland lies in the Bankruptcy (Scotland) Act 1913. In November 1968 the Scottish Law Commission appointed a working party under Lord Kilbrandon to examine the relevant law in Scotland. It concluded that the 1913 Act had operated satisfactorily but suggested certain simplifications and improvements.

Although, therefore, there is some similarity between bankruptcy in England and Wales and sequestration in Scotland, there are significant differences both in law and practice but, in so far as the provisions of this Bill are appropriate for Scotland, they will take effect in Scotland as well as in England and Wales.

Bankruptcy refers only to individuals and partnerships. Insolvent companies may be compulsorily wound up under the provisions of the Companies Act 1948. In December 1973 our predecessors introduced into the House of Lords a Companies Bill to implement a number of the recommendations of the Jenkins Committee, which reviewed the 1948 Act and reported in 1962. Because the present Government wished to undertake a wider-ranging review of company law, that Bill was not proceeded with. However, some of the measures—which I hope will be regarded as relatively non-controversial—contained in that Bill have now been included in this Insolvency Bill. Another Bill was published today—the Companies (No. 2) Bill, which will also deal with certain matters extracted from the 1973 Bill, although it has certain novel features.

Unhappily the work of the Insolvency Service Division has been growing for a number of years, quite apart from the difficulties thrown up by the recession that we are now undergoing. In substantial part, this is due to the erosion in real value of the monetary limits laid down by the relevant statutes. We must try to adjust this work load to the specialised staff resources which are available. The most appropriate way of doing this is to restore the value of these limits.

An instance of the need for this change is afforded by the monetary limit for the minimum debt required to found a creditor's petition in bankruptcy. The limit, at present £50, was fixed before 1914. It is completely out of date. Today, even though he may be owed this comparatively trivial sum, a creditor can institute bankruptcy proceedings against his debtor. I hope that the increase of this, and other monetary limits, will lead to a considerable reduction in the number of more trivial domestic and consumer credit cases which give rise to bankruptcy proceedings. These cases do not usually involve the general public or a wide circle of trade creditors, there are few or no assets available to discharge costs, and the proceedings, which necessarily involve a substantial number of skilled officials, are an unnecessary drain on the public purse.

Some of the other major results of the restoration of the value of limits will be the raising of the amount of wages or salary allowed as a preferential debt to employees; an increase in the amount of necessary goods a bankrupt may retain, and in the minimum amount necessary to constitute the offence of obtaining credit whilst an undischarged bankrupt.

The position of employees so far as arrears of wages or salary is concerned will, of course, be improved when the relevant sections of the Employment Protection Act 1975 come into operation on 20th April this year. They provide that, in the event of an employer becoming insolvent, employees will receive early payment out of the Redundancy Fund of up to eight weeks' arrears of wages, payment in lieu of notice, holiday pay and so on, up to a total not exceeding £80 per week. The Secretary of State for Employment will then stand in the shoes of the employees in respect of such moneys paid out and will be entitled to claim in the bankruptcy or liquidation.

There is a similar right of subrogation provided in the Companies Act 1948 for any person advancing moneys to pay the wages of company employees. It has been suggested that by increasing the monetary limit for preferential wages, we are merely assisting these lenders to recover moneys advanced, to the detriment of unsecured creditors. There are, of course, several categories of preferential debts, all of which rank equally between themselves, and we take the view that it would be undesirable to make an exception of one of them, that is, wages, by not fully restoring the value of the present monetary limit. I certainly consider, however, that the whole system of preferential debt is in need of review. This will be considered during the wider-ranging review of insolvency law which we are now undertaking."

At this time peers also addressed the Blagden and Justice reports. In the House of Lords (HL Deb 05 February 1976 vol 367 cc1517-8WA) two eminent peers exchanged words on the reform documents. Lord Gardiner asked Her Majesty's Government:

"Whether they accept any (and if so, which) of the 69 recommendations for the improvement of the Law of Bankruptcy and Deeds of Arrangement contained in the Report of the Blagden Committee (1957) and of the 31 recommendations for the improvement of the Law of Bankruptcy contained in the Justice Report Bankruptcy (1975)."

Lord Winterbottom retorted:

"The Insolvency Bill recently introduced puts forward proposals very similar to the more urgent of those contained in the Justice Report. It also makes provision for dealing with the problem of bankrupts who do not apply for discharge which was to the forefront of the Blagden Committee's consideration. The Department has also recently stated that it is starting a wider-ranging review of insolvency law generally and matters not dealt with in the reports mentioned will be considered during the course of that review. The Government will also be engaged in negotiations concerning the Draft EEC Bankruptcy Convention. I very much regret that it would take very considerable time and research to ascertain the detailed position as to all outstanding recommendations of the Blagden Committee and the Justice Report."

The Blagden Committee report's recommendations for reform (as noted by Davis) had been a long time in coming. As can be seen from the following exchange, a full ten years before the eventual legislative reforms. On the Blagden Committee (Recommendations) Mr. du Cann
asked (HC Deb 15 March 1968 vol 760 cc386-7W) "the President of the Board of Trade what consideration his Department has recently given to the recommendations of the Blagden Committee; and what conclusions he has consequently come to about possible changes in the laws governing bankruptcy."

Mr. Darling responded,

"We hope to introduce legislation to amend the bankruptcy law in the light of the Blagden Committee's recommendations but I cannot say when it will be possible to do so." It would be ten years before this occurred.

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