Clause 242 - Abolition of Crown preference

Enterprise Bill – in a Public Bill Committee am 4:30 pm ar 9 Mai 2002.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of Nigel Waterson Nigel Waterson Ceidwadwyr, Eastbourne 4:30, 9 Mai 2002

I beg to move amendment No. 437, in page 170, line 5, after 'production)'' ', insert

'and immediately after those words there shall be inserted ''after deducting any amounts paid or payable by the Secretary of State in respect of such debts under Part XII of the Employment Rights Act 1996.''.'.

Photo of Mr Nigel Beard Mr Nigel Beard Llafur, Bexleyheath and Crayford

With this we may discuss amendment No. 438, in page 170, line 5, at end insert—

'(4) In section 189 of the Employment Rights Act 1996 (Transfer to Secretary of State of Rights and Remedies) subsections (2) to (4) shall cease to have effect.'.

Photo of Nigel Waterson Nigel Waterson Ceidwadwyr, Eastbourne

On one level, the abolition of Crown preference is a dramatic step. I hope that, with your indulgence, Mr. Beard, we can have a modest clause stand part debate on the concept after we have dealt with these fairly narrow amendments. The proposal has been widely welcomed, but as with so much else to which the Chancellor turns his hand, one must be careful about the small print.

The amendments deal with one situation. The expectation from all the DTI's announcements and from the forest of press releases was that Crown preference would be completely scrapped, and a great cheer went up when that was announced. However, although the clause abolishes the Crown's preferential rights to the debts listed in subsection (1), it does not abolish the DTI's subrogated preferential rights in respect of the salary and wage arrears that it is

required to pay employees under the insolvency provisions of the Employment Rights Act 1996. Those subrogated preferential payments can be very substantial, and must be paid in full before anything can be paid out on any remaining preferential claims that employees may have. That can seriously reduce an employee's chances of receiving any payment in excess of the sums payable by the Secretary of State. It seems, therefore, that the Chancellor giveth with one hand and taketh away with the other.

These are probing amendments, however. I would be interested to hear on what basis the Government will maintain the existing position for such preferential claims.

Photo of Jonathan Djanogly Jonathan Djanogly Ceidwadwyr, Huntingdon

I welcome the abolition of Crown preference in the round, although I shall give my stand part speech on the next clause, which deals with the substance.

I have one question. The Bill refers to certain categories, and subsection (1)(a) deals with Inland Revenue debts. The explanatory notes state, however, that those are debts that are due to the Inland Revenue for 12 months prior to the relevant date. Similarly, paragraph (b) refers to Customs and Excise debts, but those are debts owed six to 12 months prior to the relevant date. Why does the clause refer to debts owed for 12 months, not to all debts? Perhaps other debts are cancelled in some other way, but I doubt it. I would be interested to hear the Minister's opinion.

Photo of Douglas Alexander Douglas Alexander Minister of State (e-Commerce & Competitiveness)

I have listened with interest to the points that have been made in favour of the amendments, and I shall deal first with amendment No. 437.

When amounts are paid out of the national insurance fund under the insolvency payments provisions, the position of the Secretary of State is somewhat different from that of other Crown preferential creditors. She assumes the rights of all the former employees concerned and becomes a single creditor of the employer in their place. She steps into the former employees' shoes, and has the same preference as they would have had in respect of those debts. Indeed, she has the same preference as they still have in respect of the proportion of those debts that exceeds the statutory maximum payable under the insolvency payments provisions, which are intended to provide a minimum safety net.

It would be odd for the Secretary of State to have a different status in the insolvency proceedings than the former employees themselves would have in respect of the same debts. Any private sector individual or organisation that paid the former employees' claims would have the same preference as the employees, and I am not at all convinced that the Secretary of State should be placed in a worse position than other creditors in equivalent circumstances.

It should be borne in mind that debts under the insolvency payments provisions arise at or around the time of a business's insolvency. That contrasts with other Crown preferential debts, which are levied as Government revenue, and have generally accrued or been owed during the trading life of the business.

Debts under the insolvency payments provisions also arise from money being paid out of the national insurance fund. The Secretary of State has a responsibility to safeguard the fund, into which employees and employers have paid their contributions for eventualities such as those that we are discussing. In the light of all those considerations, I cannot accept amendment No. 437, and will ask the Committee to vote against it if it is pressed.

I have listened carefully to the points that have been made on amendment No. 438 with regard to removing the ''super preference'', as it might be best described. The amendment cuts across several areas of Government policy, and I am sure that hon. Members will appreciate that I cannot accept it. However, if Opposition Members are prepared not to press it, I will reflect on what has been said. I should make it clear, however, that I am not making any promises that I will conclude that changes are necessary.

I was asked a specific question on the scope of preferential debts to Customs and Excise, as opposed to those of the Inland Revenue. The scope of the status was set out in the Insolvency Act 1986. If that clarity is insufficient and the hon. Member for Huntingdon wants further guidance on the terms of that, I would be happy to write to him.

Photo of Nigel Waterson Nigel Waterson Ceidwadwyr, Eastbourne 4:45, 9 Mai 2002

I am not sure that I accept everything that the Minister has said, but his explanation has been full. Given that there are issues to develop in the stand part debate and on the following clause, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

Photo of Nigel Waterson Nigel Waterson Ceidwadwyr, Eastbourne

As I have suggested, the scrapping of Crown preference is a major step that we welcome. In fairness, it has been welcomed widely by many organisations, such as the Institute of Directors, the Federation of Small Businesses and the R3 group, which is the prime clearing house of the various insolvency practitioners.

Crown preference is one of the relatively few issues in the Bill that impinges on our constituency mailbags and surgeries to some extent. There has always been a feeling that the Crown preference was unfair on the part of small business men and sole traders—certainly, those who come and see me from time to time—and that, were it not for Crown preference, in many situations money would be available for creditors that is not available at the moment.

One or two of my colleagues, including my hon. Friend the Member for Cities of London and Westminster, have more than hinted that when dealing with them on behalf of constituents who have got themselves into difficulties, the Inland Revenue, and especially Customs and Excise, can be extraordinarily inflexible. That seems even more so when companies get themselves into insolvencies.

The Opposition broadly welcome the scrapping of Crown preference. There is a figure for the cost to the Treasury—I cannot put my hands on it at the moment, but it is at least several hundred million pounds—but the way to look at that is as extra funds available for creditors other than from the Government and the taxpayer. That is to be welcomed.

There are some more sceptical voices, however. The Institute of Chartered Accountants has pointed out that an unintentional effect of the removal of Crown preference is that the Inland Revenue and others could be motivated to enforce methods of recovering their debts even earlier, as my hon. Friend the Member for Cities of London and Westminster suggested. That could precipitate more insolvencies, not fewer.

A similar point has been made by the British Bankers Association, which takes the view that the sum of funds released will have little or no material impact on the recovery rates of other creditors. It stated in its response to the White Paper:

''The most important thing the Crown could do to support the further development of enterprise, would be to behave in a 'commercial' way when considering CVAs or other instances of distress. Businesses could be saved if the Crown were prepared to forego part of its 100p in the pound.''

I want to focus on the role of the Crown, not in insolvency, but in the build-up to it, when a business is clearly in difficulty with cash flow or something similar and needs the forbearance and understanding of its creditors, including such bodies as the Inland Revenue and Customs and Excise. My experience, having attempted a number of times to help constituents who were under great pressure, is that it is barely worth spending the money on a stamp to write to Customs and Excise. The response is invariably totally inflexible; a pound of flesh will always be taken under present circumstances. The Inland Revenue tends to be more flexible—or perhaps less efficient—in following up monies owed to it.

During the crucial period when a business is clearly in difficulties, but is not necessarily doomed to total failure and liquidation and needs understanding and forbearance, the provision will have no effect whatever. As I understand it, all that we shall achieve under clauses 242 and 243 will be to say that the Crown will not have its pound of flesh once an insolvency has taken place. The benefits of that, although to be welcomed—and I have welcomed them—might be outweighed by the fact that more businesses will be pushed into liquidation, because the bodies that we have mentioned will be much more efficient and much keener to ensure that they are not owed money in the liquidation of their companies. They will be more proactive in pursuing those amounts when they fall due and more deaf to entreaties that they should hold off and wait to see what happens. I should like to think that that is not the case.

I am sure that the Minister and his Department will have had discussions with the Treasury, the Inland Revenue and Customs and Excise about those matters. I hope that they have at least sought—possibly even obtained—assurances that there will not be a change of practice so that money that would otherwise be lost

under the provisions of the Bill can be recouped. Otherwise, many of us, as constituency Members, might find it even more difficult when constituent companies, especially small traders and individuals trading on their own account, come to us for help and try, through us, to extract some sympathy and mercy from the Crown bodies. I hope that my concern is unjustified and that the Minister will reassure me and, through me, many small businesses.

Photo of Jonathan Djanogly Jonathan Djanogly Ceidwadwyr, Huntingdon

As has been said by many, the concept of getting rid of Crown preference is welcome. That will make us more like other countries where, I believe, it is a rarity. However, in some ways, too much is being made of how the provisions will dramatically benefit unsecured creditors in particular. It is important to appreciate that the amount of the preference debt is not automatically distributed. In reality, only the assets that are caught by the floating charge will go into the preference pot, ready for distribution. I would be grateful for the Minister's clarification as to whether the Crown will remain as an unsecured creditor as well.

What will follow is, to my mind, certain, having seen the banks in operation. We shall see the banks trying to ensure that as many assets as possible are subjected to fixed charges rather than to the floating charge—they will try to make the pot as small as possible. I would be pleased to know whether the Minister has considered that possibility and what the Government's response would be. One wonders why the Government did not just accept that they would not be a preferential creditor, write off the money and allow it to be distributed to unsecured creditors.

Photo of Douglas Alexander Douglas Alexander Minister of State (e-Commerce & Competitiveness)

I recognise the importance of the scrutinising function of the Committee, but given the wide welcome that the provisions have received, perhaps we are in danger in our debate of not catching the genuine reaction to the proposals that is felt the length and breadth of the country. The removal of preferential status in insolvency proceedings is widely welcomed, not least by the kind of small business people for whom the hon. Member for Eastbourne spoke. The Crown will no longer have preferential rights in respect of debts due to the Inland Revenue for PAYE and national insurance contributions or to Customs and Excise for VAT and certain excise taxes and duties. I should clarify, for the convenience of the hon. Member for Huntingdon, that the Crown will be an unsecured creditor, but the clause addresses the issue of preferential status.

The money that the Crown receives as a preferential creditor will be available to ensure higher returns to other creditors. The Crown will then rank alongside all other unsecured creditors. The idea of the Crown giving up its preferential status was welcomed in the publication ''A Review of Company Rescue and Business Reconstruction Mechanisms''. Responses to the consultation were largely of the view that the Government are in a far better position to absorb the effect of bad debts than the average trade creditor, and recognised that there was little merit in the contention

that preferential status was an appropriate compensation for the Crown's position as an involuntary creditor.

In response to the points raised in relation to Customs and Excise and the conduct and actions of the Inland Revenue, I hope that I can give the reassurance that the hon. Member for Eastbourne seeks. The revenue departments have assured us that in pursuing outstanding debts following the abolition of preference they will continue to offer help and support to vulnerable businesses facing genuine difficulties. That includes support for business rescues via voluntary arrangements and in administrations. The revenue departments are committed to assisting viable businesses trade through financial difficulties wherever possible. They have always taken an active approach to their debt-management effort, even where they knew a debt in a potential insolvency was protected by preferential status. There is no reason why abolition of preference will change their approach.

Photo of Nigel Waterson Nigel Waterson Ceidwadwyr, Eastbourne

That is precisely what we are worried about—that the provision will not change their approach. I do not think that my experience is unique among members of the Committee; I would be interested to hear whether other Members have had the same experience. My experience is that Customs and Excise in particular does not take a sympathetic or helpful attitude, so for it to say that it will continue to take that attitude may be good salesmanship, but does not cut any ice with me or with some of my constituents.

I find it chilling that the best that Customs and Excise can do is to say that it will carry on as it has been doing, because that is precisely my complaint. We need a much more proactive statement from the Minister on behalf of the bodies in question that they will be more sympathetic and helpful rather than the opposite. He said that they would be carrying on as before, which is the last thing that anyone wants.

Photo of Douglas Alexander Douglas Alexander Minister of State (e-Commerce & Competitiveness)

I take the hon. Gentleman's point, but it is hardly a cheap political point to suggest that some of the actions of Customs and Excise and the Inland Revenue under previous Governments have not always recognised the importance of sustaining viable businesses. There has been change, but there is further work to do. However, this is a signal of the Government's general commitment to advancing an enterprise agenda and working closely with companies through the appropriate procedures. There is probably further work to be undertaken, but progress is being made.

Photo of Mark Field Mark Field Ceidwadwyr, Cities of London and Westminster

I am very heartened by the Minister's enthusiasm and confidence. Headline figures that were provided by the Under-Secretary refer to the value to the Government of the Crown preference as between £70 million and £100 million a year. Conservative Members are concerned that the pool of money will be far smaller. I would be interested to see whether the sum lost to the Crown will be anything like as much as £100 million a year. How much does the Minister envisage the Government losing in Crown preference per annum during the next three to five years?

Photo of Douglas Alexander Douglas Alexander Minister of State (e-Commerce & Competitiveness)

The Department estimates that the loss will be around £70 million a year—

It being Five o'clock, The Chairman adjourned the Committee without Question put, pursuant to the Order of the Committee [16 April].

Adjourned till Tuesday 14 May at half-past Ten o'clock.