Clause 241 - Prohibition of appointment

Enterprise Bill – in a Public Bill Committee am 4:00 pm ar 9 Mai 2002.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of Douglas Alexander Douglas Alexander Minister of State (e-Commerce & Competitiveness) 4:00, 9 Mai 2002

I beg to move amendment No. 581, in page 166, line 40, after first 'of', insert

'a receiver who on appointment would be'.

This is a technical amendment to correct a reference to a floating charge-holder in Scotland being entitled to appoint an administrative receiver. It has been put to us that the relevant charge documentation often refers not specifically to the appointment of an administrative receiver but to the appointment of a receiver. When that person is appointed, if he or she falls within the definition given in section 51 of the Insolvency Act 1986, by virtue of section 251(b) of that Act, he or she is an administrative receiver. The amendment will ensure that clause 241, which deals with the prohibition of appointment of such a receiver, reflects that. I ask hon. Members to support the amendment.

Amendment agreed to.

Photo of Nigel Waterson Nigel Waterson Ceidwadwyr, Eastbourne

I beg to move amendment No. 523, in page 167, line 7, after 'instrument,' insert

'and the date so appointed shall be a date after the date of such order'.

The amendment is designed to prevent the Secretary of State from fixing the date retrospectively. If she could do that, it would mean that the parties to a floating charge would not know when they created the charge whether it would carry the right to appoint an administrative receiver or not. That would make the decisions involved more difficult for both the lender and borrower. In a detailed press release of 12 November 2001, the Under-Secretary was quoted as saying that the existing provisions would apply to all floating charges entered into before the commencement of this part of the Bill. It would be reassuring for the business community if that matter could be set straight in the Bill.

Photo of Jonathan Djanogly Jonathan Djanogly Ceidwadwyr, Huntingdon

I certainly support the amendment. Clearly, there will be an interim period between Royal Assent and the date when the order is made and it is important that businesses should know where they stand. However, I want to ask the Minister why the Government have included these provisions at all? If the Government believe that prohibiting administrative receivership is the way forward, why not say that and allow the Bill to receive Royal Assent? Why should that provision be introduced by way of order?

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

Put simply, the amendment is unnecessary. It is designed to add a provision to the

Bill to prevent the Secretary of State from legislating retrospectively. I can assure Conservative Members that we have made it clear to all interested parties—and I am happy to confirm it for the record—that the power will not be exercised so as to apply the new law retrospectively to any floating charge created before new section 72A comes into force. I hope that that gives the degree of comfort that is sought.

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

There is a practical concern, with which the Minister has not dealt in any detail. There will now be a great incentive for creditors to ensure that their interests are protected by a floating charge prior to the Bill coming into force. That will have a negative effect, given what the Government are trying to achieve. Would it therefore not be better to go down the road of this amendment than to find that a lot of floating charges are created to fall just inside the time limit to which the Minister referred?

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

To be perfectly honest, I am not convinced by the argument outlined by the hon. Gentleman or the rationale of the amendment. Bringing in powers on the appointed day by order is normal practice and although we are cognisant of the risks of retrospective legislation, we believe that the existing drafting of the provision is suitable for the implementation of complex provisions. We have given assurances, which I have been happy to confirm today, that deal with the concerns expressed by the hon. Member for Eastbourne. The statutory construction that we propose is the correct way forward and it advances the Bill's objectives. On that basis, I ask the hon. Gentleman to withdraw the amendment.

Photo of Jonathan Djanogly Jonathan Djanogly Ceidwadwyr, Huntingdon

I would appreciate a reply to my question. Why do the powers need to be brought in by order at all?

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

It is normal practice to do so. I hope that that answers the hon. Gentleman's point. We retain our original position on that.

Photo of Nigel Waterson Nigel Waterson Ceidwadwyr, Eastbourne

I do not want to appear churlish, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

I beg to move amendment No. 477, in page 168, line 17, leave out from second 'project' to end of line 20 and insert—

'which—

(a) is a financed project, and

(b) includes step-in rights.'.

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

With this it will be convenient to consider Government amendment No. 478.

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

The purpose of the amendments is to ensure that new section 72E, which excepts project finance generally, is consistent with the other project finance provisions. The existing provisions refer to ''the'' project company in 72E(1)(b). That is not quite apt, since the definition of ''project company'' found in paragraph 6 of Schedule 2A provides that a number of companies may be project companies. The substitution of 72E(1)(b) will also mean that this exception works similarly to new sections 72C and 72D as regards the definition of step-in rights in paragraph 6 of Schedule 2A.

Step-in rights are taken by financiers to protect their security where a project runs into trouble. Such rights are usually over the main project company carrying out the project rather than all companies carrying it out, hence the wording of paragraph 6 of Schedule 2A. Therefore, the exception will apply where such rights are taken over a project company, but the rights do not need to be taken over all project companies. I ask the Committee to support the amendments.

Amendment agreed to.

Amendment made: No. 478, in page 168, line 25, leave out paragraph (b).—[Mr. Alexander.]

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

I beg to move amendment No. 587, in page 168, line 33, leave out 'if' and insert 'by virtue of'.

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

With this it will be convenient to take Government amendments Nos. 588 to 594 and 507 to 509.

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

Amendments Nos. 588 to 594 are designed to narrow the scope of the exception in new section 72F to the prohibition of an appointment of an administrative receiver. Our policy is not that it should still be possible to appoint an administrative receiver of a company just because that company is a party to a market contract or because its property is subject to a system charge or a collateral security charge. The ability to appoint an administrative receiver in the context of such financial market charges is needed only where the administrative receiver is appointed by someone entitled to do so by virtue of a market charge, a system charge or a collateral security charge.

Amendment No. 588 removes the definitions that referred to the Financial Markets and Insolvency (Money Market) Regulations 1995, which were revoked on 1 December 2001. It also amends the reference in new section 72F(a) to deal specifically with a market charge.

Amendment No. 507 slightly widens the scope of the definition of ''party'' as set out in paragraph 1(3)(c) of new schedule 2A. As used there and in new section 72B, the term ''party'' includes a party to an agreement that forms part of the arrangement, which provides for raising finance as part of the arrangement, or which is necessary for the purposes of raising finance as part of the arrangement.

Concern was raised that the final part of the definition—that a party to a capital market arrangement includes one that is necessary for the purpose of raising finance—was too narrow and would not include the provision of, for example, an insurance policy by way of finance, a liquidity facility or some service to the arrangement, which may be necessary to implement the arrangement, but which is arguably not necessary to raise finance.

By using the word ''necessary'', the amendment will have two benefits. It will mean that the scope of the exception is not unwarrantably wide, because the agreement in question will need to be necessary for the purposes of implementing the capital markets arrangement. However, it is also general, and there is

no scope to construe it so narrowly as to mean that the agreement must concern the raising of finance. It will include the agreement to provide insurance for the arrangement, because the provision of an insurance policy or a liquidity facility will usually be necessary for implementation.

Amendments Nos. 508 and 509 are in response to comments that we received on consultation. They extend the scope of the exceptions contained in new sections 72C, 72D and 72E to step-in rights and provide that the definition of finance will for, the purposes of paragraph 6 of new Schedule 2A, include an indemnity.

The revised wording of the provision on step-in rights will cover the situation in which a new company is used as a vehicle to help rescue a project that has gone wrong. The project financier who stepped in could then sell the new company vehicle to new financiers to carry on the project. The new wording will also provide for the situation in which the reference to assuming ''responsibility'' for continuing the project is not an appropriate way to refer to what happens in certain projects in practice. By extending the definition of finance to include an indemnity, we will cover the situation in which an insurer makes finance available by means of providing insurance to the financier of the project, and takes step-in rights. I therefore ask hon. Members to support the amendments.

Amendment agreed to.

Amendments made: No. 588, in page 168, line 34, leave out paragraphs (a) to (c) and insert—

'(a) a market charge within the meaning of section 173 of the Companies Act 1989 (c.40),'.

No. 589, in page 168, line 41, leave out 'there is'.

No. 590, in page 168, line 42, leave out 'over property of the company'.

No. 591, in page 168, line 44, leave out paragraph (e).

No. 592, in page 169, line 1, leave out 'there is'

No. 593, in page 169, line 1, leave out 'those regulations' and insert

'the Financial Markets and Insolvency (Settlement Finality) Regulations 1999 (S.I. 1999/2979)'.

No. 594, in page 169, line 2, leave out 'over property of the company'.

No. 507, in schedule 18, page 280, line 28, leave out 'raising finance as part of' and insert 'implementing'.

No. 508, in schedule 18, page 281, line 42, after 'to' insert—

'(a)'

No. 509, in schedule 18, page 281, line 43, at end insert—

', or

(b) make arrangements for carrying out all or part of the project.

'(2) In sub-paragraph (1) a reference to the provision of finance includes a reference to the provision of an indemnity.'.—[Mr. Alexander.]

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

Photo of Nigel Waterson Nigel Waterson Ceidwadwyr, Eastbourne 4:15, 9 Mai 2002

The clause is important and deserves a stand part debate before we move on. It involves the partial abolition of administrative receiverships, which has not met with universal support. I think that the Minister quoted the British Bankers Association earlier—it seems a long time ago—as saying that it was in favour of the proposals, but I do not think that that is strictly accurate. Certainly it is not accurate so far as the clause is concerned, although it may have been for a different aspect of the Bill, in which case I apologise profusely.

In the BBA's response to the White Paper, it said how successful administrative receivership had been, describing it as

''an engine for reconstruction and enterprise in the UK''.

It went on to describe the importance of secured credit as making it possible to put someone in place quickly, with a view to restructuring a company, saving jobs and getting the business moving again in a cost-effective way.

Photo of Mr Tony McWalter Mr Tony McWalter Labour/Co-operative, Hemel Hempstead

Does the hon. Gentleman agree that people put in place quickly often act strongly in favour of the bank, and do not necessarily bear in mind the needs of all the creditors, or even of the continuing existence of the business?

Photo of Nigel Waterson Nigel Waterson Ceidwadwyr, Eastbourne

I am aware that that argument is made. However, in a separate submission, the BBA referred me to figures published in April 2000 that showed that 75 per cent. of cases handled by bank specialists involved the recovery of the company. That is encouraging. The BBA said that

''British banking is highly based on rescue, unlike the American system, which is based on asset. By terminating AR, Banks are moved toward a system in which higher risk ventures, like independent start-ups, will be shunned by loaners''.

My hon. Friend the Member for Huntingdon made that point in an earlier debate. According to the BBA, it is not only the banks that will suffer, but the start-ups and the people looking for venture capital for higher-risk ventures, who may find it more difficult to raise the loans that they need.

The BBA also raised the issue of speed, stating:

''In times of financial crisis, the swift appointment of an AR enables the situation to be quickly dealt with. An AR, say, who comes in at 5.00 on a Friday afternoon will have the weekend to prepare for Monday morning, and the beginning of the rescue process.''

It goes on to mention the system being bogged down

''with business and administrators sitting around, waiting for Courts to act and allow them to go in.''

We will unarguably lose some flexibility by scrapping ARs in their present form for most situations. The BBA response to the White Paper also stated:

''this will lead to an environment in which finance for the vast majority of businesses which do not get into difficulty may become less flexible, more expensive and probably less available.''

If I may say so, we have here a classic example of the law of unintended consequences; something of which the Government have proved themselves to be masters on all sorts of subjects.

The BBA is not alone in expressing disquiet about

the proposal. Freshfields Bruckhaus Deringer, the law firm, stated:

''we believe that by abolishing administrative receivership and muddling the objectives of an administration, a cost-effective and successful rescue tool will be lost, and a more complex and consequentially more expensive administration regime will be introduced.''

That, again, comes from people who deal with the subject on a day-to-day basis.

I, like other hon. Members, have also received views submitted on behalf of9 the Royal Institution of Chartered Surveyors, the Association of Property Bankers and the Investment Property Forum, who all have concerns about clause 241, particularly about the exemption threshold of £50 million. That figure has a suspiciously round ring, and I would be interested to hear the Minister tell us by what thought processes that figure was arrived at. That threshold is intended to enable project finance companies to appoint administrative receivers. Those bodies say that they believe that the threshold should either be removed or reduced to what they consider to be a realistic figure of £10 million.

The Association of Property Bankers suggests that the majority of the projects with which it is involved are funded at below the £50 million threshold. That is also an issue that has been raised with me by the British Bankers Association. If I say that the £50 million is an arbitrary figure, I do not intend to be gratuitously offensive. I am sure that the Minister would agree that it must be an arbitrary figure, but I ask him to give some thought as to whether he could listen to the representations being made by those bodies; they know their own business, and they suggested amendments—they have not yet been tabled but may be tabled on Report—that would reduce the figure to £10 million.

The Minister deserves some credit for having listened to City voices on the question of continuing administrative receivership in certain circumstances. I know that the City of London Law Society has been active in trying to persuade Ministers and officials to exempt project finance deals and public-private partnership deals. I do not want to discuss the political aspects of public-private partnerships; we shall have plenty of other opportunities to debate that. However, a recent article in Legal Week stated:

''The rationale behind continuing to allow administrative receiverships in large-scale private projects is that they rely heavily on bank finance 'step-in' rights to allow them to complete work under the control of the banks should deals be threatened the collapse.''

At least partially, the Minister and his colleagues seem to have listened to the representations of those who regularly deal with the rules.

I understand that administrative receiverships will continue to be available for holders of pre-existing floating charges, so the two parallel but separate regimes will continue for the foreseeable future. We have the capital markets arrangements, or project companies with step-in rights, where the intended or actual debt is more than £50 million. We have public-private partnerships or utility project companies with

step-in rights. We also have members of recognised clearing houses or investment exchanges, companies undertaking money market contracts and member companies of financial markets. I am sorry only that the hon. Member for North-East Derbyshire (Mr. Barnes) is not here to hear about the City of London's success in lobbying the Government on those specific exemptions. More specifically, special administration regimes are to be kept in place for water and sewage undertakings, Railways Act administrations, air traffic services, Greater London Authority public-private partnerships and building societies.

We welcome those exemptions, as far as they go, but it is clear that a sufficient body of opinion, enough to make a stand part debate worth while, has reservations about scrapping administrative receivership. On reflection, the Minister might think that, having left open the wide range of exemptions that I have described, the option should simply be left open. Perhaps he can give us some idea of the number of situations that could arise with the £50 million limit, and how many more deals would be covered if it was reduced to £10 million.

We are not talking about a vast number of administrative receiverships. However, the proposal has its supporters; those people believe that it gives them the ability to sort something out in a failing company in quick time when other measures might be too slow and expensive, and ultimately unsuccessful. We want to probe the Minister's thinking on the rationale behind the scrapping of ARs and on the exemptions that he has put in the Bill, particularly the £50 million limit.

Photo of Jonathan Djanogly Jonathan Djanogly Ceidwadwyr, Huntingdon

When we discussed clause 239 stand part, I spoke at some length on the issue, acknowledging that it could be discussed then or now. I am not going to go over it again. However, having reached the end of the debate, I have had the concerns that I then had about the ending of administrative receivership confirmed. On the whole, as my hon. Friend the Member for Eastbourne said, administrative receivership has been a successful regime. If anything, banks now tend to use it not as a way of beating companies over the head but as leverage to bring people to the negotiating table in order to find a sensible way forward.

The end result here is going to be a new administration system that will contain certain characteristics of the old administrative receivership regime, but with the addition of court involvement, extra costs and extra time delays. I still have grave doubts about it.

I should be grateful for the Minister's comments on the workings of one of the exceptions; chapter 72C of the Insolvency Act 1986, the exception for public-private partnerships. The clause is not self-explanatory; neither are the explanatory notes. Is it the case that where public money is involved in a public-private partnership, the Government's new principles of protecting unsecured creditors and wanting companies to trade on are effectively thrown out of the window, with the Government retaining the

right to slash and burn with their administrative receiver?

If that is the case, I shall be grateful to hear the Minister's view. Is it not a question of double standards; it is acceptable for the Government to act in one way, but business cannot act in the same way?

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

Even though there have been only a limited number of contributions, the debate has ranged widely. In order to put into context some of the more detailed issues that we shall consider during the rest of the afternoon, I shall reflect that in my comments. For clarity, clause 241 will prohibit the appointment of administrative receivers by inserting a new chapter IV to part III of the Insolvency Act 1986. Part III of that Act is about receivership generally; the new chapter IV also includes five exceptions to the prohibition.

Administrative receivership allows the holder of a floating charge whose security covers the whole or substantially the whole of a company's property to enforce that security by appointing an administrative receiver, usually referred to in Scotland as the receiver, as I said earlier. It effectively places control of a company in the hands of a single secured creditor, who has little or no duty to consider the best interests of other creditors.

The impression left by the recession of the early 1990s is that administrative receivership was often used to pull the plug on a company with no thought given to whether, with breathing space, the company could trade out of its difficulties and survive. By prohibiting a floating charge holder from appointing an administrative receiver and ensuring that the collective administration procedure is used, we shall move firmly in favour of a procedure in which all creditors have the opportunity to participate and under which the administrator must act in the interests of all creditors. However, we are not interfering with the existing corporate lending agreements.

Holders of floating charges created before the Bill comes into force will still be able to appoint administrative receivers if they want to. It could be that they will want to use the new procedure. If so, we have provided that holders of existing charges may appoint an administrator to take advantage of the new procedure. We recognise that some very specialised financing structures are used in business today for which the ability to appoint an administrative receiver is vital in order to maintain control and ensure continued cash flows or capital repayments to the appointer.

That is perceived to be necessary by City financiers and their advisors to allow these structures to raise the amounts of finance—at the sort of interest rates—that they currently raise, and which are often significantly more favourable than through traditional commercial lending. So, in addition to the prohibition on the appointment of an administrative receiver in new section 72A, the Bill provides five specific exceptions, which will allow the appointment of an administrative receiver in particular circumstances.

A specific query was raised by the hon. Member for Eastbourne in relation to the threshold of £50 million. I start with the obvious point that the financial threshold outlined highlights the fact that these are specialised financial structures. The provisions are not aimed at normal, everyday, commercial lending, and the figure in respect of capital market arrangements was arrived at following discussions between my officials and the City of London Law Society. Therefore, we see no reason why the threshold is inappropriate. It is set high enough to limit the scope for use as an avoidance mechanism by normal commercial lenders, but we have the power to amend it, if that turns out to be necessary.

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

Will the Minister at least give us an assurance that he will not completely shut his mind—or the collective departmental mind—on this issue? Organisations such as the Royal Institution of Chartered Surveyors are serious players that clearly have a view. In the City, £50 million may seem like small change, but for others, such a threshold is too high. Will he at least not rule out the possibility of changing it?

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

Perhaps the appropriate way forward would be to invite those individuals who have concerns to contact me or my ministerial colleagues, so that we are fully briefed on the points that were raised earlier in the debate.

On the specific point raised by the hon. Member for Huntingdon, who gave us a graphic description of the potential powers of the Government in relation to the use of AR procedure, the issue in question is the protection of essential services—for example, hospital units or other places where exactly that sort of mechanism has been anticipated. There are other project finance exceptions for the private sector, but we will, no doubt, have an opportunity to consider those in subsequent discussions.

Question put and agreed to.

Clause 241, as amended, ordered to stand part of the Bill.