Committee for Enterprise,
MINUTES OF EVIDENCE
Insolvency Bill:
Committee Stage
(NIA 14/01)
Members present:
Mr P Doherty (Chairperson)
Mr Neeson (Deputy Chairperson)
Mr Armstrong
Mr McClarty
Dr McDonnell
Ms Morrice
Mr Wells
Witnesses:
Mr M Bohill	)	Department of Enterprise,
Ms J Broadway	)	Trade and Investment
Mr R Nesbitt	)
Mr J Reid	)
Mr H Widdis )	Assembly Legal Adviser
The Chairperson: You are very welcome. Some of us know each other very well, but this may the first meeting for others. After you give the Committee your views about the Bill, members may ask some questions.
Mr Bohill: Mr Reg Nesbitt, who is the Department's director of insolvency, will discuss both Bills, and the rest of our team shall support him.
Mr Nesbitt: The Insolvency Bill, which is now at Committee Stage, relates largely to the moratorium that has been made available to companies in financial difficulties that wish to avail of a company voluntary arrangement. The best way to discuss the Bill is to compare the current law to the changes that we expect as a result of the Bill.
At present, directors of a company that is in financial difficulties can call a meeting of its creditors to vote on whether to accept a compromise offer to pay part or all of its debts over time. A vote in favour of that option binds only those creditors who received notice of the meeting. That is an important part of current legislation.
Under the new law, small companies attempting to enter a voluntary arrangement will have the option of a 28-day moratorium, which can be extended by up to two months through a meeting of the company and its creditors. A moratorium will temporarily insulate the company from creditors' pressure to give the directors the opportunity to frame a proposal and call a meeting of creditors.
Those two descriptions show the distinct difference between the two procedures. The ethos of the Bill is to save any companies that are salvageable. A major weakness of the current law is that protection is not available. Fixed charge-holders, in particular, can appoint their administrative receiver and therefore thwart the potential to save the company. In a nutshell, that is the aim of the Bill. There are several other minor points on which I will recap if the Committee so wishes.
The Chairperson: Please do so, briefly.
Mr Nesbitt: Under the present system, an individual obtains protection as a result of the interim order procedure; however, there is no option not to use that procedure. The Bill makes it possible to take out an individual voluntary arrangement without having to obtain an interim order. A landlord who is owed rent would not be able to enter and foreclose premises to obtain payment. In keeping with the European Convention on Human Rights it would no longer be possible for answers obtained under compulsion to be used in any criminal action against an individual.
Liquidators' reports on suspected criminal offences would be made directly to the Department, instead of to the Director of Public Prosecutions. The law would be amended to make available to creditors deceased insolvents' shares in property that is held under joint tenancy. The Department would acquire the powers to make Regulations to give effect to the model law on cross-border insolvency adopted by the United Nations Commission on International Trade Law.
Those are minor but important parts of the Bill. The major feature is the moratorium for small companies, of which there are some 20,000, or 95% of companies in Northern Ireland. It may, therefore, be a useful procedure for them to adopt should they get into financial difficulties.
Mr Wells: That procedure is similar to the American practice of suing for protection. When companies such as Enron, which are cooking the books, get into trouble they file for protection and are given 30 days during which no meeting can be called. Is the proposed procedure similar to that?
Mr Nesbitt: The two procedures are different, because protection can continue for quite a long time. In this case the company has 28 days in which to decide on a procedure that is acceptable to creditors. If the creditors do not accept it, it fails.
Mr Wells: Is there a loophole that would allow a dishonest director to salt away assets and revenues to an offshore account during those 28 days, or to use the opportunity to get rid of as much money as possible to prevent its distribution among creditors?
Mr Nesbitt: That would be virtually impossible; the Bill would prevent that. Anyone found out would be in serious trouble.
Mr Wells: Is there any evidence to suggest that, had the stay of execution already been available, some companies could have resolved their difficulties with their creditors and avoided going under?
Mr Nesbitt: Only six company voluntary arrangements were made last year. The Department does not know what the rate of uptake for the provision will be. I suspect that it will not be high, but we must wait and see. There are no substantive figures relating to its operation in England and Wales that would allow me to give an objective answer.
Mr Wells: Is it the case that no one can compel a company to make a voluntary arrangement and that it is entirely voluntary?
Mr Nesbitt: Yes.
Ms Morrice: The Committee received detailed questions from the Institute of Chartered Accountants in Ireland. In its letter, under the heading "Company Voluntary Arrangements (CVAs) – Status of moratorium period creditors", the institute states:
"It is not clear to us whether this means simply that all creditors who are owed money at the start of the moratorium are bound (for whatever their debt is at the date of approval), or whether it means that creditors are bound for the amount owed to them at the start of the moratorium."
Mr Nesbitt: The Department became aware of that matter only 10 days ago. The institute has confused slightly the binding of creditors and the approving of them. It means simply that all creditors are bound to the moratorium and any subsequent voluntary arrangement. The Bill does not provide that the creditors' claim to be included in the arrangement be in place at the date of the moratorium. Creditors' claims will be taken at the date on which they agree the proposal.
Ms Morrice: Has the Department already responded to the institute's question, or is this your response?
Mr Nesbitt: This is my response.
Ms Morrice: Do you think that your answer will clarify the matter for the Institute of Chartered Accountants?
Mr Nesbitt: I expect so, although the matter is subject to rules. This detail does not form part of the Bill.
Ms Morrice: The institute states that
"the problem arises of the status of any debts arising between the two dates."
Mr Nesbitt: The institute quotes the Kenneth George Hoare case in which the court decided that the VAT incurred until the date of the creditors' meeting would form part of their normal claim. Therefore, the amount of the claim on the date of the creditors' meeting will be accepted.
Ms Morrice: The institute concludes that
"providing that preferential claims are to be calculated at the date of the arrangement taking effect would avoid this problem."
Mr Nesbitt: In its letter, the institute also states:
"We note that the relevant date for calculation of preferential claims is the date of filing of the documents in court".
I am not sure where the institute received that information.
The difference between preferential claims calculated on the date of the moratorium and all other claims commencing on the date of the creditors' meeting would cause confusion. For example, an Inland Revenue claim could involve preferential debts calculated from the moratorium date and unsecured ones calculated from the date of the creditors' meeting.
Ms Morrice: I have heard that divorcees who owe money to their ex-spouses — alimony, if you like — can declare themselves bankrupt to avoid payment. Does the Bill prevent that scenario?
Mr Nesbitt: We are discussing company voluntary arrangements, whereas your example relates to individuals.
Ms Morrice: I am referring to cases where an individual who is declared bankrupt no longer has to pay debts to a spouse.
Mr Nesbitt: Such a debt could not result in a bankruptcy order. I do not believe that an alimony debt could form the basis of a petition for a bankruptcy order.
Ms Morrice: In other words, the money does not have to be paid if the individual is bankrupt.
Mr Nesbitt: In such a family situation there would be a requirement to continue to pay.
Mr Bohill: Such a debt would not trigger bankruptcy.
Mr Nesbitt: I do not think so, but I would need to check that. We have not come up against such a situation. A motoring fine is not a debt that can be used for a petition for a bankruptcy order. It cannot be claimed from the bankrupt's estate.
Mr Bohill: There are two points to be made. The Bill relates to company voluntary agreements; therefore, personal bankruptcy matters are outside the scope of the Bill. Mr Nesbitt is saying that in his experience as the Department's director of insolvency, he has not come across a case where such a debt triggered a personal bankruptcy order.
Ms Morrice: The debt would have to be very large.
Mr Armstrong: What is your view on the institute's comments on the binding of unknown creditors that
"under current legislation only those creditors who have received notice of the meeting are bound. This change raises a number of potential difficulties, but the one which we feel is most readily susceptible to correction by amendment to the Bill is the effect of these provisions on those with claims under the Third Parties (Rights Against Insurers) Act 1930. We agree in principle that unknown creditors should be bound by an arrangement."
Mr Nesbitt: When we did our homework on the institute's letter, we found that many of its points were drawn from the amendments tabled in the House of Lords, which were defeated. As regards this point, there is a remedy: if an application is made to the court under article 236, the person being bound by the voluntary arrangement can be relieved of that and will not lose out.
Normally, if a company employee suffers an injury, the company pays out from its insurance policy. However, if someone is injured and the company goes into insolvency, and an insurance claim is made by the company, the moneys, if not claimed by the individual, become a general part of the assets of the company and are distributed to everybody. However, if a claimant goes into court under a company voluntary arrangement and — which he can do in other insolvency situations such as liquidation — objects to being prejudiced, he can, on the court's approval, approach the insurance company directly and get the moneys paid to him personally.
Mr Reid: Common law protection exists already in the form of article 236 of the Insolvency (Northern Ireland) Order 1989. Ultimately, if a person's rights against the insurer are not protected he can apply to the court and have the original decision overturned.
Mr Nesbitt: To quote from a House of Lords speech,
"We understand the concerns which lie behind these amendments but we do not consider that they are necessary. In our view — and there is case law which supports this — creditors who are able to make a claim under the Third Party (Rights Against Insurers) Act 1930 and who find themselves bound by a voluntary arrangement should be able to seek relief from a court on the grounds of unfair prejudice under either paragraph 36 of Schedule A1 of the Bill or sections 6 or 262 of the Insolvency Act 1986 as appropriate."
That amendment was defeated in the House of Lords. The Bielecki case was mentioned in the institute's letter, but it was not quoted in full — the extract was therefore somewhat selective.
Mr McClarty: In the best traditions of courtroom drama, I have no further questions.
The Chairperson: Mr Widdis, would you like to comment, or are you happy with the statements?
Mr Widdis: I am happy with them. I followed the explanation and I could repeat it, but I would not be adding anything to it.
Mr Armstrong: I have no further questions.
The Chairperson: Before we go through the Bill clause by clause, I will state for the record that the Minister has notified the Committee that he may make technical amendments to it.
Ms Morrice: Does the Bill constitute parity legislation? How does it compare with other legislation in the UK and in the South?
Mr Nesbitt: It establishes parity with the UK, but I am not clear about the position in the Republic.
Ms Morrice: Is it simply an extension of the UK legislation without changes?
The Chairperson: The Committee will include the Minister's letter in the minutes of the session and that will avoid my having to read it aloud. The letter is dated 21 July and is included in section E of the members' packs. According to the Minister's letter, the two amendments are technical, as opposed to substantive, in nature. Do any Committee members wish to express views on it?
Ms Morrice: It would be interesting to know exactly what the amendments are and whether they differ from the UK legislation. Will they give us different legislation? Are there different circumstances here?
Mr Nesbitt: No, it is entirely the same as GB's. Part 2 of that amendment is an exact replica of the corresponding provision of the Insolvency Act 2000.
Ms Morrice: The amendments being introduced by the Minister have therefore been introduced by the Minister in England?
Mr Bohill: The original Bill was based on that which was introduced in GB. These two particularly important amendments were made during the passage of the Bill in Westminster. We are, therefore, incorporating them into our Bill so that parity is maintained.
Ms Morrice: To what to those amendments pertain? What are they about?
Mr Bohill: The amendments are technical and quite complicated. They are summarised in the Minister's letter, and when he submits them it will be seen how technical they are. They are not substantial.
Mr Nesbitt: To answer your original question, the Office of Legislative Counsel (OLC) had drawn up the Bill differently, only to find that a certain matter had been omitted. We therefore had to adopt the complete English version. It is convoluted, and even I find difficulty in understanding it. Paragraph 20(a), which has been inserted into the Insolvency Act, says that reports by liquidators, supervisors and so on must be made to the Department. Part 2 amends the Building Societies Act, and there was no provision in 20(a) to allow those reports to be sent to the Financial Services Authority (FSA). An amendment had to be made for that provision.
Ms Morrice: Does that relate only to building societies?
Ms Morrice: They had, therefore, been left out of it?
Mr Nesbitt: The reporting provisions had been left out.
Ms Morrice: And this is to ensure better reporting provisions for building societies?
The Chairperson: We will now deal with the Bill itself; all Members have a copy of it. The purpose of this meeting is to carry out a detailed, clause-by-clause scrutiny of the Bill. Members will have the opportunity to raise any concerns or suggest any amendments. Members should read the relevant clauses and paragraphs in the Bill, along with the related commentary in the memorandum. This Bill has 14 clauses and four schedules. Each clause, and any subsections, must be considered in turn. The Committee will have two options: to agree that it is content with the clauses as drafted, or to agree that it recommends to the Assembly that a clause be amended.
The purpose of the Bill is to make available to small companies attempting to enter a voluntary arrangement with their creditors the option of a short moratorium during which they will be protected from legal proceedings, including proceedings for winding-up. This will provide such companies the opportunity to put together a rescue package.
The Bill also includes a range of other measures including: making an interim order — a moratorium — optional in the case of an individual attempting to enter a voluntary arrangement with his creditors; providing for the Department to recognise bodies to authorise persons to act as nominees or supervisors in company or individual voluntary arrangements not being persons who are currently licensed to act as insolvency practitioners; restricting the right of landlords to effect peaceable re-entry where an administration order as been applied for or made; amending article 182 of the Insolvency (Northern Ireland) Order 1989 to provide for allegations of criminal misconduct in connection with company liquidations to be made directly to the Department rather than through the director of public prosecutions; amending article 183 to ensure that it is compatible with the European Convention on Human Rights; amending article 365 so that the value of a deceased insolvent's interests in jointly owned property will be recoverable for the benefit of the insolvent estate; to create power to make Regulations to give effect with or without modifications to the model law on cross-border insolvency which was adopted by the United Nations Commission on International Trade Law (UNCITRAL) of which the UK is a member state.
The Long Title of the Bill is "A Bill to amend the law about insolvency; and for connected purposes".
Question, That the Committee is content with the Long Title, put and agreed to.
Clause 1 (Moratorium where directors propose voluntary arrangement)
Clause 1 is explained on page 1 of the Bill and page 5 of the explanatory and financial memorandum. The clause introduces schedule 1 to the Bill, which makes the option of applying for a short moratorium available to an eligible company where its directors intend to put a proposal to the company and its creditors for a company voluntary arrangement.
Dr McDonnell: Who determines the length of the voluntary arrangement?
Mr Nesbitt: The nominee, but it would depend on the circumstances. If the nominee is happy he will put his proposals in court and the moratorium will commence. He might then have to negotiate with a few parties and the length of the voluntary arrangement may or may not be accepted by the committee of creditors. They will probably determine which way it goes and how long it will be. The Bill states that the moratorium is for 28 days, with extensions for a further two months.
The Chairperson: Schedule 1 — moratorium where directors propose voluntary arrangement — is explained on pages 8 to 36 of the Bill and pages 8 to 16 in the explanatory and financial memorandum. Paragraphs 1, 3, 4 and 5 amend the Insolvency (Northern Ireland) Order 1989 so that the directors of eligible companies may apply for a short moratorium for their company during which a proposal for a company voluntary arrangement can be put to its creditors.
Paragraph 2 adds Regulations made under paragraph 5 of the schedule A1 to those Regulations which can be made under the Insolvency (Northern Ireland) Order 1989 which must be laid and approved by the Assembly.
Paragraph 1, schedule A1, defines some of the terms that are used in schedule A1. Paragraphs 2 to 4, schedule A1 set out which companies are eligible for a moratorium. The Minister proposes to table an amendment to paragraph 2 of schedule A1 at Consideration Stage. The details are outlined in the Minister's letter of 21 July. Paragraph 5, schedule A1 allows the Department, by Regulations, to amend the eligibility criteria. Paragraph 6, schedule A1 places a duty upon the directors seeking a moratorium to provide information to the nominee. Paragraph 7, schedule A1 sets out the documents that the directors must file at the High Court to obtain a moratorium. The list of documents may be amended by Regulations.
Paragraph 8, schedule A1 sets out the duration of a moratorium and provides that a moratorium come into force when the documents required to be submitted to the High Court are filed. Paragraph 9, schedule A1 places a duty on the directors of the company to notify the nominee that a moratorium has come into force. Paragraphs 10 to 11, schedule A1, require the nominee to advertise when a moratorium comes into force and when it ends and also notify the registrar and the company. In the case of a moratorium coming into force, he must also notify any creditor who has petitioned for the winding up of the company and, where it ends, any creditor of whose claim he is aware.
Paragraph 12, schedule A1, deals with the effects of a moratorium upon parties other than the company during the period for which a moratorium is in force. Paragraph 13, schedule A1, prevents a floating charge from crystallising, or restrictions from being imposed on the disposal of any of the company's property while the moratorium is in force. Paragraph 14, schedule A1 states that security given over a company's assets during the moratorium will be unenforceable unless there were reasonable grounds, at the time it was granted, for believing that it would benefit the company.
Paragraph 15, schedule A1, outlines the effect on the company. Paragraphs 16 to 22 apply in relation to a company that is subject to a moratorium. The fact that a company enters into a transaction in contravention to paragraphs 16 to 21 does not make that transaction void or unenforceable against the company. Paragraph 16, schedule A1 sets out that all invoices, orders and letters, on which the name of the company appears, must also state the name of the nominee and refer to the fact that a moratorium is in force. Any breach of this provision constitutes an offence.
Paragraph 17, schedule A1, advises that during the moratorium a company may not obtain credit to the value of £250 or more without first telling the person who is giving the credit that a moratorium is in force. A breach of this provision constitutes an offence. Paragraphs 18 and 19, schedule A1, state that during the moratorium the company may only dispose of any of its property or make any payment of a debt which existed at the start of the moratorium if there are reasonable grounds for believing that the disposal or payment will benefit the company, and it is approved by the moratorium committee or by the nominee.
Paragraph 20 and 21, schedule A1, permit the disposal during the moratorium, by the company, by sale or otherwise of charged property and any goods that are in the possession of the company under a hire-purchase agreement if the High Court or the holder of the security or owner concerned agrees.
Paragraph 22, schedule A1, states that when a moratorium is in force a company commits an offence if it enters into a market contract, grants a market charge or system-charge, gives a transfer order or provides any collateral security. Any officer of the company who authorises or permits the company to enter into such a transaction also commits an offence.
Paragraph 23, schedule A1, imposes a duty on the nominee to monitor the company's affairs during the moratorium in order to form an opinion as to whether the proposed voluntary arrangement, or that arrangement with any modifications of which he has been notified, has a reasonable prospect of being approved and implemented, and whether the company is likely to have sufficient funds to enable it to continue its business throughout the moratorium.
Paragraph 24, schedule A1, sets out the arrangements whereby a nominee must withdraw his consent to act during the moratorium and states that the moratorium comes to an end if the nominee withdraws his consent to act.
Paragraph 25, schedule A1, provides that the High Court, on the application of any creditor, director or member of the company, or any other person affected by a moratorium who is dissatisfied by any decision or act of the nominee, may confirm, reverse or modify that decision or act and give directions to the nominee or make any order that it sees fit, either during or after the moratorium.
Paragraph 26, schedule A1, sets out the course of action that creditors may take if there are reasonable grounds for believing that the company has suffered a loss as a consequence of any act, omission or decision of the nominee, but the company does not propose to take any action.
Paragraph 27, schedule A1, provides that in certain circumstances the High Court may direct that the nominee be replaced by another person with the necessary qualification.
Paragraphs 28 and 29, schedule A1, provide for the summoning, conduct and reporting to the High Court of the outcome of such meetings of the creditors and the company as the nominee calls.
Paragraph 30, schedule A1, provides that the meetings summoned under paragraph 28 shall decide whether or not to approve the proposed voluntary arrangements.
Paragraphs 31 to 33, schedule A1, permit the initial period of the moratorium to be extended for a maximum period of up to two months, provided that certain conditions are satisfied.
Paragraph 34, schedule A1, makes provision where a moratorium is extended for a moratorium committee to be set up to exercise the functions conferred on it by the meetings held under paragraph 28, where those meetings have approved an estimate of the expenses to be incurred in carrying out the committee's functions.
Paragraph 35, schedule A1, determines when decisions made under paragraphs 30, 31, or 34 are to take effect. It also provides that, in the case of conflict, the decision of the creditors' meeting is to prevail, subject to the right of any member to apply to the High Court for an order that the decision of the company meeting should prevail instead.
Paragraph 36, schedule A1, provides that a decision approving a company voluntary arrangement binds all creditors of the company owed money at the start of the moratorium including unknown creditors.
Paragraph 37, schedule A1, provides, by way of application to the High Court, for the decision approving a company voluntary arrangement to be challenged on the ground that it unfairly prejudices the interests of a specific person or that there has been some material irregularity in the conduct of a meeting held under paragraph 28.
Paragraph 38, schedule A1, provides for the implementation of an agreed company voluntary arrangement, and for the person who is carrying out the functions of the nominee to become the supervisor of the voluntary arrangement.
Paragraph 39, schedule A1, provides that any creditor or member of the company can apply to the High Court if he considers that the company's affairs have been, or are being, managed in a way that is unfairly prejudicial to the interests of creditors or members, or that an actual or proposed act or omission of the directors is, or would be, so prejudicial. The paragraph applies only in relation to directors' acts or omissions during the moratorium.
Paragraph 40, schedule A1, provides that any person who was an officer of the company who did certain acts in the 12 months prior to the start of the moratorium is to be treated as having committed an offence. For example, that applies if the officer has fraudulently removed company property worth £500 or more or if he destroys or falsifies the company's records in relation to its property in that period. Any person who is an officer of the company during the moratorium who does the same thing also commits an offence. The paragraph also provides defences that may be raised in relation to these offences.
Paragraph 41, schedule A1, provides that it is an offence for an officer of a company to seek to obtain a moratorium, or an extension to it, by making a false representation or fraudulently doing, or failing to do, anything.
Paragraph 42, schedule A1, provides that any provision in a floating charge is invalid if it provides for the obtaining of, or any action to obtain, a moratorium, to be an event causing the charge to crystallise or restrictions to be imposed on the disposal of property or a ground for the appointment of a receiver.
Paragraph 43, schedule A1, gives the Financial Services Authority the right to participate in the moratorium procedure if the company is, or has been, regulated by the authority.
Paragraphs 6 to 12 make consequential amendments to various parts of the Insolvency (Northern Ireland) Order 1989. For example, the amendments to article 197 will not permit suppliers of gas, water and electricity to require a nominee to pay outstanding debts for supply as a condition of supply during the moratorium. The amendment to article 347 provides that the relevant date for determining preferential claims is the date on which the moratorium comes into force. A new article, 362(1), is added to create the power to increase or reduce monetary sums specified in schedule A1. That will take account of the addition of the new company voluntary arrangement moratorium.
Question, That the Committee is content with the clause and schedule, put and agreed to.
Clause 2 (Company voluntary arrangements)
Information can be found on page 1 of the Bill and page 5 of the explanatory and financial memorandum. This clause introduces schedule 2 to the Bill. The schedule makes various amendments to the existing company voluntary arrangement procedure.
Clause 3 (Individual voluntary arrangements)
Members should refer to page 1 of the Bill and page 5 of the explanatory and financial memorandum. This clause introduces schedule 3 to the Bill, which makes various amendments to the existing individual voluntary arrangement procedure.
Schedule 3, which refers to individual voluntary arrangements, is outlined in pages 41 to 46 of the Bill and page 17 of the explanatory and financial memorandum.
Clause 4 (qualification or authorisation of nominees and supervisors)
This clause is outlined on page three of the Bill and page five of the explanatory and financial memorandum. It amends article 3 of the Insolvency (Northern Ireland) Order 1989, which deals with acting as an insolvency practitioner. It also inserts a new article 348A dealing with the arrangements for the authorisation of nominees and supervisors.
Question, That the Committee is content with the clause, put and agreed to.
Clause 5 (Administration orders)
This clause is outlined on page 3 of the Bill and page 6 of the explanatory and financial memorandum. It amends articles 23 and 24 of the Insolvency (Northern Ireland) Order 1989 and provides that a landlord or other person to whom rent is payable may not exercise the right of forfeiture of the lease of a company's premises by means of peaceful re-entry where a company has applied for, or is subject to, an administration order, except with leave of the High Court.
Clause 6 (Investigation and prosecution of malpractice)
This clause is outlined on page 6 of the Bill and page 5 of the explanatory and financial memorandum. It amends article 182 of the Insolvency (Northern Ireland) Order 1989 and provides that, in a winding up by the High Court, the court may direct the liquidator to report apparent criminal misconduct by past or present company officers or members of the company to the Department rather than to the Director of Public Prosecutions. The clause also requires a liquidator in a voluntary winding up to report suspicions of criminal misconduct by company officers past or present or members to the Department rather than to the Director of Public Prosecutions. It also provides that, when investigating the alleged misconduct, the Department may exercise powers under the Companies (Northern Ireland) Order 1986.
Clause 7 (Restriction on use of answers obtained under compulsion)
This clause is outlined in pages 4 and 5 of the Bill and page 6 of the explanatory and financial memorandum. It amends article 183 of the Insolvency (Northern Ireland) Order 1989 so that answers given by an individual under a power of compulsion, conferred by article 182(4), cannot be used against him by the prosecution in subsequent criminal proceedings, except in very limited circumstances.
Dr McDonnell: What does that mean, Chairperson?
The Chairperson: I do not know. [Laughter].
Dr McDonnell: Who sets the limits?
Clause 8 (Insolvent estates of deceased persons)
This clause is outlined on pages 5 to 6 of the Bill and page 7 of the explanatory and financial memorandum. It inserts a new article 365A into the Insolvency (Northern Ireland) Order 1989 by addressing the effects of the Court of Appeal decision in the case of In re. Palmer Deceased (A Debtor) 1994 Ch. 316. In March 1994, the Court of Appeal attributed the ordinary, rather than the technical, meaning to "the estate of a deceased person" used in the context of an order-making power in section 421, which is article 365 in Northern Ireland.
The consequence of that is that the debtor's interest, on the day of his death, in his share in property held on a joint tenancy — usually the matrimonial home — does not become available to the trustee to distribute among the creditors of a deceased insolvent. The clause allows the trustee of a deceased insolvent, if certain conditions are met, to apply to the High Court to recover the value of the deceased insolvent's former interest in a jointly owned property from the survivor for the benefit of the estate. The purpose of an order under article 365A is to cover debts and other liabilities of the insolvent estate.
Ms Morrice: Does this mean that the matrimonial home is not given over to debtors?
Mr Nesbitt: Under the old rules, if someone in a joint tenancy dies, the surviving tenant acquires his or her interest. The effect of this amendment will be that if a joint tenant dies and is found within five years to be insolvent, his interest in the joint tenancy forms part of his estate for insolvency purposes.
Mr Armstrong: What if he commits suicide?
Mr Nesbitt: The situation would be the same.
Ms Morrice: In the past, the interest in the estate went to the surviving spouse. Where does it now go under this amendment?
Mr Nesbitt: It now goes to the trustee of the deceased insolvent's estate.
Ms Morrice: That is quite an interesting change.
Mr Nesbitt: It would depend on the nature of the tenancy of the house. There are two types of tenancy — a tenancy in common and a joint tenancy — and this can happen only in a joint tenancy situation.
Mr Wells: In the majority of cases, a husband and wife own the house between them.
Mr Nesbitt: The estate would be divided in two.
Mr Wells: Ms Morrice's point is important. If a deceased husband were found to be insolvent, would his wife be evicted, with her half-share of the property taken from her and sold?
Mr Nesbitt: It depends on the type of tenancy. That happens only in a joint tenancy situation.
Mr Wells: This is an important change.
Mr Nesbitt: It is an important change in this area.
Dr McDonnell: Are you referring to a house owned by a company?
Mr Nesbitt: This has nothing to do with company law; it relates to cases of individual bankruptcy.
Ms Morrice: My understanding is that the wife would normally have been entitled to the whole house under a joint tenancy, but that this amendment will enable creditors to take half the house from the wife, with the result that she will have to sell the property to pay the debts.
Mr Nesbitt: That may be the case.
Ms Morrice: This amendment has done that?
Mr Nesbitt: Obviously, the matter would have to be settled in court. The Bill brings the law into line with current bankruptcy practice. Normally, in the majority of cases, the wife will obtain 50% of the house.
Ms Morrice: Normally, they got the entire house.
Ms Broadway: In an ordinary bankruptcy, the spouse would retain 50% of the property and the other half would go to the trustee. This clause will bring the law on deceased insolvency into line with normal bankruptcy law.
Ms Morrice: Therefore, it is not changing the procedures, which have been custom and practice?
Ms Broadway: It will redress the decision in the case of In re Palmer Deceased (A Debtor), which made the situation unclear. It stated that 100% of the estate would go to the wife, a situation that would not have arisen in an ordinary bankruptcy situation, where 50% would have gone to the trustee.
Ms Morrice: Therefore, the wife has to pay the debts of the husband. Where she would normally receive the husband's half of the property, does she now have to give that over?
Mr Reid: Normally, if the husband becomes bankrupt while he is alive, the ownership of the property is divided. Half of that is treated as belonging to the wife and the other half as belonging to what is termed the bankrupt's estate. In extreme cases that could result in the husband and wife being evicted if means cannot be found to allow the wife or any of her relatives to buy out the husband's share.
Problems arise in situations where the decision in the Palmer case is allowed to prevail. A different decision would be applied where it is discovered that a woman's late husband was insolvent: the money would not go to the creditors; it would pass to the wife. That would have been anomalous vis-à-vis the situation where both husband and wife are alive, and the amendment is intended to redress that anomaly. The widow will lose her husband's interest in the house, which will become the creditors', as applies to any bankruptcy.
Ms Morrice: Yes, but there is a big difference if the husband is dead.
Mr Reid: I want to address a further inequality in the ownership of the house. Ownership can be through a joint tenancy or a tenancy in common. At present, if ownership is held through a tenancy in common, the wife will lose her husband's interest in the house. In a joint tenancy her husband's interest is safeguarded, and she will not lose out. It is an accident of the nature of the tenancy, and the amendment will address that inequity.
The Chairperson: In summary, is this provision rolling back the courts decision?
Mr Reid: Before the Palmer case, the deceased husband's share in the property would have passed to the creditors. That case decided that in the case of a joint tenancy the ownership would pass entirely to the widow. The Bill would restore the situation that prevailed before the Palmer case, that is to say, the value of the house would be divided between the husband and the widow, and the creditors would get the husband's share.
It cannot be denied that the provision is not to the widow's benefit; however, it puts the law on a par with that which would apply if both husband and wife were alive. If a husband becomes bankrupt while he is alive, the matrimonial home can be lost, and, admittedly, that is a serious consequence of bankruptcy. However, if the decision in the Palmer case were to prevail, there would be the anomaly that a wife in a joint tenancy would be home and dry, with the matrimonial home preserved in its entirety for her, but that would not be the case in the instance of a tenancy in common.
Ms Morrice: A few serous points must be clarified. First and foremost, if the Bill were enacted as it is, a campaign would be needed to inform husbands and wives of the arrangements that would best serve their interests as regards joint ownership of their home if bankruptcy occurs after a partner dies. Married couples must be able to understand what might happen.
Secondly, what is the legal standing of jurisprudence, given that we are amending legislation to overrule the court's decision in the Palmer case?
Mr Reid: Currently, in order for the wife to retain uninterrupted or unimpaired ownership of the matrimonial home following her insolvent husband's death, she would have to hold the home under a joint tenancy. That situation is an accident caused by the nature of the ownership of the home. Under the new arrangements, the same situation will apply irrespective of the nature of the ownership. I am sure that the average husband and wife, if the husband is engaged in business, would not have been aware that they needed to adjust their tenancy to safeguard the home in the event of the husband dying insolvent.
Mr Nesbitt: In the majority of cases, the wife will lose at least 50% of the property.
Mr Wells: What happens if the husband has the good sense to sign the whole property over to his wife?
Mr Nesbitt: It depends on how many years before the bankruptcy that that is done. If it is done in the last five years before the husband dies, then —
Mr Reid: It can be treated as a transfer at an under value. If the property was passed to the wife on the basis of "natural affection" and she did not buy out the interest at its value, that can be overturned at the court hearing following the husband's bankruptcy. If that happens, the wife might be required to restore the interest to her husband's estate.
Mr Wells: How many years ago does that have to have happened?
Mr Nesbitt: Five years. However, that would be settled in court.
Mr Wells: Has this clause been equality proofed? Obviously, it is wives who will be affected in the majority of cases.
Mr Nesbitt: There are not many cases of that nature — perhaps one or two a year.
Mr Wells: It is not unknown for someone to commit suicide because of his debts, leaving a widow. Without wishing to be sexist, the vast majority of business people are still, unfortunately, men. Therefore, the link between death and the discovery of bankruptcy is not an unusual one. I share Ms Morrice's concern that further equality proofing is needed, given that the vast majority of people who will suffer as a result of this clause will be women who believe that, at least, they have retained the family home. Children are also involved. The only way that a widow would be able to dissolve the debt would be to sell up.
Mr Nesbitt: That happens in the majority of cases.
Mr Wells: Yes, but the difference in this case is that the woman has lost her husband, is left with a widow's pension and has to get out.
Ms Morrice: The deceased husband will have been bankrupt, and she will be left with nothing. The clause would be a retrograde step.
Mr Nesbitt: That situation could exist in the other 98% of cases.
Ms Morrice: When they are still alive.
Mr Nesbitt: Prior to the Palmer case, the wife would have lost the property. Palmer took the matter to the House of Lords and won on the basis of technical detail.
Ms Morrice: Is Palmer a wife?
Mr Nesbitt: Palmer is deceased.
Mr Wells: The difference is that, in at least 98% of insolvency cases, the husband, wife and family are still together and have a prospect of rebuilding their lives. The husband can eventually get another job, after he has been forgiven for being a bankrupt. However, the cases dealt with by clause 8 are fraught with difficulties because the husband is dead and may have committed suicide or been driven to despair by his debts.
Mr Armstrong: The deceased insolvent's wife could be an invalid, and their house may have been customised to meet her needs.
Mr Wells: His wife could be 70 years old.
Mr Nesbitt: I understand the social concerns.
The Chairperson: Clearly, several of the Committee's concerns about clause 8 are now emerging. How will those concerns affect the Bill as a whole? If the Committee does not approve clause 8, will its views be taken on board and the Bill be resubmitted to the Committee? I share some of the Committee's concerns and I am considering what will happen in the future.
Mr Nesbitt: The Committee must make known its objections, which we would then consider before returning to the Committee.
Ms Morrice: I will pick up on a point made by Mr Wells. The Bill may have been equality-proofed, but, because of its detailed and technical nature, clause 8 could have been missed by the Equality Commission. We could request that the clause be sent back to those responsible for equality-proofing, together with the Hansard copy of this discussion. Those involved could give us advice.
Mr Wells: Obviously, this is parity legislation, but I would like to think that our equality legislation is stiffer and more rigorous than that of the rest of the United Kingdom. I can see how that was buried and lost in the document. Granted, the clause may affect only one or two people a year, but knowing my luck, one of them will be from Kilkeel or Ballynahinch. None the less, it would do no harm to send the clause back to Brice Dickson of the Northern Ireland Human Rights Commission or Joan Harbison of the Equality Commission for Northern Ireland and ask their opinion, without delaying matters.
I would like to know about a technical aspect of the progress of the Bill — what are the constraints?
The Committee Clerk: The Speaker, rather than the Committee, sends Bills to the Equality Commission, so I will have to check the rules in Standing Orders to find out whether the matter must be referred back through the Speaker.
Ms Morrice: The same rules apply for male and female spouses, so there is equality in that respect. However, the point was raised that, due to the nature of society, 98 % of the spouses are female.
Mr Reid: One must also bear in mind the situation of the husband and wife. They may have acquired a luxurious house on the backs of creditors of the husband's business. Although I accept that the clause appears to hit the widow particularly hard when she loses the house, some of the creditors may be operating small businesses and may be hit hard if they cannot gain access to the husband's assets that were acquired with moneys that he had taken from creditors.
Mr Nesbitt: The creditors could go to court and the decision could be revisited.
Dr McDonnell: That is a valuable point. I have every sympathy with the point pursued by Ms Morrice and Mr Wells. I do not want a vulnerable person to become a victim of circumstances beyond his or her control. Equally, I would sympathise with creditors whose wives and children could be made vulnerable and who may, in turn, go to the wall too.
Some companies go to the wall because someone has overpaid himself. Those companies may not have been in the top 100 of the FTSE share index, but we must be careful, because directors may have paid themselves salaries to fund luxurious lifestyles. Some company directors may have houses worth more than £1 million, but they cannot be allowed to continue living in such luxury at the expense of a creditor. A fine balance must be achieved. Eventually a legal case may result.
Ms Morrice: The point is that the matter was decided in court in the Palmer case, and a judgement was made in favour of the spouse of the deceased. Up until now, the Palmer case ensured that the spouse benefited. The legislation will be changed to ensure that the reverse applies and the creditor benefits. The point is that we are changing the law to the disadvantage of spouses.
Dr McDonnell: With all due respect, we need to know the details and circumstances of the Palmer case. To draw vague conclusions from vague information can be misleading. I know about several small companies that have been left in the lurch; they resent the fact that a business can just fold up and leave other creditors unpaid. Although we are talking about tragic sudden death or suicide in this case, people hold grudges. Creditors may feel that a fly-by-night merchant has padded himself and his family well and allowed the company to go bankrupt, having stashed his assets in such a way as to make them inaccessible to them.
A fine balance must be achieved, and, although I agree with Ms Morrice's point, we must consider the bigger picture. I find it hard, therefore, to be prescriptive.
Mr Reid: If the Bill were to adjust a joint tenancy, and make it an exception that the matrimonial home could not constitute an asset in the bankrupt's estate — in other words, preserve the exception made by the Palmer case — you would have to do that for all forms of tenancy. Otherwise a more serious inequality will arise: the accident of the nature of the tenancy will dictate whether the matrimonial home is preserved for the wife.
Dr McDonnell: Another dimension leading on from that point is that if the matrimonial home is not regarded as an asset in the bankrupt's estate, it cannot be used as security for borrowing. Many businesspeople, especially small business owners, use their matrimonial home as security. By pursuing this policy, we may render that asset invalid as a means of security and, therefore, deprive small businesses of a lever to acquire capital.
The Chairperson: Dr McDonnell made the relevant point that the detail of the Palmer case was probably important.
Dr McDonnell: We all have strong social consciences, and it is right to examine specific cases, but only in limited circumstances. We must be wary of bouncing — [interruption.]
Ms Morrice: We are changing the legislation. To date, legislation has allowed judgements to go in favour of the spouse.
Mr Nesbitt: Only since the Palmer case.
Mr Armstrong: It would still be possible to borrow on 50% of the value of the home.
Dr McDonnell: No, it would not be possible. If the home is not an asset, it is not an asset. No bank would lend money to a small business if the home were no longer available as security.
Mr Reid: The lender — a financial institution or bank — would take a charge over the matrimonial home as security on a loan to a small company operated by the homeowner, or to the homeowner himself if he owned the small business. If the businessman died insolvent, the lender would be locked out and would not be able to access its security. If the home was held under a joint tenancy and the husband died, the bank's security would be worthless. That places the bank in an appalling situation.
Dr McDonnell: I will argue against myself now: before advancing money, on the basis of security in the form of a home or property, the bank could ask the borrower's partner to sign a waiver to take them out of the equation. The issue may not be as major as I thought initially.
The Committee Clerk: Standing Order 32(1), "Public Bills: Human Rights Issues", states:
For the purpose of obtaining advice as to whether a Bill, draft Bill or proposal for legislation is compatible with human rights (including rights under the European Convention on Human Rights) —
Ms Morrice: We are not dealing with human rights; we are concerned about the equality aspects of the legislation.
The Committee Clerk: There is no Equality Commission any more. Is the commission not part of —
Ms Morrice: There are two separate organisations: Brice Dickson is head of the Human Rights Commission, and Joan Harbison is head of the Equality Commission.
The Committee Clerk: The issue is not covered in Standing Orders.
Mr Wells: That is an anomaly or a mistake; it should have been covered.
The Committee Clerk: Standing Order 33(1) states:
"For the purpose of obtaining advice as to whether a Bill, draft Bill or proposal for legislation is compatible with equality requirements (including rights under the European Convention on Human Rights) the Assembly may proceed on a motion made in pursuance of paragraph (2)."
Paragraph (2) states:
"Notice may be given by
(a) any member of the Executive Committee, or
(b) the Chairman of the appropriate Statutory Committee … of a motion "That the … Bill (or draft Bill or proposal for legislation) be referred to an Ad Hoc Committee on Conformity with Equality Requirements".
The issue is not covered, as that Standing Order relates only to the setting up of an ad hoc Committee to consider the Bill.
The Chairperson: Does that have to be carried out in the Assembly or in Committee?
The Committee Clerk: The matter would be brought before the Assembly as a motion. The Committee could write to Joan Harbison to seek her advice on the matter.
Ms Morrice: What happens to legislation if the Committee is not happy with a clause that it is scrutinising at Committee Stage?
The Committee Clerk: The Committee recommends an amendment to the clause, or its removal.
The Chairperson: After it receives advice.
Ms Morrice: We must therefore seek advice on whether an amendment is needed.
Mr Bohill: Mr Chairperson, would it be helpful if the Department were to carry out some quick research into the problem?
The Chairperson: How quick is quick?
Mr Bohill: We could prepare that for next week.
Ms Morrice: We would need the Equality Commission's response also.
The Committee Clerk: All the information would need to be available by the beginning of September.
The Chairperson: Given the timescales involved, will the Committee have an opportunity to meet in September?
The Committee Clerk: We will organise a time extension, if required, until 3 October 2002, in case extra time is needed.
Ms Morrice: How can you get a motion approved now?
The Committee Clerk: We can do so in September.
The Chairperson: Can I have members' views; we have heard a good deal of debate? There is concern, but we need balance also.
Mr Wells: That is why the Committee exists; it does not rubber-stamp everything. We merely require clarification, and if the Equality Commission advises that it is content with the matter, or that there is no room for manoeuvre because of parity, we will have to accept that. We will be able to say that we have done our best.
The Chairperson: We need to receive clarification on clause 8.
Ms Morrice: The question is whether the spouse of the deceased insolvent would be more disadvantaged under the new legislation.
Clause 8 referred for further consideration.
Clause 9 (Model law on cross-border insolvency)
Members should refer to page 6 of the Bill, and page 7 of the explanatory and financial memorandum. This clause enables the Department, with the agreement of the Lord Chancellor, to give effect, with or without modification, to the United Nations Commission on International Trade Law model law on cross-border insolvency by secondary legislation.
Clause 10 (Interpretation)
Members should refer to pages 6 to 7 of the Bill, and page 7 of the explanatory and financial memorandum. This clause sets out the meaning of certain terms used in the Bill. Subsection (2) deals with the legislative status of functions conferred on the Financial Services Authority.
Clause 11 (Orders)
Members should refer to page 7 of the Bill, and page 7 of the explanatory and financial memorandum. This clause empowers the Department to create subordinate legislation to deal with matters arising as a result of the introduction and implementation of the Bill's provisions.
Clause 12 (Repeals)
Members should refer to page 7 of the Bill, and page 7 of the explanatory and financial memorandum. This clause introduces schedule 4 to the Bill, which lists repeals to the Insolvency (Northern Ireland) Order 1989 and the Companies (No. 2) (Northern Ireland) Order 1990.
Schedule 4, which deals with repeals, appears on page 46 of the Bill.
Question, That the Committee is content with the clause and the schedule, put and agreed to.
Clause 13 (Commencement)
Members should refer to page 7 of the Bill, and page 7 of the explanatory and financial memorandum. This clause provides for the Department to make an order — or orders — bringing the provisions of the Bill into operation except for this clause and clauses 9, 10(1), 11 and 14, which will come into operation on Royal Assent.
Clause 14 (Short title)
Members should refer to page 7 of the Bill.
29 July 2002 (part i) / Menu / 3 September 2002 (part i)