Small Business, Enterprise and Employment Bill

Public Bill Committee, 4 November 2014.

John Robertson (Labour, Glasgow North West)

We now continue line-by-line consideration of the Bill. We resume with consideration of clause 92, the first clause in part 9. No amendments have been tabled on this part of the Bill, and I am minded to encourage the Minister to deal with all the issues in part 9 when addressing clause 92 stand part. I will allow reasonable latitude in the debate and then perhaps we can proceed speedily to discuss the next group of amendments.

Clause 92 - Convictions abroad

Jo Swinson (Liberal Democrat, East Dunbartonshire)

Good morning to you, Mr Robertson, and all Committee members.

I will now discuss part 9, on director disqualification, clauses 92 to 104 and the technical Government amendment 33. Part 9 comprises a series of measures designed to strengthen the director disqualification regime and to increase the likelihood of directors who act improperly being held to account for the harm that they cause. On average, some 1,200 directors are disqualified each year after action taken by the Insolvency Service. We recognise, however, that the regime can be strengthened to better protect businesses and consumers who have become victims of director misconduct.

The provisions of part 9 will increase the matters that a court must have regard to within director disqualification proceedings to ensure that more focus is placed on things such as the amount of harm that a director’s conduct has caused and their track record in running companies. For the first time, we will also be able to bring proceedings to bar a director when they have been convicted of a company-related offence abroad, such as fraud or tax evasion. I hope that that measure will be widely welcomed. We will also enhance the investigation process as part of a more intelligence-led approach, which will include improvements to how director misconduct is reported. Our new measures will ensure that we work smarter and better with other regulators when there has been director misconduct. To help creditors receive compensation for director misconduct, we will also allow compensation to be awarded against disqualified directors in certain circumstances, enabling help to victims of misconduct when creditors have not been adequately compensated through the insolvency process.

The measures will help to remove the perception that wrongdoers are not held to account and will improve confidence in the insolvency regime. Many hon. Members have raised concerns about directors whom they feel should have been disqualified but have not. The measures will strengthen the regime to ensure that the public, small businesses and consumers can be better protected when there is a track record of misconduct.

Government amendment 33 to schedule 8 is minor and technical and rectifies a drafting error in changes that the Bill makes to director disqualification legislation in Northern Ireland. It also relates to clause 93, which will enable a director disqualification application to be made against a person who has instructed an unfit director of an insolvent company. As a matter of policy, the measure will not extend to societies registered under the Industrial and Provident Societies Act 1965, but that policy has not been accurately reflected in the drafting of the corresponding amendments to Northern Ireland legislation in schedule 8 to the Bill. I hope that the Committee will be content to accept the amendment.

Iain Wright (Labour, Hartlepool)

Good morning to you, Mr Robertson, and the rest of the Committee. I thank the Minister for her explanation of part 9 and for allowing me to leave the Committee early on Thursday afternoon to attend a debate in the Chamber. I am grateful to her and to my Whip for permitting me to do so.

The Opposition have no issues with part 9. A strengthening of the current regime is welcome. I have only a brief question regarding what the Minister said today. She mentioned that some 1,200 directors are disqualified each year. I know that this is difficult and that there will be an element of “how long is a piece of string?” but to what extent does she think that part 9 will extend that? Can the Minister say how many this wider net will capture? This is a welcome move; it imposes a sense of responsible capitalism, not just in the United Kingdom but elsewhere. For that reason, we welcome the Bill and hope that it has a speedy passage.

Jo Swinson (Liberal Democrat, East Dunbartonshire)

I hate to disappoint the hon. Gentleman, particularly when he has been so generous and constructive this morning. I understand that he was in the Chamber on Thursday afternoon to contribute to the debate on the sale of park homes. As a former Minister, he had done so much work on that area previously. He missed my comments in Committee on Thursday about the points he raised.

I will not be able to put a number on the expected change to director disqualifications. It is a difficult to do that and we would not necessarily target a certain number. By definition, it depends on behaviour. We hope that there will be more deterrence of unscrupulous behaviour and misconduct by directors.

The measure is about making sure that there is the confidence that, where directors behave in a way that is not appropriate, that will be taken into account. We will all have read of such cases in our constituency mailbags. I receive many pieces of correspondence from hon. Members about directors who have been involved in a string of companies that end up in an insolvent situation. In some cases, people feel that that is a deliberate attempt to avoid paying their creditors. That kind of track record of behaviour will be taken into account in a way that is not straightforward at the moment. I hope that, in that way, such directors will be caught.

One of the challenges is that the first time that somebody undertakes such behaviour, it will be very difficult to catch them, before there is evidence. If somebody is entitled to be a director, they have the ability to behave in such a way. The measure will not eliminate the problems, but it will help that situation.

Iain Wright (Labour, Hartlepool)

I fully understand the Minister’s explanation. Given the fact that the regime is being strengthened and widened, will additional resources be given to enforcement and compliance in order to make sure that the new regime is as effective as possible?

Jo Swinson (Liberal Democrat, East Dunbartonshire)

The hon. Gentleman may be aware that there has been a period of significant change in the Insolvency Service over the past few years, especially because there has been a reduction in the number of cases that it deals with, not particularly in terms of directors’ qualifications, but in terms of insolvency more generally. There has been an organisational challenge for the Insolvency Service to manage a reduction in its footprint in terms of offices and numbers of staff to correspond with the falling case load. As a result, it has been improving its efficiency and resources remain available.

We will make sure that the Insolvency Service continues to be adequately resourced to undertake its important functions. The service has a good record in achieving disqualifications and is well respected for its work in supporting the insolvency regime. Press releases regularly show that prosecutions in cases of fraud and misconduct are increasing and that confidence in British business is increasing.

Toby Perkins (Labour, Chesterfield)

The Minister will be aware that the number of D1 reports made by insolvency practitioners that have led to a director’s disqualification has fallen from around 40% at the turn of the century to around 20% now. Many people in the profession are concerned that in the current regime the balance has gone too far and the burden of proof is too high, deterring them from pursuing disqualification. Does the Minister anticipate that the changes will lead to those percentages going up, or does she think the balance is about right?

Jo Swinson (Liberal Democrat, East Dunbartonshire)

We are changing the criteria and that can, of course, be looked at. I am not keen to put a number on it for the obvious reasons that the hon. Gentleman accepted. None the less, we anticipate that if the changed criteria make it easier to disqualify a director, there may well be an increase.

We need to look at things in context. In terms of trends in disqualification, there has been change over time. There was a big spike in 2003-04 after the law was changed, and there was also a bit of a dip in 2011-12. It does not stay constant from year to year. We will certainly ensure that the regime is one that everyone can have confidence in. Where directors need to be disqualified but there are currently barriers to that happening, this change will help. That should enable everyone to have greater confidence in the regime for companies and in doing business, which is a good thing. I hope that the Committee will be content with part 9 of the Bill.

John Robertson (Labour, Glasgow North West)

We now come to a number of clauses and schedules to which no amendments have been tabled. With the leave of the Committee, I propose that a single question be put.

Schedule 8 - Northern Ireland: provision corresponding to sections 92 to 99

Clause 105 - Power for administrator to bring claim for fraudulent or wrongful trading

Toby Perkins (Labour, Chesterfield)

I beg to move amendment 217, in clause 105, page 83, line 10, at end insert—

‘(3) This section shall not come into force until the Secretary of State has carried out a full review of the impacts of abolishing the time limits for administration and the effect of such a change on this section.”

On part 10, it is worth starting by recognising that we, in the UK, have an incredibly successful insolvency regime in terms of the number of businesses saved and jobs rescued from businesses that have gone into administration or insolvency. From a regulatory and professional perspective, Britain’s regime is the envy of many countries around the world. I draw the Committee’s attention to my registered interest and the support given to my office in the past by R3.

Our insolvency regime is powerful and has a strong track record of success. It is an incredibly important industry which deals with what is, understandably, a contentious moment in the business cycle. It often does its work at a time when businesses, through no fault of their own, are suddenly hit with the realisation that they will lose money that they expected to be paid because another business has gone bust. They often then turn to an insolvency practitioner, to rightly and legitimately question the actions taken. It is incredibly important to recognise that any changes we make to this regime must be made with great care and caution, as it deals with an important sector of business.

This Government have returned to the subject of insolvency on a number of occasions—in the Legal Aid, Sentencing and Punishment of Offenders Act 2012, the Deregulation Bill and now the Small Business, Enterprise and Employment Bill. It certainly gives the impression of a Government that sits uneasily with the regime that currently operates in this country. It is important to put that broader context into the discussions on part 10. I would like clarification that my contribution relates specifically to clause 105 rather than to the broader Bill.

The Chair indicated assent.

Toby Perkins (Labour, Chesterfield)

I am grateful for that confirmation.

On clause 105 and amendment 217, the official Opposition support any moves that make it easier for administrators or any other wronged parties to take fraudulent trading actions and to catch delinquent directors. The clause aims to do just that. We have reservations, which I will expand upon, about how the clause will work in practice, but the theory behind the clause—which we would support—is that it would allow administrators the same right as liquidators to bring wrongful and fraudulent trading actions, therefore allowing more actions to be taken overall.

Administration is a useful and important tool, which is often very successful in terms of saving jobs and recouping creditor money. It suggests that the business has the opportunity to trade out of the position that it is in. Often, employees who would lose their job under liquidation will retain their job under administration and move on to continue to work for the company under either similar or new ownership.

On that basis, it is important that we recognise that administration is an important tool not just for insolvency practitioners but for the business that is struggling. However, administration is, at this moment, a short-term procedure, used in specific circumstances. We are concerned that, in general terms, it takes a couple of years to bring a wrongful trading claim. Administration would be time-limited to 12 months. If there is a process that generally takes a couple of years, and administration only lasts a year, is that likely to work as an effective power, or is it likely to be a disincentive for businesses to go into administration? Our amendment intends to probe that. It is an important question.

If businesses have traded fraudulently or wrongfully, they should be held to account for that; but in cases where that is likely to have happened, it is important that we do not see businesses continuing to trade beyond the point where they are insolvent, because they are frightened of the administration process. That is an important distinction.

Extending the provisions on liquidations to administrations is unlikely to deliver much practical change, as long as administration is treated as a dynamic and short-term procedure and the existing time limits on the process remain in place. The period of one year, even allowing for possible extensions, does not generally allow enough time to begin a wrongful trading action and see it through to a conclusion before the end of the administration. The timings involved create incentives for delinquent directors to adopt obstructive and delaying tactics to hold up proceedings and therefore get away with wrongdoing. Therefore, we are not convinced that extending the wrongful and fraudulent trading provisions into the realm of administration will be successful, as long as the provision for automatic termination of administrations within one year remains. That is why the amendment we have proposed to this clause, in my name and those of my hon. Friends the Members for Hartlepool and for Edinburgh South, gives the Government the opportunity and space to address these concerns by investigating whether that period of administration should be extended in more general terms or, if not, by considering the likelihood of this new regulation’s delivering what the Government intend.

The amendment has obviously been tabled in a spirit of co-operation—as are all our amendments—to enable the Government to analyse whether the new regulation is likely to deliver on the Government’s intentions. As I say, we support the aims of clause 105. However, we know that the Government have said many times that they are against creating new regulations that are impracticable, so it is important to consider whether it will actually make a difference. This probing amendment asks the Government to consider whether the arbitrary time limit on the administration process is justified, and what impact that will have on the provision that the Government are attempting to introduce in clause 105.

Perhaps the Minister could respond on the specific question whether an administrator will be able to bring an action after the business has exited administration. If the start of the process of wrongful or fraudulent trading happened whilst the business was in administration, and the business then moves out of administration, would the administrators still be able to bring that action? What evidence have the Government heard about the likely impact of the new power on business rescue numbers and on jobs saved by the administration process?

Have the Government heard any evidence to suggest that this may cause businesses that would previously have moved into and then out of administration not to go into administration in the first place? Sometimes that is the best process and the best way of saving jobs and businesses. If this measure makes businesses plough on beyond the point of no return because they are concerned about the implications of not doing so, that could have negative consequences for the number of businesses and jobs that are saved. I would be keen to hear what the Minister has to say on our amendment, and on the specific questions I have raised.

Jo Swinson (Liberal Democrat, East Dunbartonshire)

I thank the hon. Gentleman for his amendment 217, which is, as always, tabled in a spirit of co-operation and constructive comment in order to explore these issues. I also very much welcome his recognition that the insolvency regime in the UK is well respected internationally, with many elements that are being echoed and learnt from by our partners in other European countries. Indeed, many look to the UK as having a regime that helps to deliver business rescue, and does so very efficiently. This is a good moment to put on the record my thanks to all those in the Insolvency Service who do such a fantastic job of making that happen and, indeed, to insolvency practitioners up and down the country who work to achieve that.

I turn now to the specifics of the amendment, which would seek to prevent the new right to allow administrators to pursue wrongful and fraudulent trading claims from being commenced until the Government had reviewed the possible effect of abolishing the administration time limits. I obviously accept and recognise that the hon. Gentleman is very much in favour of the new right for administrators to be able to pursue these fraudulent trading claims, and he is not seeking a significant delay to this additional power but instead seeking to understand and probe whether there are other ways of achieving the same thing.

I appreciate the spirit of the amendment, but I hope the hon. Gentleman will be reassured that later in the Bill, in clause 115, we are proposing to increase the time limits for administration by allowing the creditors of a company to consent to extend the one-year duration of administration by up to an additional year. Of course, the court has the power to grant extensions beyond that, so some of those concerns about the timings should already have been dealt with. That is six months longer than creditors can currently consent to. That will also reduce the number of cases in which the administrator needs to apply to the court to prolong the duration of administration, which obviously removes a degree of bureaucracy, cost and uncertainty from the process.

Looking at the evidence and analysing the Companies House data for a sample of cases has shown that around 90% of administrations are concluded within two years. We think, therefore, that being able to have that one-year time period, with the possibility of consenting to extend for a further year before having recourse to the courts, should help to deal with this issue for the vast majority of cases. However, that said, it is important to recognise that there is a good reason for the time limit on administration. It is a dynamic procedure in which we want administrators to be acting as swiftly as possible to restructure and rescue businesses where at all possible. Allowing companies to remain in administration for longer than is needed would add unnecessary expense to the procedure and, in some cases, arguably give the insolvent business an unfair advantage over competitors.

I recognise the point that where an administrator commences a wrongful or fraudulent trading action the claim might take more than a year or two to complete if it is defended. However, the time limit on the duration of administration will not necessarily reduce the effectiveness of the right proposed under clause 105. For example, if the administrator’s legal action has not been concluded when the administration is otherwise complete, the administrator could use the new right to assign an office holder’s claim, proposed by clause 106, to pass the claim over to the liquidator or any other party well placed to pursue it. That helps to deal with the first question that the hon. Gentleman raised.

Toby Perkins (Labour, Chesterfield)

It might potentially offer some reassurance if we were not so opposed to clause 106. The Minister is saying that if an administrator has brought a claim and it is not completed by the time that the business moves out of administration, then the administrator themselves will not be able to pursue that claim.

Jo Swinson (Liberal Democrat, East Dunbartonshire)

They would have to assign that claim. I appreciate that the hon. Gentleman has objections to clause 106, which we will come to in a moment, but together as a package, those clauses mean that those cases can be covered by the alternative proposals. Either the liquidator or another party would be able to take that forward. Clearly, the intention is not that those that have been making wrongful or fraudulent claims are in some way able to get away with it as a result of a time limit on administration. That is not the Government’s intention and so we have the provision, through those clauses, to ensure that that would not happen, but I understand the hon. Gentleman’s concern about that.

Often the former administrator becomes the liquidator, so it might well be the same professional person in control of the claim if it was so assigned. That would be a pretty straightforward way of continuing the claim. If the administrator thought that it would be inappropriate to assign it outside of administration, then the time limit on administration is not a fixed end point. In addition to clause 115, which extends the period by which creditors can consent to an extension of administration, there is still recourse to the courts. Obviously, in those circumstances, an administrator would be able to make an application to the court to prolong the administration if they really felt that the claim needed to be pursued and action taken within that time frame. In all those potential eventualities, the ability to take that action remains in place.

Clause 105 was suggested by insolvency practitioners as part of the insolvency red tape challenge that we conducted earlier in the Parliament. Our earlier consultation tells us that removing the time limit on administration would not be well supported by many stakeholders, particularly creditor groups. Therefore, the review that is proposed in amendment 217 is not the best way forward, but I accept that the hon. Gentleman is keen to probe those issues and I am glad that he has done. I hope he feels reassured and able to withdraw the amendment and leave clause 105 as it is.

Toby Perkins (Labour, Chesterfield)

I thank the Minister for her response. I am glad to see, in the light of recent events, that she has decided to stick with the Government to the bitter end and is not feeling so much under the yoke of these Conservatives that she cannot carry on. My goodness, it will be a bitter end, but it is good to see that she is carrying on the fight.

The Minister made some interesting contributions on this clause. She is right that in some cases the administrator, in practical terms, will become the liquidator. I hope she will consider, as the clause moves forward, whether it might create a perverse incentive for administrators that have got so far with a process to think about liquidating a business because they want to see the process through to the end. That would fly in the face of what the industry would want and might be a perverse disincentive for administrators.

None the less, it does create provision, as the Minister rightly says, that is not there currently, so while it may not be used a huge amount—I am conscious that the Government do not want to bring regulations forward if no one uses them and clog up the statute book in that way—it may be used on occasion. I shall not preview our objections to clause 106, since we are about to have that discussion, but they are different from the issues that she has raised here. I hope that the Minister will consider how this clause will work in practice and will keep an open mind about what disincentives may be created.

Notwithstanding that, as I said at the start, ours was a probing amendment and the Minister is right to say that provisions in clause 115 will extend the opportunity for the administration to be extended in length where it is seen to be in the best interests of creditors. She is also right to say that administration should, by definition, be a short-term, dynamic process. It is not a permanent, or even semi-permanent, healthy situation. Therefore, I beg to ask leave to withdraw the amendment.

Clause 106 - Power for liquidator or administrator to assign causes of action

Toby Perkins (Labour, Chesterfield)

If you think enthusiasm was lacking in that “Hear, hear”, just wait half an hour.

As with clause 105, we welcome the intention in this clause to get more money back to unsecured creditors. However, we have significant concerns that there is an easy assumption here that transposing language used elsewhere on to the Insolvency Act 1986 will automatically deliver similar benefits. We are very sceptical of that. There are many reasons why an insolvency practitioner may decide not to pursue a claim. It may be something as simple as lack of evidence or resource. In such circumstances, we can see the Government’s argument that it would make sense to let somebody else do it instead, particularly if they consider that there is significant reason to pursue a course of action.

This clause would allow the office holder to assign not only the right of action but the proceeds of such action. By ensuring that the purchaser would stand to gain fully from potential benefits arising from the action, alongside bearing all the risk and cost of pursuing the claim, the Government are assuming that a clear incentive will be created to pursue more wrongdoers. The clause may well deliver in that regard. However, there may be other, unintended consequences.

I am nervous that competitive advantages may be given to people who abuse the process in a way that is not necessarily predictable at the outset. Insolvency practitioners already assign company causes of action, so companies feel that extending that to other areas will have a clear impact. However, there is a fundamental difference between company actions and office holder actions.

A company action is brought by the company as the claimant and includes, for example, recovery of a commercial debt or a claim on the director’s loan account. The insolvency practitioner will collect information on behalf of the company and, where appropriate, can assign the claim. By contrast, office holder actions are claims conferred by statute on the insolvency office holder and arise as a consequence of the insolvency. Examples include wrongful trading, preferences and undervalued transactions. Actions are taken when the director has not operated in the best interests of their business or if they have been trading wrongfully or while insolvent.

An insolvency office holder has extensive powers of investigation as well as control of all the company’s records, including confidential and sensitive material. The exercise of investigatory powers is essential in deciding whether there is a case for bringing an office holder claim. When the office holder obtains information under their powers of investigation, they are imbued with a duty of confidence to use that information only in the interests of the administration or liquidation. They cannot, for instance, share such information with creditors for the creditors’ gain. Therefore an office holder’s investigatory powers and their powers to bring office holder actions are closely bound up—a fact recognised by the law in providing that only a licensed insolvency practitioner can pursue such claims.

That is where we have concerns. By assigning such powers to third parties, the ethics, duties and obligations on qualified professional insolvency practitioners are separated from the incentive and the right to pursue a complaint.

Office holders are given the necessary powers because they can be relied on to pursue an investigation in the correct manner and a regulator is in place to ensure that they do so. The third party, in this case, would nevertheless require access to the necessary information to pursue the claim, and currently the only way of obtaining such information is through the office holder.

On the assumption that there can be no suggestion of the office holder’s powers being delegated to the assignee, it is difficult to see how the proposal could be implemented. Conceivably, the insolvency practitioner could retain the primary responsibility for exercising investigatory powers and dealing with confidential material; but that could mean that the claim could be pursued only if the insolvency practitioner continued to run it from start to finish but—rather than its being subject to their own professional view and discretion as now—on the instructions of the assignee. That is likely to put an insolvency practitioner in a very difficult situation and, therefore, lead to a reluctance to assign claims.

Will the Minister expand on how she anticipates the clause will work in practice? Where does the balance of responsibility sit in the process of assigning a cause of action in terms of the confidential information that the office holder holds and can investigate?

We should not forget that the proposal is being considered only because of the Government’s record on action for justice; it would not be required if it were not for the assault on legal aid. Funding is currently available for these types of actions: conditional fee arrangements and after-the-event insurance can fund insolvency litigation when an insolvent estate has no money to fund the pursuit of directors or third parties who have taken money. Under the current regime, legal costs are paid for by the losing party and, in most cases, the simple threat of the regime encourages the director or third party to settle long before the case is taken to court. That quick resolution helps to keep insolvency costs down, so more money is returned to creditors.

According to a report published by Professor Walton of the University of Wolverhampton in April 2014, the current regime enforces claims of approximately £300 million a year, returning £70 million a year to the Government through Her Majesty’s Revenue and Customs and another £230 million to businesses. A further £150 million a year is returned to creditors. However, the Legal Aid, Sentencing and Punishment of Offenders Act 2012 will end that regime next April, after which the costs must be paid from the fruits of the action, significantly reducing the amount of money returned to creditors. Professor Walton said that as the majority of claims realise £50,000 or less, they are unlikely to be pursued under the new regime because the cost will be so high that they will not be worth while. His report concluded that there are no alternatives to the current regime that will secure the same level of money for creditors. Most of the £150 million a year under the current regime will be lost as things stand, regardless of whether the clause stands part of the Bill.

In that context, does the Minister understand that we see the approach in its totality as a piecemeal means of making up for the failures of previous legislation? Will she clarify how the measure will operate in practice? Specifically, will she address the issue of the assignee having access to confidential information about other businesses’ buying prices, or other confidential information that is held by businesses? Let us remember that businesses that are suppliers to other businesses may also be their competitors. Businesses are not always organised in a straight up-and-down manner, with neat tiers of supplies. They are often other businesses’ suppliers in one department and their competitors in another. There are potentially serious unintended consequences to enabling creditor businesses to become assignees, allowing them to pursue actions of this sort and potentially enabling them to access information that they were not previously able to access.

What representations has the Minister received, and from whom, about the likelihood that the confidentiality expected of an office holder will be passed on to the assignee? What evidence does she have that insolvency practitioners will be motivated to pass it on? Can the Minister envisage reasons—for example, competitive information gathering—why an assignee might want to access information that can currently be seen only by the office holder? What safeguards does she propose against abuse?

Jo Swinson (Liberal Democrat, East Dunbartonshire)

I understand the hon. Gentleman’s concerns about clause 106, which is intended to increase the prospects of creditors recovering their unpaid debt—an issue that he acknowledged. One way of doing that is to enable liquidators and administrators to assign to a third party insolvency actions that can currently be brought only by a liquidator or administrator.

The clause will help in a range of circumstances, such as when the liquidator or administrator is unable or not inclined to pursue the action themselves. As the hon. Gentleman said, such actions include claims for wrongful trading against directors who caused their company to trade when they ought to have known it was insolvent, and claims against directors who deliberately paid off favoured creditors or sold company assets for less than their worth in anticipation that the company would enter insolvency. It is right that we try all avenues to take recovery action against the directors and others who have benefitted in such cases, to ensure that creditors are compensated for their financial loss.

However, the decision to take action is a judgment of the liquidator or administrator. In some cases, they may be unable to take action, perhaps due to a lack of funding for the litigation or because of the costs involved in prolonging the insolvency procedure. Currently, when the liquidator or administrator chooses not to bring a claim, there is no way for anyone else to take the claim; there is no other avenue, even if there is a creditor or another party who is willing to take it over. We have come to the view that that is illogical. Just as the liquidator or administrator can assign pre-existing claims that the company itself had the rights to pursue, the new measure will mean that claims that arrive on entering insolvency will be brought into line with the pre-existing claims that can already be assigned. It is not consistent to treat the two circumstances differently.

The hon. Gentleman should be reassured about the concerns he expressed. He asked about how the power under this measure would work. It is basically about recognising that insolvency practitioners will still tend to bring claims where they can. Of course, many do, so the measure is not about saying that they should not or will not be bringing such claims; it just gives a little more flexibility by giving the insolvency practitioner the additional option of assigning the action instead of taking action themselves.

The hon. Gentleman rightly raised the issue of confidentiality. The IPs will still be bound by statutory limitations on disclosing information and the assignee will not have access to the statutory powers that exist for the insolvency practitioner. That is a particularly privileged position conferred on IPs, so that they can fulfil their statutory duties. It would not be right or appropriate to transfer those powers or, indeed, any information received under those powers.

In making any assignment, the insolvency practitioner will need to consider carefully whether there are any legal restrictions—such as those in the Data Protection Act—on the information that they can pass on. It will be for the prospective purchaser who is considering taking on such an action to establish in the negotiation whether or not they can access sufficient information to bring the action and therefore whether it is sensible for them to take on the assignment.

The hon. Gentleman raised the issue of changes to the funding of legal aid. I accept and understand the concerns expressed in various quarters about those changes. We are in incredibly challenging financial times, so changes have been made that have made the situation more challenging for many. It is sensible to look at every possible avenue through which a claim can be brought.

It is difficult to estimate and assign the potential loss. The hon. Gentleman mentioned the report by Professor Walton, who had the challenging task of trying to find out the likely effects. The sample of cases was small—less than 1%—and no process is currently in place that allows the accurate measurement of losses to creditors. None the less, it is in the public interest to try to ensure that we control costs on both sides of civil litigation by removing excess litigation from the system.

We want to ensure that the actions that should be taken are still taken. Clause 106 will give additional flexibility to insolvency practitioners to assign such action to be taken when they cannot take it themselves. It is a welcome part of the reforms to the insolvency regime in the Bill, so I commend it to the Committee.

Clause 107 - Proceeds of office-holder claims not part of general assets of company

Jo Swinson (Liberal Democrat, East Dunbartonshire)

I beg to move amendment 163, in clause 107, page 84, line 3, after “assignment” insert “(or, in Scotland, assignation)”

John Robertson (Labour, Glasgow North West)

With this it will be convenient to discuss the following:

Government amendment 164.

Amendment 218, in clause 109, page 85, line 7, leave out “creditors’ committee or”.

Amendment 219, in clause 110, page 85, line 24, leave out from “least” to “a” in line 25 and insert “one creditor makes”.

Government amendments 165 to 177.

Amendment 220, in clause 111, page 88, line 41, at end insert—

‘(4A) The deemed consent procedure may not be used where the insolvency practitioner judges that a face-to-face meeting would incur no additional cost saving to creditors.”

Government amendments 178 to 187.

Amendment 225, in schedule 9, page 215, line 41, leave out paragraph 6.

Government amendments 188 to 190.

Government new clause 8—Sections 110 to 113: further amendments.

Government new schedule 1—Abolition of requirements to hold meetings; opted-out creditors.

Jo Swinson (Liberal Democrat, East Dunbartonshire)

With your permission, Mr Robertson, I propose to speak to my Government amendments first and then listen to what Members say in speaking to their amendments before responding to those.

This group of amendments adds a new clause which introduces a schedule of consequential changes to the Insolvency Act 1986. These changes are necessary for clauses 110 to 113 to work effectively. The schedule also abolishes final meetings in liquidation and bankruptcy proceedings, which may take place months or even years after the date of insolvency. These are rarely, if ever, attended by creditors. As drafted, clause 114 contains a Henry VIII power, which will be removed, and there are technical amendments to clauses 107, 110 to 113, 122, 145 and 147.

The amendments to clauses 110 to 114 relate to the removal of face-to-face meetings as the default way in which decisions are made in insolvency proceedings. They also relate to the ability of creditors to opt out of receiving correspondence from insolvency office holders. Amendment 187 will remove clause 114, which contains a Henry VIII power to amend the 1986 Act by removing meetings as the default method of decision making in insolvency proceedings and also enables creditors to opt out from receiving correspondence during insolvency. Clause 114 will be replaced by new clause 8, which introduces new schedule 1. The new schedule will make those changes to the 1986 Act, removing the need for the power. Amendments 189 and 190 remove references to clause 114 from clauses 145 and 147.

Amendments 165 and 176 amend clauses 110 and 111 to enable the insolvency rules to make provision for particular insolvency processes to use specific methods of decision making, which may include face-to-face meetings. Similarly, amendments 166 and 178 clarify when deemed consent may be used to make decisions in an insolvency. Deemed consent allows for a proposal to be approved by default unless there is a certain level of objection to it. Amendments 167 and 179 clarify the position where creditors object to the use of deemed consent, while amendments 170 and 181 remove a definition that is no longer needed because of amendments 166 and 178.

Amendments 168, 169, 172, 173, 180, and 183 to 186 clarify that parties such as company directors may participate in decision-making processes without being entitled to vote when proposals are being considered. Amendments 171 and 182 allow the insolvency rules to provide for who receives notice of decision-making processes, specifically allowing those who have opted out of receiving correspondence to be excluded. Amendments 174, 175 and 177 improve the consistency of language used in clauses 110 and 111 relative to each other and the rest of the insolvency legislation.

Let me turn to the final amendments in the group, which are fairly technical. Amendment 188 makes a minor change to the drafting of clause 122. It extends the scope of the challenge against the outcome of a meeting where a proposal for an individual voluntary arrangement, or IVA, is either accepted or rejected. Clause 122 will now take account of an interested party’s ability to challenge the outcome of a meeting where an IVA proposal was rejected by creditors.

Finally, I would like to mention some minor and technical amendments to clause 107, which is to be read alongside clause 106. That clause, which we have just discussed, amends the Insolvency Act 1986 to allow legal actions that arise on insolvency to be assigned to another party to pursue. The measure extends to Scotland, but two technical amendments are required to reflect differences in the legal terminology in Scotland—I know that you would want to ensure that we get that absolutely right, Mr Robertson.

I commend our amendments to the Committee. I will listen with interest to what the Opposition have to say about their amendments and respond to the points raised at the end of the debate.

Toby Perkins (Labour, Chesterfield)

First I shall respond to the Minister’s comments on the Government amendments and then I shall speak to our amendments 218, 219, 220 and 225. On clause 107, while it is more of a technical change, in determining which class of creditors are the beneficiaries of which type of claim, we were, along with many in the industry, surprised to see the clause included in the Bill.

The main change brought about by the clause is that the proceeds of office holder claims will no longer form part of the net property of the company. That means that they will not form part of the assets that are covered by a bank’s floating charge and so will be treated as available for the general body of creditors. We accept that the amendments are necessary to take account of the different legal terminology in Scotland.

We believe that in practice the clause will be likely to mean that the general body of creditors will see increased returns and secured creditors will see reduced returns. Many in the industry who have responded to Government consultations in the past were very surprised that the clause, which will have a real impact on the returns to secured and unsecured creditors in different ways, and therefore the wider economy, appeared in the Bill without, apparently, any widespread consultation. They were concerned that in all the Government’s consultations on the process of insolvency, this provision was not raised.

I see that the Minister is writing a note that will lead precisely to the question that I am about to ask her. What consultation was engaged in before bringing forward this clause and what representations were received on its impact, particularly on secured creditors? Will the Minister commit to further scrutiny of the clause and its potential impact before the Bill is passed?

I should also be interested to know what estimates the Minister has produced of the impact of the clause. How much more money does she believe will be returned to the general body of creditors as a result of the change, and how much less money does she believe will be returned to secured creditors as a result of the reforms?

Our amendment 218 omits the phrase “creditors’ committee or” from clause 109. It has always been the case that office holders in liquidations and bankruptcies require official permission to carry out certain functions as part of the process. This is for the simple reason that the insolvent estate needs to be protected from powers that could have a negative impact on it financially and, as a result, on its creditors and employees.

These permissions are obtained from creditors’ committees or, where there is none, from the Secretary of State or the court. Clause 108 gives liquidators the ability to exercise any of these commonly used functions without gaining approval first. Likewise, Clause 109 gives trustees in bankruptcy the ability to exercise any of these powers without the need to obtain approval of either the court or a creditors’ committee or, where there is none, the Secretary of State.

We accept that insolvency practitioners are regulated professionals who are paid to work in the interests of creditors and protect the monetary value of the estate, and that in most cases any misconduct should be dealt with by their own regulatory system. However, in the small number of cases—around 3%—where creditors’ committees are used in bankruptcy cases, we feel that these committees can be a very useful way of empowering creditors. Obtaining permission from creditors’ committees is also accepted to be far less costly than an application to the Secretary of State or to the court due to their ability to reach quick decisions and propensity to be in a localised area.

We therefore have some doubts as to whether the need to seek permission from such a committee should be removed altogether, which is the aim behind our amendment. What does the Minister believe will be the implications for the continued existence of creditors’ committees at all if this position of influence is removed altogether? Why does the proposed change have creditors’ committees within its scope? Our amendment 218 would allow sanction to be removed in the absence of the approval of the court, but would still leave power in the hands of the creditors’ committee. In responding to the amendment, it would be helpful if the Minister could let us know the circumstances under which she sees the creditors’ committee as not being worthy of being consulted before that step is taken.

I turn to our amendments 219 and 220, which amend clauses 110 and 111. Whilst the clauses I have just discussed were drafted with the intention of further empowering insolvency practitioners to use their own discretion, clauses 110 and 111 do the exact opposite. Again, we believe that the Government have got the balance wrong. The intention of clauses 110 and 111 is to end once and for all the automatic practice of insolvency practitioners holding physical creditor meetings in all types of insolvency procedures. Instead, the insolvency practitioner will need to hold virtual meetings through other means, such as phones or over the internet, or whatever they judge to be the most effective.

The official Opposition strongly support the principle of adapting the insolvency regime to incorporate modern technology. We tabled amendments to the Deregulation Bill earlier this year to create an online version of the standard paper D1 forms. At the time that move was blocked by the Government’s moratorium on new regulation for micro-businesses, even though 82% of insolvency practitioners said that it was a deregulatory measure. We are glad that the Government subsequently indicated that they agree to our proposed amendment to the Deregulation Bill, albeit they voted against it at the time.

However, in this instance we have concerns that the savings predicted to be brought about by the reforms are too optimistic and that, left as they are, the clauses would lead us down a road towards further creditor disengagement. Creditor engagement is a core part of a strong, transparent, fair and trusted insolvency regime. Insolvencies by their nature can be complicated, confusing and frustrating for those who have lost money through no fault of their own. Creditor meetings are an essential part of creditor engagement, trust and confidence in the insolvency regime. The very fact that the Government are leaving in place a provision for creditor meetings, albeit they are creating much tighter definitions as to when they will be suitable, means that they obviously accept that such meetings are of value.

The mindset behind going down the route of saying that we do not need to have physical meetings, and that everything can be done either on the phone or using the internet, calls into question the whole basis on which this place works. When we had the evidence session to the Bill Committee, we could have invited all the witnesses just to talk down the telephone or be on an internet link. We did not; we wanted to actually get people here to question them, because we recognised that the kind of communication that happened on the telephone or on the internet was less perfect, and did not deliver in the same way. That is why we ask witnesses to come from across the country to attend our Select Committees or our evidence sessions to Bill Committees. It is because we know that the interaction we get will be different and better if it is face to face.

If you have a policy that encourages creditors to engage, why would you want to weaken that by saying, “Let’s not have face-to-face meetings; let’s do it all on the phone or on the internet”? Creditor meetings are an essential part of creditor engagement. Physical creditor meetings are formal meetings of all creditors, which are called by an insolvency practitioner who is handling an insolvency. A meeting is usually called at the outset of an insolvency proceeding, and on occasions periodically thereafter. The meetings play a number of important roles, including helping to establish who all the creditors are and what they are owed, updating creditors on the process and progress of the case, and finding out more details about the financial affairs of the debtor.

Creditors will often be able to provide details to the insolvency practitioner of which they would not otherwise have been aware. It is often on the back of the creditor meeting that creditors—whether they be employees or other people known to the directors of the business that had gone bust—will come forward and say, “I am aware of properties that the business owned,” or “I am aware of other transactions or other bank accounts.” One creditor may say something that triggers something in another’s mind, which will lead them to say, “Actually, that reminds me of something I heard about this debtor.”

It is important that such meetings are held because they create creditor engagement and they often lead the insolvency practitioner to additional resources held by the debtor. As a result of those conversations, greater resource is found and that goes back to the creditors, which is what we all want.

I am worried that so much of what the Government are doing on insolvency is not about finding all the potential sources of revenue held by the estate to maximise the amount of money for creditors, but about reducing the costs of the process. The measures proposed will reduce the costs that the insolvency practitioner introduces at the end in some cases, but that may mean that a substantially less thorough job is done and, as a result, money that should be with the creditors is held in accounts available to the debtor.

We already have a regime that is admired around the world, that delivers on creditor returns and saving jobs. If we end up with a process that leads to a smaller bill from the insolvency practitioner but also reduces the amount of money that goes to creditors and the number of jobs saved, we will not have done the creditors any favours. The thrust of amendments 219 and 220 is about ensuring that creditors are engaged.

Creditor influence on how insolvency practitioners perform their function and charge fees could be limited. Some small creditors, such as sole traders and small businesses, could be permanently excluded from engaging with insolvencies. Creditors are often individuals who already find the process confusing, and they are often face it at a time when they are in despair about the fact that moneys that they were expecting will never arrive. To suggest that they could pick up the phone for a 10-minute call and that that will somehow engage them is wrong-headed in the extreme.

Iain Wright (Labour, Hartlepool)

My hon. Friend is making a powerful case. Does he think that the clause will increase burdensome bureaucracy on small businesses when the Bill’s purpose is to minimise that as much as possible?

Toby Perkins (Labour, Chesterfield)

My hon. Friend makes a valid contribution. I have raised our concerns about the clause and, while I do not intend to vote against it, we certainly do have reservations about the impact of clauses 110 and 111. We are worried that those clauses will reduce creditor engagement and that, as a result, the amount of money that ends up in the creditors’ pockets will be reduced. That flies in the face of what we should want our insolvency regime to achieve.

At the beginning of the insolvency process, the insolvency practitioner often has limited knowledge about a company or individual’s financial history. The first creditor meeting often allows useful information about financial affairs to emerge, such as: how many creditors there are, who they are; whether there are hidden assets and whether there was any possible wrongdoing by a director or an individual. That knowledge allows the insolvency practitioner to maximise returns to creditors and ensure that any wrongdoing is dealt with by the justice system.

We would all recognise that in our day-to-day jobs we are asked to attend many meetings; many individuals want to have meetings with Members of Parliament, with shadow Ministers and even more so with Government Ministers. Often, when we are discussing whether or not to have a meeting, we will say, “Let’s have a telephone call.” Why do we say that? We know that it will take less time, we know that it will be less thorough, but we believe that it is a way of reducing the time taken in a way that still enables us to get the basic facts across, although probably not in the same depth. That is precisely what amendments 219 and 220 would prevent happening in the case of creditor meetings. I do not mean that I take anyone that I suggest having a phone call with rather than a face-to-face meeting less seriously; I do not want to create that impression. However, we all recognise that there is a difference between face-to-face contact and telephone or internet-based contact.

In administrations and liquidations the first meeting is a really useful opportunity for creditors to participate in the process and is the most appropriate and convenient forum for agreeing the basis of the insolvency practitioner’s fees and establishing a creditors’ committee. The drawbacks of alternative meetings should be clear. A report published just a few months ago by the Federation of Small Businesses revealed that 45,000 small businesses do not have broadband and thousands of others have very slow broadband speeds. In rural communities particularly, access to broadband can be very limited. Networks of information are often incredibly helpful in increasing returns to creditors. I know there are Members on the Committee who represent coastal communities and those in more rural areas where broadband speeds continue to be a major problem. If creditors’ committees end up being something done purely through live internet, creditors in those communities will be disfranchised. Their counterparts in the centre of London will probably be able to engage in that process quite well. The creditor down in Newton Abbot might find it much more difficult if they do not have the access to the internet.

Anne Marie Morris (Conservative, Newton Abbot)

I thank the hon. Gentleman for referencing my constituency and he makes a valid point about broadband. It is a critical issue. The difference between his position and mine is that I recognise the problem, but my challenge to the Government has been to fix the broadband issue. I have to say that, to the Government’s credit, we are now working strong and fast to beyond 96% coverage in Devon. I understand the issue, I just think there is a different solution, which the Government is already on top of.

Toby Perkins (Labour, Chesterfield)

I agree with the hon. Lady to a point—let us solve the main problem of broadband speeds. She gives credit to the Government, but she will be aware that the pace of broadband roll-out is far slower than was previously intended. It should be a legitimate right for every business that pays tax in this country to expect a basic, decent level of broadband speed and I urge the Government to get on with that.

Oliver Colvile (Conservative, Plymouth, Sutton and Devonport)

Does the hon. Gentleman recognise that the issue of connectivity down to the south-west is really important? As my hon. Friend the Member for Newton Abbot has said, it is not only to do with broadband, but trains, roads and everything like that too, which has been due a significant level of investment for the past 20 or 30 years.

Toby Perkins (Labour, Chesterfield)

The hon. Gentleman attempts to expand the debate to a whole variety of different infrastructure questions, and they are legitimate questions. By definition, the focus of infrastructure spending becomes more difficult the further one gets from the largest bodies of the population. His constituents should have the right to expect the same broadband as businesses in other areas. It is no surprise to me that the more remote communities are from London, the more impoverished they are. That has been at the forefront of the broader question we have been raising about the rebalancing of the economy. It is why we are so concerned that the movement over the past four years, under this Government, rather than being to rebalance the economy, as everyone spoke about back in 2008, to reduce the reliance on London and the south-east, has been in the opposite direction. That is partly an infrastructure question, but is a much broader economic question.

The hon. Gentleman is right to raise the point about the broader infrastructure question for his constituents and for those in more remote parts of the UK. It is all the more reason why changes that disfranchise businesses that do not have access to superfast broadband—the sort of broadband that would be needed in order successfully to operate a video conference link—should not be brought in until such issues are resolved.

It may well be that in 10 years, Select Committee and Bill Committee evidence sessions will happen by video link; we will not need to ask our witnesses to come down here because it will be second nature for all our meetings to take place via the internet. I must say that I doubt it—human beings are social creatures and will always want a face-to-face link. In such an important area as the engagement of creditors, before we have resolved the issue of internet connectivity in certain parts of the country, particularly, and much more broadly across the rest of the country in the context of superfast broadband, we should not be proposing anything that disfranchises creditors in some areas and leaves creditors in other areas able to take part in the process. That will only increase the inequalities that exist, to which the hon. Member for Plymouth, Sutton and Devonport just referred.

In the interests of transparency the option should remain on the table and we can get back to this sort of thing in the future, once we have changed the way that we operate. In the interests of transparency, the Bill’s language around a prescribed proportion of 10% of creditors being needed to call a physical meeting is problematic, since it could cost time and take money out of the process. This system could build in delays as votes are taken and in large insolvency, such as the recent cases of HMV or the wedding gift website, the organisational efforts to get responses from the hundreds or thousands of creditors that would make up the 10% threshold would be extreme.

Government amendment 165 slightly improves the situation by enabling rules to allow physical meetings in certain prescribed circumstances, where an alternative meeting format has not been able to come to a conclusion. We presume that the Government have in mind a teleconference failing to reach a verdict, or a Skype meeting failing, so they seem to be implicitly accepting our argument that in certain circumstances, new media options would not be appropriate. In order to overcome this confusion I ask the Committee to accept our amendment 219 to clause 110, which is clear, straightforward and enforceable and allows the insolvency practitioner to be the judge of the circumstances and what is most likely to be useful.

Likewise, the Government seem to assume that holding meetings in a virtual, online space will be cheaper for creditors and IPs alike. We are dubious about that claim. In certain cases, all the creditors will be local and known to the business in insolvency, so it makes more financial sense for them to meet in the business’s boardroom rather than connect to broadband facilities or dial into a conference call. Our amendment 220 to clause 111 simply acknowledges that fact. It would enable IPs to use their discretion to decide which option works best financially for the creditors and the businesses they are trying to save.

Finally, our amendment 225 to schedule 9 would bring about changes that are dependent on our previous amendments. It would make a real difference to improving creditor engagement. I intend to press amendments 218 to 220 and 225. I look forward to hearing what the Minister has to say about how the Government will ensure that these changes, which are designed to reduce the cost of the process, do not dumb down the industry, return less money to the creditors and weaken our successful insolvency regime, which is one of the great strengths of our economy.

Jo Swinson (Liberal Democrat, East Dunbartonshire)

I welcome the hon. Gentleman’s comments setting out the thinking behind the amendments. A variety of issues arise in relation to the amendments to clause 107, which also address a later part of the Bill—in particular, the provision for face-to-face meetings. It is important to clarify that clause 107 simply formalises in statute a long-standing position in case law. It makes a helpful clarification, rather than a law or policy change, so it was deemed that a consultation on the clause was not necessary.

In an overarching sense, the hon. Gentleman challenged whether the Government’s action will return more money to creditors, which is the ultimate intention of the insolvency regime. Our insolvency regime does it well, but there are significant ways in which it can be improved. We share the hon. Gentleman’s motivation to improve the situation. However, he said that we should focus on getting more money out of creditors, rather than on reducing costs, but those two things are linked.

Toby Perkins (Labour, Chesterfield)

I believe that the Minister misspoke slightly. She said we are trying to get more money out of creditors, but we are trying to get more money to creditors.

Jo Swinson (Liberal Democrat, East Dunbartonshire)

Absolutely—sorry. The hon. Gentleman is quite right. I like to keep Committee members on their toes. We are trying to get more money for creditors out of businesses, and going through a business rescue situation is intended to maximise the money that is used to pay off the creditors.

The hon. Gentleman suggested that we are too focused on reducing the costs of the process, but those two things are inextricably linked. To maximise the money that creditors receive, we must not only maximise the amount of money in the business but minimise the cost of getting money to the creditors. Both sides of that equation are important. Therefore, there is a balance to be struck, which insolvency practitioners consider daily. They must look at the costs of their undertaking an action and whether it will bring in a worthwhile amount of money for the creditors. Those two things are linked. Therefore, it is important that we reduce the costs of the insolvency regime, as it will result in more money going to creditors.

Amendment 218 would ensure that the trustee in bankruptcy needed the permission of the creditors’ committee before appointing the bankrupt to assist them in dealing with the bankruptcy. Clause 109 removes the requirement for trustees to seek permission before exercising certain powers given to them in insolvency legislation, including permission to issue legal proceedings in the bankrupt’s name and to continue trading the bankrupt’s business. Who gives permission depends on the type of insolvency. Trustees always have a clear duty to act in the interests of creditors and should not undertake actions that are likely to have a negative impact on the bankrupt’s estate and therefore reduce the money available for creditors. Any failure to do so should be addressed through the regulatory system, which we will come to later in Committee. The requirement to seek a sanction from the creditors’ committee therefore serves no worthwhile purpose, and just adds unnecessary cost. In the light of my comments about the need to get rid of unnecessary costs, we are removing the requirement.

Amendment 218 would make an exception for cases where the trustee wished to appoint the bankrupt to assist in dealing with certain tasks. That sometimes happens where the bankrupt is involved in a particularly unusual trade or there is some urgency to the matter and the trustee cannot find someone else to perform vital tasks.

I will give the Committee an example: imagine that someone who is bankrupt has been running a business selling tropical fish. The fish will need to be fed and the water maintained at an exact salinity and temperature—a certain degree of skill and expertise is required in carrying on the business. Finding someone with the necessary expertise to take over the business while the fish are sold could be challenging, so the trustee may ask the bankrupt to continue running the business. Such decisions will normally need to be taken very quickly, so seeking permission could cause unnecessary delay, which could also increase costs unnecessarily. Put bluntly, in the example I have given, the fish could die, reducing the business’s assets and the money that could be returned to creditors. It would obviously not be very nice for the fish either.

If a trustee acts improperly by employing a bankrupt when they should not have, that will be a matter for the regulator to address. We are strengthening that system as well. Of course, creditors’ committees can still meet. It was acknowledged that they are relevant only to a very small proportion of cases—about 3%—but they will still be able to meet. The issue is whether or not their permission must be sought before urgent action is taken. I would argue that it should not.

Clause 110, which amendment 219 would change, removes face-to-face meetings as the default method of getting decisions from creditors and contributories in corporate insolvency proceedings, but, crucially, it allows them to require the insolvency office holder to call a face-to-face meeting if they want to. That may happen only if a set amount of the creditors or contributories agree with the request. It is currently planned that that amount will be 10% of the creditors or contributories by value. The level will be set by the insolvency rules. The important thing is that the people who are paying will have discretion as to whether a meeting takes place. That is an important principle when we are trying to ensure that creditors are not paying unnecessary costs.

Amendment 219 would allow a meeting to be called by just one creditor, whatever the value of their claim. Although that might seem straightforward at first glance, giving everyone a say and even more say to creditors, it would actually introduce an element of risk into proceedings by giving a lot of power to one individual creditor, who could have very little economic interest in an insolvency case but would none the less be able to cause unnecessary cost to all other creditors and needlessly take up the insolvency practitioner’s time. The amendment, therefore, would set the bar too low.

The general principle of face-to-face meetings has been discussed in some detail. We all recognise that there are times when a face-to-face meeting is the right way to proceed and can be a useful tool. Nevertheless, it is far from the only tool. If such a meeting is not welcomed, well attended and well used, it just adds expense to the process. Bearing in mind the fact that insolvency practitioners often charge several hundred pounds for an hour of their time, the cost that can be added is not inconsiderable.

We know from Elaine Kempson’s report that generally only 4% of creditors engage with meetings, so the ability to hold them is not necessarily well used. Indeed, insolvency practitioners themselves tell us that meetings are often poorly attended. The basic outcome of most of these meetings is that they lose money for creditors, which is not in their interests. We do not want a situation where an insolvency practitioner calls a meeting of all creditors and no one turns up but, none the less, they are able to tick a box and suggest that there has been engagement with the process. That does not do anyone any favours.

Toby Perkins (Labour, Chesterfield)

A dangerous precedent is set here. The Minister is right that creditors, on many occasions, will say, “I’m not going to get my money back. I’ll get 10p for £1, so what’s the point in me going to the meeting?” We understand that. However, people may turn up to the meeting and, on the back of it, discover things that they did not know. As a result, the insolvency practitioner might be able to find additional resource. The fact that only 4% or 10%—whatever the figure may be—choose to engage in the meeting is not, in itself, a reason not to have the meetings.

Jo Swinson (Liberal Democrat, East Dunbartonshire)

It ought to be at the discretion of the people who pay for the privilege of holding such meetings. The hon. Gentleman paints a picture of various creditors going along to a meeting and finding additional pots of money that the company may have. From the discussions we have had and the evidence submitted through the various insolvency reviews undertaken, that does not seem to be the reality. Often, not a single creditor turns up to these meetings; not a single one. It is purely the insolvency practitioner sitting there, waiting to see if anyone will turn up.

It is important that a proactive effort is made to engage creditors, rather than having something that can all too easily turn into a tick-box exercise, where people have been invited to a meeting and the engagement is therefore done. That proactive effort might be through a virtual meeting, e-mails, correspondence or telephone calls. The creditor engagement might involve everyone being there at the same time, or individual discussions being held. It must depend on the individual circumstances. Where there is a real appetite among creditors to have a meeting, they can, of course, ask to do so. It is right that they can make that decision to call a meeting.

The hon. Gentleman said that more money may be found as a result of the meeting. Where creditors have such information—perhaps because they are given the information when the IP engages with them—and, as a result, there is a demand to hold a meeting, they can do so and it will be worth while. However, many meetings are not worth while in terms of the creditors’ interests.

Toby Perkins (Labour, Chesterfield)

The Minister is in danger of being entangled by her own contradictions. She says, on the one hand, that it should be up to the creditors to decide whether a meeting is held. On the other hand, she says that if 89% of creditors do not want a meeting and 11% do, they can still have it. I believe that creditor meetings are important and that valuable things will sometimes come out of them. She is, of course, right that sometimes no one turns up and the meeting is a waste of time. However, we cannot know that in advance. Often creditors are disillusioned when they find the business has gone bust. If they do not engage with the process up front, the whole process just collapses. I think that that is wrong-headed.

Jo Swinson (Liberal Democrat, East Dunbartonshire)

I appreciate that the hon. Gentleman takes a fundamentally different position. He says that it is a waste of time if no one turns up to the meeting; it is not only a waste of time but a waste of money. It is a waste of money for the creditors who the whole process is designed to help. Meetings should take place only if there is a significant chance that holding it will increase the money available to creditors. Those criteria are not met through the current provision. There is too great a tendency and temptation to feel that holding the meeting is creditor engagement. It should be done in a much more cost-effective and proactive way. He talked about 11% of creditors wanting to have a meeting. Those people have a significant stake in the outcome of the insolvency process, so if 11% of them want a meeting, that at least indicates that there is a demand and that it is worth having one.

Obviously, the exact threshold will be set in the insolvency rules. If there are strong views among Members of this House or among stakeholders about whether 10% is the right level, that can of course be considered. We want to set a level that is feasible and that can be reached if people want to have a meeting, not one that is a huge bar. I am happy to take representations from Members on whether 10% is the right level.

We live in a different world from when the initial provision came in, in the 19th century. Apart from anything else, the vast majority of creditors will often not necessarily be geographically close to the location where the meeting is to be held. That is significantly different from the situation in the 19th century, when a business’s creditors tended to be nearby. We live in a globalised world and businesses trade all across the country, so creditors might be hundreds of miles away, so a meeting is less likely to be the most effective form of engagement; none the less, creditors still have the right to ask for one.

Amendment 220 would change the way in which deemed consent was used in personal insolvency proceedings. Under the proposed process, an insolvency office holder would write to creditors with a proposal, and unless a specified number objected to it, it would be passed. The office holder could see thereby whether the proposal was likely to be uncontentious, meaning that a decision on a vote would in all likelihood be unnecessary. The effect of the amendment, if intended to be read as drafted, would be that deemed consent could not be used where the office holder had identified that a face-to-face meeting would incur no additional cost saving—that is to say, when such a meeting would be at a cost to the estate—but of course, face-to-face meetings will in almost all circumstances come at a cost to the estate, so the amendment would remove the opportunity to use deemed consent in nearly all cases. That would be absolutely contrary to the aim of the clause.

Amendment 225 would amend schedule 9, which contains changes to the Insolvency Act 1986 that are required for clause 121 to operate effectively. The Government’s proposal is that the official receiver should be appointed trustee on the making of a bankruptcy order, unless the court orders otherwise. As things stand, the official receiver is appointed receiver and manager, with limited powers to act, when a bankruptcy order is made; only later in the process is a trustee, who has more power to deal with the assets of a bankrupt, appointed.

There are no particular benefits in delaying the appointment of a trustee. The clause is designed to cut red tape at the start of the bankruptcy process, whether the official receiver remains the trustee or an insolvency practitioner is later appointed. The amendment would mean that, even though the official receiver was already the trustee, they would still need to consider whether the creditors should be asked to nominate an IP, and a notice would have to be sent to them if the intention was not to do so. The amendment would retain what is in most cases a pretty meaningless process, and it would not achieve the objective of cutting red tape—in fact, it would result in provisions of the 1986 Act being retained for the appointment of a first trustee in bankruptcy when a trustee is already in place.

Under the new process, official receivers will, as they do now, seek insolvency practitioner appointments where they do not have the necessary expertise to deal with the case. In addition, creditors have ultimate control over who acts as trustee, as they may seek to replace the trustee, provided that they represent at least a quarter of the creditors by value. Official receivers will continue to consider the wishes of creditors, and published guidance is already available on how they should consider requests for the appointment of an insolvency practitioner. Clause 121 and schedule 9 are designed to cut red tape. Unfortunately, the amendment would put it back into the Bill, which is contrary to what we are trying to do maximise returns to creditors.

I hope those explanations are helpful. I urge the hon. Gentleman not to press his amendments, and I hope the Committee will support the Government’s amendments.

Clause 109 - Exercise of powers by trustee in bankruptcy: removal of need for sanction

Clause 110 - Abolition of requirements to hold meetings: company insolvency

John Robertson (Labour, Glasgow North West)

Sorry—too late. You were too slow, Minister, so it stands. You will need to table an amendment for later proceedings. It pays to pay attention.

Clause 111 - Abolition of requirements to hold meetings: individual insolvency

Clause 112 - Ability for creditors to opt not to receive certain notices: company insolvency

Clause 113 - Ability for creditors to opt not to receive certain notices: individual insolvency

Clause 114 - Sections 110 to 113: further amendments

Jo Swinson (Liberal Democrat, East Dunbartonshire)

We do not want clause 114 to stand part of the Bill. It is to be replaced by new clause 8, as I explained in a previous debate.

Clause 117 - Administration: sales to connected persons

Toby Perkins (Labour, Chesterfield)

I beg to move amendment 221, in clause 117, page 93, line 28, after “(administration)”, insert

“which relates to pre pack administrations,”

John Robertson (Labour, Glasgow North West)

With this it will be convenient to discuss the following:

Amendment 222, in clause 117, page 93, leave out line 36.

Amendment 216, in clause 117, page 94, line 27, after sub-paragraph (6) insert—

‘(6A) Regulations under this paragraph may only be made in relation to pre-packaged sales by administrators.

(6B) For the purposes of this paragraph a pre-packaged sale is an arrangement under which the sale of all or part of a company’s business or assets is negotiated with a purchaser prior to the appointment of the administrator and the administrator effects the sale immediately on, or shortly after, his appointment.”

Toby Perkins (Labour, Chesterfield)

It is a pleasure to know that I have been so persuasive in my efforts so far. I hope that the winning record continues.

There are around 20,000 corporate insolvencies in the UK a year; about 3% or 600 to 700 of these are pre-pack sales. While only a tiny percentage of all corporate insolvencies are pre-packs, it is understandable that they attract public scrutiny—because of a lack of transparency, because they appear to fly in the face of fairness, and because of the way in which pre-packs are delivered as a fait accompli for any businesses or individuals that have lost money through no fault of their own by that insolvency process.

Pre-packs are agreements for the sale of an insolvent business put in place but not completed before the company goes into formal insolvency. This is often done without the knowledge of the creditors. We all want to save as many businesses as possible and the jobs they provide, and pre-packs are one of the reasons why Britain’s track record on saving businesses and jobs is such a strong one. Notwithstanding that, it is vital that we do whatever we can to increase the confidence that creditors have in the process.

We should recognise that, although creditors will always feel aggrieved about pre-packs, they are often the least worst option facing a struggling business. Independent research shows that pre-packs fare considerably better than straightforward business sales in terms of the retention of jobs and returns to secured creditors: in 92% of pre-pack cases, all the employees were transferred to the new company, compared with 65% in business sales; and the average returns to secured creditors in pre-packs are higher than those in straightforward business sales. In addition, Teresa Graham’s 2014 review found that found that pre-packs have a place in the UK’s insolvency landscape because they preserve jobs and businesses, although reform was proposed. I believe that the Government share that intention, but I also believe that the clause as drafted captures connected party sales in all types of administrations. Such wide drafting may have unintended consequences, and the Minister may have to look again at the clause on Report. In particular, R3, the insolvency practitioners’ trade body, warns that a business could end up going into liquidation instead of administration as a result of the clause. This would lead to job losses and the UK’s business rescue culture being undermined.

The clause provides the Government with the reserve power to prohibit not only pre-pack administration sales to connected parties if certain criteria are not met, but potentially all connected party sales in administration. Our amendments 221, 222 and 216 are designed to overcome that problem. The Government have confirmed that the clause is aimed at pre-packs, yet it captures all types of trading administrations. These types of administrations could include a straightforward business sale—for example, there may be a case where a company has been put into a trading administration where there is no pre-pack deal on the table; the administrator conducts open and wide marketing and there are a number of expressions of interest in buying the company. The administrator could be prevented by the clause as drafted from selling the business to any of the company work force, as they would be considered to be a connected party. This might mean that good offers could not be accepted by the administrator, and it would be the creditors who would lose out.

Returning to the Minister’s example of the expertise of someone in the fish industry and the knowledge that would be held about how a particular business was operated, I do not believe that it is the Government’s intention to exclude anyone who is either a family member or a previous employee from being involved in the business, but that might be the effect of the clause. Amendment 221 aims to clarify that the reforms are targeted solely at pre-packs. I hope this will also prompt the Clerks to change the title of the clause—we were unable to table an amendment to do this—to reflect the fact that clause 117 should be concerned only with pre-packs. The amendment fits in entirely with the spirit of the clause, but offers more specific wording.

Likewise, although the Minister may dismiss this as semantics, as she has, rather ungenerously, dismissed other arguments, amendment 222 would remove the reserve power granted to the Secretary of State to prohibit pre-packs altogether. Given the sensitive nature of the subject and the potential negative impact on UK plc, we feel that if such a move were ever to be taken, it should be subject to public scrutiny and debate in Parliament, rather than simply being a reserve power for the Minister to execute.

Amendment 216 would ensure that new regulations made under the clause were targeted only at the bad pre-pack practice we all want to discourage, rather than applying more generally to all pre-packs. We should be taking action on the small percentage of bad pre-packs which give all pre-packs a bad name and which may lead to measures being proposed that will capture many perfectly legitimate means of operation and see them targeted along with the small number of bad pre-packs.

I hope that the proposed changes will have the support of the Committee, and particularly that the Government will look favourably on amendment 221, which would provide useful clarification. None of us wants to walk away from this Committee leaving the Bill containing measures that will be challenged in court and ultimately deliver very different outcomes to those we anticipated. I intend to press the amendments to a vote.

Jo Swinson (Liberal Democrat, East Dunbartonshire)

The hon. Gentleman finished his remarks by stating his intention to press the amendments to a vote. He accused me of being ungenerous, but that is slightly ungenerous of him, given that he has not even heard my responses. Perhaps I am on a fool’s errand here and have little chance of persuading him, but I shall try none the less.

Toby Perkins (Labour, Chesterfield)

I shall, of course, listen intently to the Minister. She has shown already today that she is in generous mood, so I am minded to give her the benefit of the doubt.

Jo Swinson (Liberal Democrat, East Dunbartonshire)

Perhaps my generosity is being overstated. What this shows is that if you snooze, you lose. Perhaps I should have been a little more attentive at a key point, when I was also trying to look ahead to check a particular fact. None the less, I shall try to reassure the hon. Gentleman on the issues that he raises, even though he may not be minded to be reassured.

The hon. Gentleman is right that pre-packs have a role in a business rescue regime, and in some cases they can prove valuable in saving jobs and continuing to ensure that creditors can get a better deal. Research on that subject by Professor Peter Walton for the Graham review states that 60% of pre-packs are between two connected parties, and the issues are with business failure within a short time after the pre-pack takes place.

The report, however, shows that if a business is sold to a connected party, it is more likely to fail than if it is sold to an unconnected party. Of the businesses that were sold to connected parties, 29% failed within three years, compared with only 16% of businesses sold to unconnected parties. Although the hon. Gentleman points out some positive statistics about how pre-packs can be helpful, there is genuine concern about pre-pack sales to connected parties in particular. The business failure rate also suggests that there is an issue. This is a genuine query that has been raised in previous debates and in correspondence by Members on both sides of the House, which is why the Government are minded to address the matter.

Toby Perkins (Labour, Chesterfield)

The Minister speaks about a particular concern about pre-packs being sold to connected parties, but are not pretty much all pre-packs sold to connected parties?

Jo Swinson (Liberal Democrat, East Dunbartonshire)

No, the research by Professor Walton shows that about 60% are sold to connected parties. The amendments seek to ensure that the policy is targeted at addressing the harm identified by the Graham review on pre-pack insolvencies. We asked Teresa Graham to consider the matter because hon. Members had raised it on many, many occasions. She took evidence and drew on research by Professor Walton of the University of Wolverhampton, and she came up with a series of conclusions that the Government accepted and are taking forward. She proposed a route to try to create greater confidence in pre-packs.

The amendments are not necessary, and I will explain why. Clause 117 gives the Secretary of State a power to introduce regulations to address problems in relation to sales in administration to connected parties. As hon. Members know, administration is the main way in which we attempt business rescue here in the UK. Sale to a connected party is where an insolvent business is sold to a purchaser that was previously involved with the business. The most common type of connection is where someone is a director of both the insolvent business and the business that is buying it.

Amendments 216 and 221 would restrict the scope of the clause to pre-pack sales only, and not all sales in administration. I understand the intention behind the amendments, and the pre-packs we are talking about are commonly understood to be a sale that is agreed prior to the appointment of the administrator and that is effected on, or shortly after, the administrator’s appointment. The amendments could lead to a situation in which unscrupulous individuals might delay a sale specifically to avoid the regulations, which is why we drafted the current wording of clause 117. Indeed, the wording is partly a result of the independent Graham review, which gathered evidence and considered the issue in detail. The Graham review recognised the existence of the risk, and Teresa Graham’s recommendation was that all potential sales out of administration to connected parties should therefore be captured in legislation to ensure that this particular issue can be addressed without there being some kind of loophole. I hope the hon. Gentleman therefore understands why we have drafted the clause in this way, even though the specific concern tends to be about pre-pack sales to connected parties.

Amendment 222 would remove the power to ban all sales in administration to a connected party. It is absolutely the Government’s intention to review the market before introducing any related regulation, which will enable us to see whether the problems that were identified by the Graham review have been addressed, and to assess whether the six voluntary reforms recommended in that review have been effective. We very much hope that they have been, which is why we have accepted them and are taking them forward, but there remains significant uncertainty about what the market might look like within the five years of the sunset provision for the clause, so we need a range of tools to address any shortcomings.

The power to prohibit sales in administration to connected parties is a necessary tool. Although it is unlikely that the Government would seek to ban such sales, it is important that the ultimate sanction is available should the evidence show it is the right response. The availability of that power will probably increase the likelihood of the voluntary mechanisms being more effective.

I want to reassure the Committee that the Government will of course review the market and consult on any changes before regulation is introduced. I hope that I have reassured the hon. Gentleman and that, even though he thought he would not be, he has been convinced to withdraw his amendment.

Toby Perkins (Labour, Chesterfield)

I am partly reassured by what the Minister has said, but it seems slightly odd to go about Government business by saying, “We are going to create powers for ourselves, but we promise not to use them until we have reviewed whether or not they are needed.” I would not have thought that that is generally how a Government go about their policy.

Jo Swinson (Liberal Democrat, East Dunbartonshire)

We have a problem that has been well established over several years, and different solutions have been suggested to deal with it. Many people have argued on the Floor of the House for the banning of the pre-packs process. As a result of the Graham review, we have taken the view that it is sensible and worth while to seek a different solution to see whether we can deal with the issue through a voluntary process, particularly the six recommendations outlined by Teresa Graham. I very much hope that that approach will be successful, but we are currently making a significant number of changes to the insolvency regime in primary legislation, and the risk remains that the voluntary reforms are not effective. We would not want to delay a solution to the pre-pack issue further by having to go through the primary legislative process again. We are trying to ensure that we can deliver the required improvements to how pre-packs are dealt with, because, as I said, Members from all parties have expressed legitimate concerns about them.

Toby Perkins (Labour, Chesterfield)

The prohibition of pre-packs would be a really significant step, if it was taken. I appreciate that the Government are saying, “Don’t worry, we will not actually take that step without undertaking a review,” but they are approaching the end of their term and a different Government might come in after the general election. The new Government might decide to get rid of all pre-packs, and the new Secretary of State could do that very easily. I do not think that a Labour Government would do that, but if an alternative Government came in and was minded to take up the power, and the Minister said, “Hang on a second, let’s think about this,” they would say, “You put it on the statute book—you let us do this.” Is it not a dangerous power to propose?

Jo Swinson (Liberal Democrat, East Dunbartonshire)

The hon. Gentleman is perfectly entitled to take that view. I know how much correspondence I receive from MPs from all parties about constituents who have experienced real problems with phoenix companies. They end up frustrated, because a company that owes them money might be trading and they think that things are fine, but then it seems to disappear, only to pop up again a few days later with all the same people involved but none of the debt remaining.

We have discussed other measures in the Bill that are aimed at enabling action to be taken to address directors who misuse procedures in the way I have described, but we must tackle the issue of pre-packs as well. They can be a legitimate vehicle for business rescue, but they are certainly not without their problems. The issue of phoenix companies comes up so regularly that we want to ensure that the Government have the ability to act if the voluntary approach is found to be unsuccessful. That applies to this Government, but whatever the colour or shape of the Government after the general election, we also want them to be able to act without having a whole primary legislative process to consider. Obviously, there would still be the requirement to consult and then to go back to Parliament for secondary legislation.

It is right for us to make sure that that power is here within the Bill, but the hon. Gentleman is at liberty to disagree if that is his view. However, as I say, I encourage him to consider the large number of individuals and small business that have expressed genuine concerns about phoenix companies. They expect the Government to act. They want a guarantee and some confidence that, if this voluntary approach does not work, the Government do not have their hands tied and will not have to wait for more primary legislation, but can then do what is required to deal with this problem. I commend the clause to the Committee, but I urge the hon. Gentleman to withdraw his amendments.

Toby Perkins (Labour, Chesterfield)

I thank the Minister for what she has said. On amendment 222, to be frank it is a pretty odd way of doing policy for the Government to go through the legislative process and create powers that the Secretary of State could use that involve fairly fundamental changes but then say, “Don’t worry, we won’t actually bring in these changes until we have the evidence and the research base, but this will be sitting there from now on in primary legislation as a sort of potential ticking time bomb for any future Government to come in and just enact.” There are other ways in which the Government might operate on this and other ways for a Government to introduce policies. We do not think that we would introduce this—although some people would like it if we did—but any future Government could just do it without needing even to come to the House, because this Government have already given them the powers to do so. It is a fairly odd way of operating for this Government to promise that they would not use these powers, but that a future Government could do so.

Jo Swinson (Liberal Democrat, East Dunbartonshire)

On a point of clarification for the Committee, future Governments would still need to come to the House. This would still be subject to the usual procedures of the House in approving secondary legislation, but it would remove unnecessary delay. This is an issue, and the approach was recommended by Teresa Graham, who looked into it in detail for the Government. She recommended that this measure should be taken.

Toby Perkins (Labour, Chesterfield)

I hear what the Minister says, but the point remains about the way of operating. If the Government were saying that they are minded to do this, we would be having a totally different debate. However, they say that they are minded not to do this, but will create the opportunity to do it without having to return to Parliament. I appreciate that the Minister says we can do it by secondary legislation and a Statutory Instrument Committee could look at it. However, it is a pretty substantial change to an insolvency regime to propose on the basis that, “Look, we will do it, but don’t worry—we won’t use it.”

I will therefore test the will of the Committee on amendment 222. Notwithstanding the Minister’s remarks that amendment 221 would be helpful to the Government, after hearing the Committee’s will on it, I am willing to take a view on amendment 216. If we press the amendments, we will do so in the order that they appear on the amendment paper. I shall seek to divide the Committee on amendments 222 and 221.

Toby Perkins (Labour, Chesterfield)

We have heard the view of the Committee, so we will not press amendment 216.

Clause 119 - Creditors not required to prove small debts: company insolvency

Toby Perkins (Labour, Chesterfield)

I beg to move amendment 223, in clause 119, page 95, line 21, leave out

“an amount prescribed by the rules”

and insert “£100”.

John Robertson (Labour, Glasgow North West)

With this it will be convenient to discuss amendment 224, in clause 120, page 95, line 30, leave out

“an amount prescribed by the rules”

and insert “£100”.

Toby Perkins (Labour, Chesterfield)

As the law stands, and as we all know, to receive a dividend in an insolvency, a creditor must first submit a claim to the office holder. Where necessary, the office holder will request further evidence to verify the claim. The clauses simplify the process for what the Government term “small debts”, so such creditors do not have to prove their ownership of the debt in the same way.

Clause 119 takes care of company insolvency and clause 120 takes care of individual insolvency. We do not object to the overall principle of such moves, but I am very concerned that £1,000—the figure that the Government have floated for the prescribed amount—is far too high. I would be very interested to hear how the Minister came to the figure of £1,000. I appreciate that provisions will remain in place for the insolvency practitioner to require further information where they have suspicion or doubt, but the clauses seem to set a dangerous precedent that businesses can claim amounts of up to £1,000 without any evidence.

We all know that in the event of corporate insolvencies, businesses can be chaotic places. Employees are often desperately attempting to find alternative employment, with the pressure of their mortgages hanging over their heads, and the business that they expected would be capable of paying them and to which they were dedicating their career looking vulnerable and unable to do so. Under those circumstances, many normal practices go out of the window. It is also often the case that insolvent companies have been in a less than ordered state in the run-up to declaring themselves insolvent or bringing administrators in, and they are often scrambling around to find anyone who they are not on stop with to purchase supplies in an effort to stay afloat. Systems such as purchase order numbers and others may have become irregularly used. In those circumstances, it is a very dangerous step for any business to be able to say, “We have an outstanding invoice for £826. Can you send it to us? We don’t need to provide any evidence or documentation to show whether the goods were received.”

Let us make no mistake; it would be very dangerous if the insolvent business started seeing all its assets going not to the businesses to which it rightfully owes money, but to chancers making erroneous claims in the general mayhem of the situation. It is not impossible to imagine the unscrupulous making quite a good living by submitting several claims below the limit and withdrawing them only if challenged. We recognise that considerable work aimed at securing very small invoices is often unnecessary. We do not want huge processes to be pursued for invoices of £50 or £60. Our amendment is a sensible step to deal with some of those smaller claims. However, up to £1,000 is quite a significant amount to expect no invoices for in the event of insolvency.

I have never worked for a business that has gone into insolvency but I have worked for one that went through periods of quite significant redundancies. I do not know if the business was under threat at that time, but the redundancies it was making were certainly a distressing sign that all was not well. In those circumstances, where a lot of redundancies were made and the business had put some suppliers on stop, systems start to break down. If businesses have put certain suppliers on stop, they have to look round to see who else might supply them. Other people make decisions because the person previously performing that role has now been made redundant. The business attempts to continue functioning. It is therefore not unusual, in the run-up to a business becoming insolvent, for paperwork not to be in place as it normally is.

This figure of £1,000 as a limit under which businesses can claim invoices is a very high bar, particularly if a business is engaged in providing products that are common to virtually all businesses. Let us take the example of a paper supplier. Someone might purport to be a paper supplier and put in an invoice saying, “We provided £726-worth of A4 paper.” No evidence would be required. If they have been supplied by that business previously, they might have some order numbers and know the process that the business follows. They might already be owed money for four invoices and then effectively make up a couple of others if they know that the company was in a chaotic state before it went into insolvency. It is easy to see how that could happen.

I do not in any way discredit what the Government are attempting to do here. There are many cases in which this would be helpful and entirely valid. However, I ask the Minister to consider carefully whether this might lead to a rogue’s paradise and a situation where businesses end up making illegitimate claims. The Bill says that the insolvency practitioner can still ask for evidence where it has cause for doubt. However, if a business had supplied something on four occasions, knew that it would get only 20p in the pound against the four different invoices and decided to put another couple in as well, it would be very difficult for the insolvency practitioner, in the event of many of the previous employees of the business disappearing, to say whether that was a legitimate claim. If the Government are saying, “You can have up to a grand before anyone even asks to see a proof of delivery signature or before anyone checks that there was ever a request for this work to be carried out”, it does not take a genius to work out how that could be exploited by unscrupulous businesses.

Let us say that there is, under clause 120, to which our amendment 224 relates, a personal bankruptcy. We are talking about claims of up to £1,000, and those are quite significant amounts in individual insolvencies. Removing the need for proof for any bill up to £1,000 in a personal bankruptcy is quite surprising to me. Often, the person who has been made bankrupt has little reason to continue fighting. They might easily be vulnerable to unscrupulous people saying, “Look, just say that we lost £800. No evidence will be required, and we’ll cut you in for a bit of it.” Who knows how the provision could be exploited?

These are important steps. The Government are, rightly, attempting to ensure that, where possible, costs are brought out of the processes and that, where there are small amounts, they can be dealt with in a way that does not unduly trouble anyone or add unnecessary cost to the process. However, a bar that is set at £1,000, particularly for individual insolvency, is quite significant. I am concerned about that and I intend to press amendments 223 and 224 to a vote.

Jo Swinson (Liberal Democrat, East Dunbartonshire)

I see a trend developing. The hon. Gentleman is determined not to be persuaded by anything that I say, but I hope that we can return to more positive and consensual discussion on later parts of the Bill.

Clauses 119 and 120, to which the amendments relate, will give the Secretary of State the power to make rules dealing with the treatment of small debts in insolvencies. At the moment, it does not matter how much or how little a creditor is owed by an insolvent company; the creditor has to submit a claim to an insolvency practitioner or official receiver, who then has to scrutinise it to ensure that the debt is properly recorded. For small debts, that is likely to result in very small dividends, and that administrative burden is disproportionate to the amounts involved.

We know that insolvency practitioners normally charge on a time basis, and we know the concerns that have been expressed by many hon. Members on behalf of their constituents about the level of insolvency fees. Of course, that was the subject of the review by Elaine Kempson. The time spent dealing with these small claims results in additional costs being incurred, which of course reduces the funds available to be given back to creditors. Stakeholders have told us that the cost of dealing with very small claims can exceed the value of the resulting dividend. Clearly, that does not make sense.

In terms of the amount of time that some of the claims take to process, a whole raft of information needs to be included. There is the creditor’s name and address, the company registration number, the total amount of the claim, including VAT, as at the date when the insolvency order happened, whether it includes any outstanding uncapitalised interest, how and when the debt was incurred, any security held, the date when it was given, what value the creditor puts on it, details of any reservation of title in respect of goods to which the debt refers, and the name, address and authority of the person authenticating the proof. A whole raft of information has to be submitted. Obviously, that then has to be looked at by someone. The Kempson review found that that can often involve staff for whom the charge is about £103 an hour on average—the administrative staff who would be doing it. It can take half an hour, in some cases, to look at a claim—that was what one IP told us—so we are, potentially, talking about quite significant costs adding up for very small amounts that will not be returning huge amounts to creditors.

Toby Perkins (Labour, Chesterfield)

I think that we are in the same place on the principle. The issue is where the bar is set. Will the Minister accept that if the bar is set so that £999 is a small amount that does not even require a signature or proof of order, that is quite a high bar? Will she accept that our amendment fits in with the principles that she is laying out, but would ensure that the provision was not open to exploitation?

Jo Swinson (Liberal Democrat, East Dunbartonshire)

I absolutely accept that we agree on the principle.

Graham Brady (Conservative, Altrincham and Sale West)

I remind the Committee that with this we are discussing amendment 224, in clause 120, page 95, line 30, leave out

“an amount prescribed by the rules”

and insert “£100”.

Jo Swinson (Liberal Democrat, East Dunbartonshire)

It is lovely to see you back in the Chair, Mr Brady. I hope that the hon. Member for Chesterfield is not feeling too lonely on his side of the Committee. [ Interruption. ] Here we go; the reinforcements have arrived, so he will not be on his own.

Before lunch, we were discussing insolvency and the threshold for debt below which a formal application or claim would not need to be submitted. I think that there was agreement that there is clearly an amount below which it would not make sense to have a bureaucratic process or spend a lot of time assessing a claim, given that less money would be returned to the creditor than was spent processing the claim. The Opposition have suggested that the appropriate amount is £100. After our consultation and discussion with stakeholders, we have suggested that £1,000 might be appropriate. This debate is about that level.

I am concerned that £100 is too low. Few debts in insolvency tend to be less than £100, so any savings from reducing bureaucracy would be extremely limited, meaning that creditors would lose out. However, perhaps the most significant point to make is that this is about not just the amount of debt but the likely rate of return. In insolvency, where 10% or 15% might be returned to creditors, a £100 debt might return only £10 or £15. If it were £1,000, only £100 or £150 might be returned. Processing the claim is likely to cost in the region of £30—or more, according to the evidence that we have heard—so even if the level were set at £1,000, the difference between the money returned and the cost of processing would not be as large as the headline figures may suggest. That is why we are considering a £1,000 threshold. That said, we do not suggest that it be set in stone; it will obviously be subject to further consultation and discussion. I will discuss in a moment why I think it right not to set it in primary legislation, in any event.

The hon. Member for Chesterfield raised a good point about unscrupulous businesses deciding that an insolvency is some sort of jamboree and sticking in an unsubstantiated note saying that they are owed £826—I think that was the figure that he used—or any amount up to £1,000, and just being paid that money, or their share of it. The first thing to note is that in most cases, some kind of paperwork will be kept by the business that has become insolvent, so there will not be no information about what is owed. The circumstances in which such fraudulent claims could be made are perhaps limited in any event.

However, it is a fair point; we would not want the system to be open to abuse or fraud. The drafting of the clause enables the insolvency practitioner still to require a creditor to submit supporting evidence with a claim, even if it is below the prescribed level for small debt. Practitioners can do so when there is any doubt about the accuracy or validity of the records. If someone says, “I was owed £250 for this delivery of paper,” and somebody else says, “I was owed £300 for this particular supply,” and that tallies with the records kept by the company, there is no need for further paperwork. If a large number of speculative claims are submitted but the paperwork and record-keeping was pretty nonexistent, discretion is available to the official receiver or insolvency practitioner to ask for further supporting evidence. I hope that that provides some of the reassurance that the hon. Gentleman was after.

It is important to know that creditors could still submit a claim if they wanted to. For example, some may be required to do so under the terms of a credit insurance policy. We want to take unnecessary cost out, but we have drafted the clause in such a way that it is not problematic for those who still need to submit a claim, and still gives that discretion to the insolvency practitioner, if they feel that asking for more information is warranted.

Also, I ask the hon. Member for Chesterfield whether it makes sense to set a level in primary legislation. Clearly, given inflation and so on, the level that makes sense in 2014 might not make sense in a few years’ time. That is another good reason for it to be set out in the insolvency rules. The advantage is that the rules can be flexible if things get to the stage where the level is not generating significant savings and perhaps needs to be raised. Equally, if the circumstance that the hon. Gentleman outlined came to pass and it was felt by stakeholders that a lower level would be helpful, the Government would be able to act on that. For those reasons it is useful to have a debate about what the right level of that small debt should be. I hope that the hon. Gentleman is happy to withdraw his amendment, recognising the safeguards in place.

Toby Perkins (Labour, Chesterfield)

It is a great pleasure to serve under your chairmanship, Mr Brady. I will respond in the spirit in which the Minister’s response was delivered. She raises a legitimate point: the amount left in the estate is often not the full amount owed, and that would reduce the incentive here. However, in this place, we have to be very careful not to make legislation that creates an incentive for fraudulent behaviour. I stand by the point I made: a business, quite rightly, might legitimise this in their mind by saying, “I had invoices for £900 outstanding. They are paying 50p in the pound. No one knows exactly what we were or weren’t owed, so if I put invoices in for another £900, in total I’ll get what I should have got anyway, albeit in a different way.” The Government might be creating an incentive to act fraudulently.

The Minister is right to say that the power is there for insolvency practitioners to demand evidence. However, I worry somewhat about the message that it sends if no evidence is required when there are debts outstanding, and what the impact might be. Notwithstanding that, she made a legitimate point about whether putting a specific amount into primary legislation is the right way to go about this. I hope that she will continue to keep this topic under review, because we want to be careful not to create disincentives such as those I described. I accept the Minister’s comments on amendment 223.

On amendment 224, £1,000 is a lot for an individual insolvency, and I want to test the will of the Committee on that amendment. Many individual bankruptcies are for relatively small amounts, so if £1,000 starts to be claimed from people who are in a pretty desperate situation anyway, a perverse disincentive might be created. I beg to ask leave to withdraw the amendment.

Clause 120 - Creditors not required to prove small debts: individual insolvency

Schedule 9 - Trustees in bankruptcy

Graham Brady (Conservative, Altrincham and Sale West)

Amendment 225 may be proposed at this point.

Toby Perkins (Labour, Chesterfield)

I had not anticipated this opportunity, but given the Committee’s earlier view, it is worth while moving amendment 225. Our view is that the changes set out in schedule 9 go a little too far in removing responsibilities from receivers and rights from creditors.

Graham Brady (Conservative, Altrincham and Sale West)

Order. May I assist the hon. Gentleman? I understand that this amendment has already been debated—I was not in the Chair at the time—so this is an opportunity to put it to a Division.

Clause 122 - Time limit for challenging IVAs

Clause 132 - Power to establish single regulator of insolvency practitioners

Toby Perkins (Labour, Chesterfield)

I beg to move amendment 226, in clause 132, page 111, line 36, leave out “designate a body” and insert “create a single regulatory framework”.

Graham Brady (Conservative, Altrincham and Sale West)

With this it will be convenient to discuss the following:

Amendment 227, in clause 132, page 111, line 39, at end insert—

‘(1A) This framework may be overseen by several regulatory agencies.”.

Amendment 228, in clause 132, page 111, line 39, leave out from end of line to end of clause 132.

Toby Perkins (Labour, Chesterfield)

The final section on insolvency enables the Government to establish a sole regulator if the proposed changes to the current system of self-regulation do not have the desired effect. This reserve power will fall if not used within seven years of coming into force. We all agree that further homogenisation of regulation in the insolvency profession is desirable, however, we remind the Government that this does not necessarily have to be done by establishing a new single regulator. It is not hard to imagine how moving to a single regulator would involve significant change, time and cost, resulting in a regulation gap from the time the existing registered professional bodies ceased to regulate a profession until the new regulator was able to get up to speed. There may be costs attached to the process of winding down existing functions.

Professionals in the field want clarity. A survey of R3 members earlier in the year found that 50% of respondents favoured the introduction of a single regulatory process, compared with just 21% favouring a single regulator, 14% preferring the existing multi-regulator process and a similar figure favouring fewer regulators. It is clear that the majority of insolvency practitioners have a thirst for reform in this area and are keen to see some reform introduced, but the Government’s chosen methodology does not have the trust of the trade. We fear that this could strangle the new regulator at birth and undermine the chance of these clauses delivering what they intend.

Likewise, the Government’s own review of insolvency practitioner fees, published in March, acknowledged that such a change would,

“represent a significant change to the regulatory regime”

and involve time and money. Our amendments would overcome these issues and the uncertain position the profession currently finds itself in. Rather than a new giant quango, they would create a single framework in which all the regulators can operate according to the same principles and processes. A single regulatory process could avoid the drawbacks and the regulatory gap, and would be flexible enough to take account of accountants and lawyers who work in insolvency, and therefore require more than one regulator.

When considering the amendments, we should remember why the current process exists. It is not because the question of a single regulator has not been considered previously, but because the number and breadth of organisations involved in this kind of work is fairly wide-ranging, and those organisations have well-respected regulatory bodies of their own. At the time of the Insolvency Act 1986, it was considered that having a single regulator was not the way to go, but that instead there should be different regulators for these businesses, which were already being regulated by those regulatory bodies.

As time has passed, the sense that there needs to be some streamlining of the regulatory process has been established, and we support that principle. Having a single regulatory framework, as proposed in amendment 226, is a better way of handling this situation than having a single giant quango as a new regulatory body.

Notwithstanding the Minister’s persuasiveness, I hope to press the amendment to a vote. It may be that I am persuaded otherwise, but at this stage I intend that we should hear the views of the Committee on the amendment.

Jo Swinson (Liberal Democrat, East Dunbartonshire)

I am glad that we seem to be making at least some progress, and that the hon. Gentleman accepts that he may be convinced by what I have to say in resisting his amendments. I hear the case that he puts and there is not a massive difference in what we feel is the best way forward. In the research that he cites, he highlights that 50% of insolvency professionals tend to favour a single regulatory process, and of course what we have been doing with our amendments to the way that the process currently works, the new proposals in the Bill and indeed some of the changes we have already implemented, such as the single complaint gateway, which provides that online portal to make it much easier for people to know exactly where they are supposed to go so that they can have one location as their point of contact to make a complaint, are all very much in the spirit of what he suggests, namely that there should be a much more consistent process. I thank him for tabling the amendments and I think we have quite a degree of agreement on the need for some consistency, but I also believe that the better way to do that is through the measures in the Bill.

At the moment, we have a system of self-regulation, with several different regulators. As the hon. Gentleman said, the Office of Fair Trading study into the market for corporate insolvency practitioners and Professor Kempson’s review of IP fees found that this system currently lacks the confidence of users. That is the problem we are trying to address and indeed IPs themselves recognise that action needs to be taken. Our vision is to create a transparent, consistent, accessible, independent and accountable system, and I think we are all on the same page in that regard.

Clauses 125 to 131 will strengthen the current regime by driving forward that consistency, transparency and accountability. We will introduce regulatory objectives and proportionate sanctions for the insolvency service to ensure that the regime is clear and transparent. Of course, those who do not deliver that can, and will, be held to account; that is vital.

I believe that these changes will greatly improve the trust and confidence in the regulatory regime for IPs without the need for any further intervention. However, if that is not the case and self-regulation in the industry is shown not to work, it is vital that the Government can take action swiftly to introduce a new and stronger regime, by establishing a single independent regulator for the insolvency profession. However, it is important to note that this power would be used only if the other methods that we have outlined fail to achieve the desired effect.

Since the OFT report in 2010, we have worked with regulators to provide consistency. We have made good progress, but there is still some way to go. The measures in the Bill will help by driving that consistency.

Toby Perkins (Labour, Chesterfield)

The Minister’s approach appears to be to put in place a power that may be used by some future Government, but will not come into effect at this stage. If changes are delivered without this power, they will not need to use it. However, having a single regulatory framework is accepted by the industry. The Minister is proposing a reserve power that may be used in the event of failure. We are proposing to make the change in terms of the framework, as opposed to the quangos that operate it. That is a neater approach that would deliver reform. It would be a smaller, more operable change rather than a major change that may not be used.

Jo Swinson (Liberal Democrat, East Dunbartonshire)

The measures in the Bill make the kind of change that we want. We want to tweak what we already have. A lot of other countries have the single regulator model and it works very well, and there is some evidence that that might be the way to go. However, it makes sense to do what we are attempting in the Bill, which is to use the current approach, tweak it to make it better and improve that consistency, working with the model that already exists, to strengthen and improve what we have. We are keeping the idea of having a single regulator very much as a last resort.

As I was saying, we have already made good progress here. However, if the revised regime in the Bill does not deliver what we need, particularly in the confidence of stakeholders, that would be a sign that self-regulation was not working and that something more radical and new is needed. In that circumstance, the amendment would not be the answer, because it is effectively another form of self-regulation. So, if the measure is found not to work, we have a back-stop of an alternative action that can be taken as the last resort. If, having made these changes and tweaked the system, we find that that still does not command confidence, I suspect that the idea of having that multiple regulatory system will have had its day. However, it is important to note that, if that power is exercised, it would be with proper consultation and an assessment for costs and benefits. It would be subject to the affirmative resolution procedure and there would be the opportunity for full debate.

The hon. Gentleman mentioned a couple of difficulties that would arise if we were to move to such model, very much bearing in mind that that would be a last resort. He suggested that there would be a potential regulation gap and I understand that that is a genuine concern. However, I think there would be a way of having a transition from the existing regime to a new regime. We have found, for example, where we recently had the Financial Conduct Authority taking over some of the functions of the OFT, that we managed to plan and deliver that transition smoothly. There are precedents for how that can be done. Similarly, on the hon. Gentleman’s point about whether a new regulator would take some time to get up to speed, it might not end up being an entirely new body. It could be, but it could equally end up being one of the existing bodies that would take on the regulatory function for the entirety of the industry, or it could be a body such as the FCA itself. It would not necessarily be a situation where the regulator did not have that embedded knowledge and understanding of the industry and a difficulty in getting up to speed.

I absolutely agree that consistency within the regulatory framework is vital. It can be delivered by the oversight regulator through the clauses that this Bill introduces, along with a continued close working relationship between the oversight regulator and the regulators themselves.

If it becomes necessary for the clause 132 power to be exercised, it will allow for a radical change and a totally different approach, after all other attempts to reform the system have failed. At that point, I do not think it would be appropriate to try again to reform the self-regulatory system that we have in place at the moment. For that reason, I urge the hon. Gentleman to withdraw his amendment.

Toby Perkins (Labour, Chesterfield)

My generosity of spirit appears to be almost infinite today. On the basis of what the Minister has said, I accept that she will be mindful of the points we have raised and that the Government are committed down a certain path. Given the other things in the Bill, it would be sensible to have the reserve power. We will have to see how that is utilised in times to come, or if it ever is. I beg to ask leave to withdraw the amendment.

Clause 135 - Protected disclosures: reporting requirements

Ian Murray (Labour, Edinburgh South)

I beg to move amendment 230, in clause 135, page 114, line 19, at end insert—

‘(4A) The Secretary of State shall make amendments to this section under the powers of subsection (4), to provide for the definition of “workers” to include “applicants”.

It is a pleasure, Mr Brady, to have you back in the Chair. One has to ask what you have done to deserve that particular pleasure, but perhaps we can find out later. It is also a great pleasure to follow my hon. Friend the Member for Chesterfield, who has yet again managed to win a vote in this Committee, on improving insolvency provisions in this country. I hope that the Minister’s generosity of spirit will continue. If she does not wish to approve our amendments, perhaps she can just fall asleep, as she did this morning, and they can go through unopposed.

We are now on the employment part of the Bill. The amendment is fairly simple, but it has wide-ranging consequences for those who wish to use whistleblowing at work. The amendment would extend the Government’s ambitions in the Public Interest Disclosure Act 1998 regulations and on whistleblowing to blacklisting. Blacklisting is a major issue, which this Parliament has tried to deal with. The Scottish Affairs Committee has produced two extensive reports—an interim report and a full report—on blacklisting. We have also had a number of Opposition day debates on the matter, all of which have been similar to the pubs debate we had in part 4, in that we have had to drag the Government kicking and screaming to do anything on these issues.

Sheryll Murray (Conservative, South East Cornwall)

That is the second time that the hon. Gentleman has referred to my amendment. I put on record how grateful I am for the Opposition’s support for that amendment.

Ian Murray (Labour, Edinburgh South)

It is very kind of the hon. Lady to intervene and do that. We accept that gratitude and we will continue in that vein. Hopefully she might reciprocate with some of these amendments. She reciprocated this morning by not paying attention, but perhaps she will consciously vote for one of our amendments in the next few minutes.

It is worth reflecting on what the Public Interest Disclosure Act 1998 seeks to achieve. It provides protection to employees and workers. An employee’s dismissal will be automatically unfair where the reason for the dismissal is that they made a protected disclosure, which is whistleblowing as we know it. Workers have the right not to be subjected to a detriment as a result of making a protected disclosure. Employees or workers bringing a whistleblowing claim do not require a minimum period of service with the employer; it is a day one right, as with discrimination and other protected characteristics. There is also no limit on the compensation an employee can be awarded.

Those aspects are particularly relevant in seeking to understand the increase in the number and types of these claims over recent years. It is important to bear that in mind when thinking about blacklisting, which is the subject of our amendment. The whistleblowing aspect is important to preserve, but the reality is that high-salary individuals have sought to use the day one uncapped compensatory protection offered by PIDA to bring claims to satisfy the level of compensation they wish to see, rather than trying to address a genuine unfair dismissal claim through the whistleblowing legislation.

I can give an example. Someone who is on a salary of £2 million per year, who claims to have been unfairly dismissed from their work, would find the employment tribunal system unsatisfactory on the basis that compensation is capped. In that example, the cap would be at the level of about a month’s salary, if not less. So they would have to find another avenue if they wished to seek redress for unfair dismissal, and people have used the whistleblowing legislation to whistleblow on their own contracts and so on in order to try to make those claims.

That is why it is important to put into context why we are looking to extend some of this to individual applicants as well as workers themselves. Under the legislation, the employee must make a qualifying disclosure under six broad terms of malpractice. The first of these is a criminal offence, which would ordinarily be something that someone wishes to report. That seems fairly straightforward. The other terms are a breach of any legal obligation; a miscarriage of justice; a danger to health and safety, which is clearly related to whistleblowing regarding blacklisting in the construction industry and other industries where health and safety are very much prevalent; damage to the environment, where we all want to see included any area on which an employee wishes to whistleblow; and, of course, the deliberate concealment of information about any of the other breaches or types of malpractice.

We can see that these include some very serious categories of malpractice, which people may wish to raise under these whistleblowing regulations. Critically, under the Enterprise and Regulatory Reform Bill—the Committee for which Mr Brady also had the unmitigated pleasure of chairing—the Government also added the public interest test. If, therefore, an employee takes a whistleblowing action and is unfairly dismissed, the issue they raised could be incredibly serious, whether a miscarriage of justice, a criminal offence, damage to the environment or health and safety.

We think that the Government’s ambitions for what they are trying to achieve with clause 135 of the Bill do not quite go far enough. Perhaps we could reflect on the explanatory notes to the Bill, which state:

“Clause 135 provides a power for the Secretary of State to require certain bodies listed on the PID(PP)O to report annually on disclosures by workers. The content of the report will be prescribed by regulations, which will also determine how the report is published and timing of the report. The Secretary of State also has the power to make further regulations setting out additional bodies to report annually. These regulations will be subject to parliamentary scrutiny by debate in both Houses.”

We can see from the clause that the extension of the whistleblowing legislation that the Government are trying to achieve here is incredibly limited. They are extending it only so far as to ensure that companies or bodies can report to the Secretary of State on the number of workers and the types of workers. We are not quite sure how the regulations will be set out, but I imagine that the information would be set out on that basis, perhaps with a matrix under those six headings of malpractice showing how many people have complained and what the remedy may have been. While that is a service, that is pretty much the sum total of the Government’s ambition on this. That has been emphasised by Cathy James, the chief executive of Public Concern at Work. I quote from the document that her organisation sent to the entire Committee on 25 June 2014:

“These reforms do not go far enough. This is a clear missed opportunity for the Government to strengthen the law that protects whistleblowers. While the proposed new requirements on regulators to report annually are a step forward”—

which is what we have just seen with this clause—

“there are still some gaping holes in the law. These include the prevention of blacklisting of those who have blown the whistle”.

That is crucial. She then goes on to talk about a number of other issues which the Government have not included in this report. However, our amendment focuses particularly on blacklisting. It would probe the Government on what other plans they have for extending this, perhaps into,

“gagging clauses and an overall simplification of the law”.

Cathy James goes on to seek some information with regard to how this can be addressed, particularly with the 80%

“drop in claims to employment tribunals since the introduction of fees”.

Fees were introduced as part of the Enterprise and Regulatory Reform Act 2013 by the Ministry of Justice, and they are a

“barrier to people taking whistleblower claimants”.

That is a slight aside to what we are discussing, but it is worth getting on record.

Cathy James went on to add:

“Having undertaken a thorough review of the effectiveness of whistleblowing in the UK”,

which Public Concern at Work did as part of its remit,

“we are disappointed that only a handful of the Whistleblowing Commission’s recommendations are being adopted by Government.”

She was referring particularly to the lack of ambition that the Government seem to be showing in terms of the opportunity to put something into the Bill that could clearly make a difference to some of those issues.

It can be seen from the list of malpractices that I emphasised at the start that it is important to ensure that employees can raise issues without being discriminated against. Our amendment would add to the clause a provision that people should not be blacklisted for participating in whistleblowing, and that there should be a mechanism for redress if they are. It is an opportunity for the Government to show that they take the issue of blacklisting seriously, because it has been shown to be a national scandal when we have debated it in this House. Many of the trade unions, UCATT and the Blacklist Support Group have consistently raised with us in Parliament how much of a national scandal it is. It ruins lives.

The issues affect thousands of workers who have been denied employment and left unable to make a living or support their families. A lot of them have been unable to get back into employment. Given the example of what happens with blacklisting, particularly but not exclusively in the construction industry, one would hope that anyone whistleblowing on the basis of health and safety or environmental regulation breaches would be able to. We are currently discussing fracking in this House, along with all the environmental issues connected with it, including vibrations, water table pollution and so on. If someone were to whistleblow on those particular health and safety or environmental grounds, they might be blacklisted from working in that industry. They must feel safe to make such allegations without having to sacrifice not only their current employment but any future employment as well. We must extend that to other areas if we can.

Public Concern at Work has also said that we should use the Bill as an example of the carrot-and-stick approach with employers by putting it on the face of primary legislation that blacklisting is unacceptable. Although extending it to applicants might not be heavily used, and although there might be ways to subconsciously blacklist people, if you like, without actually using a list of names—it might be enough merely to know that someone has been active in whistleblowing on health and safety breaches—it would send a strong message that prospective employers cannot assess people on the basis of how previous job applications have gone or their job history. That has been tested. In the 2010 case of BP plc v. Elstone, the judge emphasised his disappointment that he was unable to extend the legislation before him in the case to that application to the employment tribunal.

We feel that this is a huge missed opportunity. In the spirit of this Committee, I would be delighted to continue that co-operative approach by listening to the Minister before I decide whether to press the amendment to a vote, but persuasive though she has been with my hon. Friend the Member for Chesterfield, we will analyse the question when we have heard from her.

Jo Swinson (Liberal Democrat, East Dunbartonshire)

I am delighted that the hon. Gentleman ended his remarks on a slightly more charitable note than he began them when he suggested that I had been sleeping during an earlier part of the Committee. I had let my attention move to a subsequent clause at that point in the vote. It is certainly a good lesson to me to stay in the moment, but I do not think it is fair to suggest that I would go to sleep.

Clause 35 takes the critical step of putting in place a power to require prescribed persons dealing with whistleblowing to report annually on public interest disclosures. A report last year by the University of Greenwich and Public Concern at Work found that three quarters of whistleblowers believe that nothing is done about the wrongdoing that they report. That statistic should worry us all, so we must address people’s lack of confidence in the whistleblowing framework.

Prescribed bodies are currently under no legal obligation to investigate matters reported to them. The duty will introduce public reporting of information to help demonstrate that reports of wrongdoing are taken seriously. It is important to point out that the measures are not intended to compromise the confidentiality obligations of those bodies. It is vital that whistleblowers are responded to positively by those who are in a position to act. We have heard case after case in which this has been the issue and that is why all parties represented in the Committee agree that whistleblowing protection is so important. We know that many regulators have procedures in place to handle whistleblowing disclosures. However, some do not and a reporting duty will make sure that all regulators are more aware of concerns that are raised to them through whistleblowing. Of course, that will require regulators to consider the impacts of whistleblowing in their sectors.

A minimum guarantee that regulators should consider how they handle whistleblowing disclosures should give greater confidence to whistleblowers that their concerns are heard and action taken when necessary. On the details of the reporting process, which is a matter that the hon. Member for Edinburgh South raised, the Department has just completed a consultation to determine the best approach. It began at the beginning of August and finished on 1 October. Responses are still being analysed but we expect to report on this in the new year to make sure that we get it right.

I want to say how we intend this to operate across the devolved Administrations, because employment law is a reserved power, yet many of the functions of regulators are devolved. We expect the reporting process for entirely devolved bodies, such as the Care Council for Wales, to mirror the process for UK-wide bodies, but we will not require these entirely devolved bodies to report to the UK Parliament. Let us be clear: this clause is only one of many steps we are taking to change cultural attitudes towards whistleblowing. It is not anticipated that the clause will be the solution to all issues that whistleblowers face. I shall not detain the Committee long on this, but it is important to point to some of the other actions that the Government have taken on whistleblowing, in order to provide reassurance that this is part of a strong package of measures to tackle this important issue.

In addition to the measure that we are debating today, we are issuing guidance to employers, workers and prescribed persons, including a non-statutory code of practice for employers. We are analysing the system that refers disclosures within employment tribunal application forms to the relevant regulator, bringing student nurses within the scope of the legislation and considering whether other student groups need to be added. That is an issue that has long been raised by the hon. Member for North Ayrshire and Arran (Katy Clark), who has worked tirelessly on these issues, and I know she will be delighted that that change is being made. The Department of Health is working to investigate whistleblowing procedures within the NHS and the Home Office is doing similarly to strengthen protection within the police. We have updated the prescribed persons list, added MPs to it, introduced vicarious liability, introduced a public interest test, removed the good faith test and brought more NHS workers into scope.

The Government are taking a whole range of steps to deal with this, because it is such an important issue, as the Committee will agree. The amendment that the hon. Member for Edinburgh South is proposing will take us to the issue of blacklisting, but first let me deal with his question of whether there will be an increase in whistleblowing claims as a result of the unfair dismissal compensation cap. Because that cap is set at a relatively high level—I appreciate that there are different opinions about that and we have had debates about it—of £74,200 or 52 weeks’ salary, whichever is lower, it is still significantly higher than the vast majority of claims. I do not think that it is driving an increase in whistleblowing claims at employment tribunals.

Turning to the issue of blacklisting, which the hon. Gentleman raises in his amendment, suggesting that job applicants are added to the definition of “worker” in subsection (4) of the Employment Rights Act 1996, I share his concern about the practice of blacklisting. It is abhorrent, unacceptable and illegal. There are hefty penalties, rightly, if people are found to have indulged in this kind of appalling behaviour. I appreciate the frustration that many involved felt when they found out about the case of the Consulting Association, which came to such prominence because the legislation change in the previous Parliament had not happened early enough to catch the Consulting Association. The level of penalties available to the regulators to deal with that were therefore not of the order that most people would have wanted to see. I absolutely understand that frustration. However, it is important to recognise that we now have a strong set of protections against blacklisting with strong penalties for those who break the law in that regime.

The hon. Member for Edinburgh South mentioned the Scottish Affairs Committee’s report on blacklisting. It has already published its interim report but we are still waiting to hear its final findings. My right hon. Friend the Secretary of State for Business, Innovation and Skills and I have, on many occasions, encouraged anyone—whether Members of Parliament or external organisations—with any evidence of ongoing blacklisting to get in touch and send us that. We would take that with the utmost seriousness. Indeed, we have passed on that Select Committee report to the Information Commissioner for further investigation. We absolutely accept the seriousness of blacklisting but, much as there is understandable concern about what has happened in the past, we do not have evidence of any kind of ongoing blacklisting.

In our consultation, we asked about the issue of whistleblowing. Again, no evidence was submitted to suggest any kind of activity preventing known whistleblowers from finding employment today. We had a very good response to our consultation and published our response back in June. However, evidence of that activity was not forthcoming. If any individuals think that they have been unfairly excluded from employment, perhaps because they are on a list of known whistleblowers, they can report their concerns to the Information Commissioner’s Office. The office has the power to investigate misuse of personal data under the Data Protection Act 1998 and can impose penalties of up to £500,000 for serious breaches.

Ian Murray (Labour, Edinburgh South)

I am grateful to the Minister for running through what the Government have been doing on blacklisting. The issue is surely that there may be no evidence to suggest that blacklisting is still taking place—I hope that it is not still taking place. If there is not a strong piece of primary legislation, people who wish to whistleblow may not come forward, out of fear for their job and future employment. There is a chicken and egg issue here in terms of what we are trying to promote.

Jo Swinson (Liberal Democrat, East Dunbartonshire)

I understand and accept the hon. Gentleman’s point, but I disagree with him on whether there is a strong piece of legislation dealing with this. The Public Interest Disclosure Act 1998 was a strong piece of primary legislation, and the Government have taken all these steps to strengthen and improve it as further evidence has come forward about where it is and is not working well. We also have regulations on blacklisting which are, if I recall correctly, secondary legislation but which none the less provide strong penalties. Some of those penalties would come under the Data Protection Act.

The protections are spread between different pieces of legislation, but I believe that they are strong. If the Information Commissioner issues a fine and the person does not comply, that can ultimately lead to a criminal offence being committed and enforced. If a worker thinks that their employer has provided a negative reference on the basis that they have made a public interest disclosure or blown a whistle, they have a route to redress through employment tribunals.

I am glad that the hon. Gentleman tabled this amendment, as we have been able to have a debate about blacklisting, which is important. However, I am not sure that the amendment is appropriate for the clause, which is about the role of regulators in particular. I assure the Committee that the Government will continue to evaluate all the information we receive in order to promote the value of whistleblowers and to ensure that we protect people who have the courage to come forward. On that basis, I hope that he is reassured and will withdraw his amendment.

Ian Murray (Labour, Edinburgh South)

I thank the Minister for her helpful response. It is genuinely helpful because it has allowed us to have a conversation about the serious issue of blacklisting and whether we should be pressing primary legislation in this House to firm up on some of those issues. Public Concern at Work has been quite clear that this is a missed opportunity. It is the second piece of primary legislation to go through Parliament that does not include something that helps with the issue of either the actuality of people being blacklisted or the perception of employees who wish to take a whistleblowing or public interest disclosure and subsequently leave their job, or are sacked, and win or not a tribunal, as the case may be. These people fear for their applications to other employers. In the main, people are whistleblowing for health and safety or for being a member of a trade union or all of the other issues that we hear about, either anecdotally or otherwise. They are likely to stay in the same sector and it is likely that people will know of them or it will be very easy to find out who they are.

The Labour Party think that it will give added protection and comfort to allow applicants to make a public interest disclosure without fear of being blacklisted, either in the strong sense of being on a named list—which is and always has been against the law, as we know through the Information Commissioner’s Office and the blacklisting issues that this House has seen—or in the sense of being subconsciously blacklisted, because the individual has either been sacked or left their job because of a whistleblowing issue.

This is an incredibly serious issue. The Opposition feel that, while the Government have made some progress, they have missed the opportunity in the Bill to add more clauses that would assist with some of those issues. On the basis of the whistleblowing commission that it put together, Public Concern at Work provided the Committee with 15 different issues where it feels the Government could have taken steps to improve the whistleblowing issue further.

Stephen Doughty (Labour, Cardiff South and Penarth)

I strongly support what my hon. Friend is saying. Blacklisting is a horrendous practice and we need to do all we can to protect whistleblowers. Does he agree that the Welsh Labour Government have taken a very positive approach on this issue, working closely with trade unions, including the GMB, of which I am a member? We have briefly spoken about this before; unions have shown the way in taking a strong stance on this issue.

Ian Murray (Labour, Edinburgh South)

I am grateful for the intervention. Most of these issues are about people making a stand and not necessarily saying, as the Minister did in her response, “We have no evidence that this is currently taking place so there is no need for us to do anything about it.” A strong piece of regulation is a deterrent that says to employers clearly that any such activity is unacceptable. The Welsh Government have been very strong in their view that they will not give public sector contracts to people who have been involved in blacklisting. The Scottish Government, to their shame, voted against doing such a thing in Scotland, despite their rhetoric. I never miss an opportunity in this Committee to remind people that the SNP are not a left-of-centre party, but indeed talk left and act right. That is another example, in terms of blacklisting.

We have a piece of primary legislation that had a real opportunity to add significantly to the public interest disclosure regime and deal with some of the issues raised with this Committee by Public Concern at Work. We seem to have missed that opportunity, so I will test the will of the Committee and give the Government one last chance to strengthen the Bill slightly further.

Clause 136 - Financial penalty for failure to pay sums ordered by employment tribunal etc

Ian Murray (Labour, Edinburgh South)

I beg to move amendment 231, in clause 136, page 115, leave out lines 25 to 29.

Graham Brady (Conservative, Altrincham and Sale West)

With this it will be convenient to discuss the following:

Amendment 232, in clause 136, page 118, line 41, at end insert—

‘(12) The Secretary of State may make regulations to allow a penalty notice under this section to include a provision for the publication of the name and other particulars of those naming employers who do not pay the relevant sum as per the conditions of the notice.”

Amendment 233, in clause 136, page 118, line 41, at end insert—

‘(12) Any payments made under this section by the employer shall reduce the liability of the employer for the relevant sum prior to being allocated to any sums payable under the penalty notice.”

Amendment 234, in clause 136, page 119, line 25, after “penalty” insert “and relevant sum”.

Amendment 235, in clause 136, page 119, line 34, after “penalty” insert “and relevant sum”.

Amendment 236, in clause 136, page 119, line 42, after “penalty” insert “and relevant sum”.

Ian Murray rose—

Ian Murray (Labour, Edinburgh South)

I am grateful for the false encouragement of my colleagues on the Opposition Benches.

Clause 136 deals with financial penalties for failure to pay sums ordered by an employment tribunal, or settlement sums elsewhere. It is an incredibly important provision, and it is something that the Opposition have been looking to achieve for some time in this Parliament.

In the Enterprise and Regulatory Reform Bill, the Government pushed through a number of measures. In Committee on that Bill, the Minister’s predecessor, the right hon. Member for North Norfolk (Norman Lamb), looked upon some of the amendments we had tabled sympathetically—as Ministers always seem to do in these Committees—and said that he would come back with measures that would better enforce payments ordered by employment tribunals. Although he did not accept our amendment on that occasion, he did in spirit—then he left his job and passed it on to someone else.

The amendment we tabled to the Enterprise and Regulatory Reform Bill provided that

“The Secretary of State may by order establish a mechanism for the enforcement of unpaid employment tribunal awards and ACAS settlements”.––[Official Report, Enterprise and Regulatory Reform Public Bill Committee, 3 July 2012; c. 362.]

The Minister at the time did not accept that amendment. As I recall, he gave a 15 or 20-minute speech on how it was dreadful and he would not accept it, and on how we were playing political games. It is nice to see that common sense has broken out and the proposal has returned to the House.

Amendment 231 would ensure that unpaid amounts include all payments. Proposed new section 37B(3)(b) of the Employment Tribunals Act 1996 does not include various items relating to the award that could be included when calculating a financial penalty. We suggest that everything should be included. Let us not forget that we are talking about a financial penalty levied on an employer for failure to pay. If an employer fails to pay, we should not exclude any of the related costs; it should be the sum total of them all.

Amendment 232 would give the Secretary of State the option of creating provisions for a naming and shaming scheme to sit alongside the financial penalty should he or she so wish. We have naming and shaming schemes for the national minimum wage and the groceries code adjudicator, so I do not know why we do not have a naming and shaming scheme for employers that refuse to pay compensatory awards when a tribunal, which is almost a court of law, has found that they must provide the redress sought by an employee through the appropriate channels.

Amendment 233 would ensure that any payments made by an employer go first to the relevant sum for the employee before the penalty fee is paid. Amendment 234 would give the same status to the compensatory award as the penalty fine. Amendments 235 and 236 would make consequential changes.

I am very interested in hearing the Minister explain Government amendments 28 and 29, which will change the venue for an appeal against a penalty from the county courts in England and Wales, or the sheriff court in Scotland, to an employment tribunal. That is an incredibly interesting change to Government policy, given that people have to pay a fee to enter the employment tribunal system. Will the Minister explain in detail why that change is being made?

As I said, it is good to see that the Government have finally come round to our way of thinking on unpaid awards for employees, which is why we support the clause, but we are concerned that it will only mitigate rather than remedy the problem of unpaid awards, which is why we tabled the amendments. Let us not forget that when someone has been wronged at work they have gone through the tribunal process, which is not easy to go through, given the provisions of the Enterprise and Regulatory Reform Act 2013. People have to pass a number of hurdles. First, they must go to early conciliation at ACAS. If that breaks down, they are issued with a certificate to say that conciliation has been unsuccessful and must go into the employment tribunal system. An entry fee has to be paid to the employment tribunal system. If someone then wants to take it to a full hearing, there is an additional fee. As I said to a Conservative Member earlier, we do not believe it is fair for a pregnant woman who has been discriminated against at work to have to pay £1,250 to enter the employment tribunal system. That does not seem just and fair.

There are a number of hurdles. After going through an incredibly stressful, time-consuming and often expensive employment tribunal, someone might be given a compensatory award which says that they have been wronged at work and the employer must remedy that problem, but the employer might just decide not to pay. There are a number of hurdles that someone would have to get past to be paid. That is why we must try to find a way of remedying the problem, particularly in cases where an employment tribunal sitting in front of a judge has declared that an employee deserves to be compensated for whatever wrong must be righted.

This is a significant problem. In 2009, research by the Ministry of Justice—which, of course, administers the fee system in employment tribunals—found that 49%, or “almost half” as my notes say, of all employment tribunal awards went unpaid in the first instance, before any enforcement action is taken through the county court system. In Scotland, the situation is particularly bad, with 46% of successful tribunal claimants receiving no payment whatsoever and a further 13% not receiving the full amount of their award. Nearly half of all employees who are granted an award in an employment tribunal are not granted that award. Admittedly, some proportion of that 49% and 46% respectively will have gone through insolvency, which we just discussed under part 10, but there will also be a large number where the employer refuses to pay and it falls squarely on the employee to seek redress for that non-payment.

Toby Perkins (Labour, Chesterfield)

My hon. Friend makes the important point that this Government see as a matter of success the fact that they have driven people away from employment tribunals. We have seen huge reductions in the number of people going to them. It is hardly surprising that we have enfeebled employees when we have an economy in which wage growth is very flat. We then have a very expensive employment tribunal system where even if people are given an award, they do not get it. We should hardly be surprised that so few people now pursue those awards. It should not be seen as a sign of the economy’s health.

Ian Murray (Labour, Edinburgh South)

My hon. Friend is absolutely right. In some regions of England, the number of employment tribunals has dropped by 80%. That is surely an indication not that 80% of claims were vexatious—the fee structure was supposed to remedy that—but of people’s fear of going into an unaffordable employment tribunal system. We heard evidence from trade unions, which are normally the buffer between the employer and employee before they enter the employment tribunal system. The trade union has sometimes said to a member, “You have a very strong case to take this to an employment tribunal,” but the person has decided not to pursue it on the basis that there would be a fee payable. In some cases, the trade union even pays that fee but someone decides not to go forward.

My hon. Friend the Member for Chesterfield is right to reflect on the fact that these issues are highlighted even more in a difficult employment economy. The Committee heard evidence from a citizens advice bureau in the east of Scotland—the area that I represent—about a client who resigned from his job after he was repeatedly not paid by his employer. He was not being paid for the work he was undertaking, so he resigned and took his case to an employment tribunal, which found in his favour, so in that sense, the wrong was righted. The tribunal ordered his ex-employer to pay him £889, but more than three months on his ex-employer has not paid him the award and the client believes that they may have wound up and started again in a different guise. These are all issues of insolvency.

Given the intervention from my hon. Friend the Member for Chesterfield, we can see that in some instances it is absolutely possible to envisage a situation—perhaps I could use the pregnancy example again—where someone is going through an upheaval in their personal life in any case, with all the financial strains that go with that; they are then faced with a set of hurdles before they can even enter the employment tribunal system, which costs them a significant amount of money; and the tribunal then decides that they are owed an award which in the end is never paid to them. We welcome the fact that the Government are trying to do something about this but, as can be seen from some of our amendments, we think that there should be other steps in place to ensure not only that the Government get paid a penalty, but ultimately that the compensation award is paid.

Amendment 232 sets out the ability for the Secretary of State to name and shame employers who fail to pay employment tribunal awards on time. As I have already said, the policy of naming and shaming employers who do not pay the national minimum wage has been announced four times by the Minister, but until a few months ago had been used only twice. The Government have named and shamed the policy more than they have actually used it. I believe that this has now changed, and a few more employers have been named and shamed. However, this also needs to act as a deterrent. What we are saying here is very much like an amendment regarding whistleblowing: it may never need to be used, but we need to have a deterrent. We need to say to employers that if they have been found in a quasi court of law to be in breach of employment legislation, then they have to pay the compensatory award that has been determined on the basis of the seriousness of that breach, and if they do not pay that we will make sure that they are named and shamed.

We all know that businesses’ reputations are one of the most important things they want to protect. Any deterrent that would put companies into that particular naming and shaming environment would indeed be incredibly useful. I wonder if the Minister, in her response, would tell us whether she has given any consideration to a naming and shaming policy. Perhaps she can draw a parallel between the other naming and shaming issues, such as the national minimum wage and the groceries code adjudicator, and all the other ways in which people could potentially be named and shamed. Why would that not be done in this particular instance?

Amendment 233 is probably our most important amendment in this section. It would ensure that, out of any payments made by an employer, the relevant sum of the compensatory award for the employee is taken out first, before the penalty fine is paid. We should reflect on that: people have entered the employment tribunal system and been awarded a payment which they have not received. They go through a system in which a penalty may be levied on the employer for not paying the award, but the employer could quite easily say, “Well, that’s fantastic. I’ll pay the penalty, but I’ll continue to not pay the award,” and the penalty would be paid in the first instance. When I pressed the Minister for Business and Enterprise in the Committee, he seemed to get himself into a bit of a bind. I asked him:

“Is there a danger the Government could be paid the fine and the compensatory award could remain outstanding, and what is the process in the Bill for continuing to pursue that?”

The Minister replied:

“Fines from the Government can, of course, be chased down by the Government. A whole series of measures already exists to allow the Government to ensure that fines are paid.”

He admitted quite clearly to the Committee that the Government have a host of potential remedies which they can use to have a fine paid. The Bill ensures that that applies in the case of employment tribunals, as well. The Minister said clearly that the Government can chase down the fines, but did not make any reference to the actual compensatory award itself.

I asked the Minister whether there was any danger that an employer would pay the fine to get the Treasury and the Government off their back, but would not pay the award. The Minister had said clearly that the Government have an array of ways to be able to claim back those fines. To this question, he replied:

“Then you would still not have paid the fine that was due”.

I am not quite sure what that means and whether or not we could then levy a second or a third or a fourth fine—a hundred fines—and the compensatory award might remain outstanding. It seems that the Treasury would build up an incredible array of fines which would come into the Consolidated Fund—and my goodness, the Chancellor needs that money after the deficit went up again last week, rather against everyone’s predictions—but the money is going into that fund and hardly touching the large deficit, which the Chancellor is unable to reduce, while the poor worker who has been wronged, has sought redress and has been granted an award is still sitting at home waiting for their few thousand pounds to land on the mat. That does not seem to me to be very equitable.

I pressed the Minister further, asking him what happens if

“You have paid the fine, but you have not paid the award.”

He replied:

“Then you still have not satisfied the tribunal.”

I pressed him and asked what happens then. He said:

“You continue not to have satisfied the tribunal, so they take action.”

I pressed even further, asking:

“What happens if you are fined again and then you pay the Government but do not pay the compensatory award?”

He said:

“This is pretty unlikely,”––[Official Report, Small Business, Enterprise and Employment Public Bill Committee, 16 October 2014; c. 126, Q295-299.]

It may be pretty unlikely, but it is still in the Bill. It is the case that the Treasury can continue to fine the employer and collect that fine without the individual having any recourse to claim back the compensatory award.

Toby Perkins (Labour, Chesterfield)

I am glad that my hon. Friend is recounting the evidence session for the Committee. Those points are more interesting than might have immediately been considered. They expose that the Government have measures and initiatives in place to recoup their own fines, but that the poor wronged party in this has none of that support. A business may say, “Well, I will pay the Government fine.” It is unlikely that the Government will pursue the matter on a second, third or fourth occasion. They will have their fine. Their money is in their pocket but the person who was wronged at the start—46% or 49%, depending on where one is based—is left out of pocket. Surely there has to be a strategy for that.

Ian Murray (Labour, Edinburgh South)

My hon. Friend has clearly been listening this afternoon. That is exactly the point that I have been making. The Government do need a strategy for dealing with that. It seems a little like déjà vu. Mr Brady, you may be feeling that yourself. Two years ago, when we considered the Enterprise and Regulatory Reform Bill, we had exactly the same debate about employment tribunal redress and the penalties for an aggravated breach. In that instance, an employer could be fined £5,000 for an aggravated breach. The issue is exactly the same. The fine could be paid first and the poor worker, whose compensatory award has not been paid, sits there waiting for that to happen. Amendment 233 says that, if an employer is fined by the Government for non-payment, any moneys that come in, in terms of satisfying that fine, go first to the compensatory award and then to the Government.

If the Government levy a fine of £5,000, the invoice comes in and a £2,000 payment is made on account—there is a way of reducing the fine if one pays on time—the money that comes in, perhaps the first £5,000, should clear off the compensatory award first. Then the Government can either have the fine cleared, or they can go after the fine, as they would in any circumstance where a final Government invoice has not been paid.

The full force of the Government machine is chasing fines. However, in the first instance, before they chase the fine, any money that is payable should go straight to the compensatory award. That would give employees a real sense that they can enforce the non-payment of awards. There would have to be some nuancing around the edges for insolvency. I am sure that the Minister’s officials would be able to deal with that issue when writing the legislation. However, it seems inequitable that someone could pay a massive fine to the Government and decide that they are not going to go any further. That is why the compensatory award should be allocated first.

I use the analogy of a parking ticket. One could pay a parking ticket but leave the car in the same place and cause an obstruction. One could continue to get parking tickets but the car would still cause an obstruction to traffic, without the root of the problem being resolved. The root of the problem has to be resolved in the first instance.

Amendment 234 would give the compensatory award the same status as the penalty fine. The clause talks a lot about financial penalties but not about what is termed the “relevant sum”. Consequential amendments would provide exactly the same interest and recovery principles that are detailed in proposed new section 37H—they would apply not just to the penalty but to the award. The award could accumulate interest and be acted on within the other principles that the measure signifies for the penalty. There are pages and pages on how the financial penalty will be paid, on the interest and the interpretation of that, but nothing that says anything about how the compensatory awards, or the relevant sums in this case, would be paid.

Interestingly, on page 118 of the Bill, proposed new section 37F, on the penalty notice, inserts subsection (3), which says:

“A penalty notice must identify the relevant sum and state”—

and there are nine qualifications, one of which is,

“the period within which the penalty must be paid”.

However, there is nothing that specifies the period within which the relevant sum must be paid. That could be part of this process as well as part of the enforcement issue.

I will be interested to hear what the Minister has to say about the penalties, about whether compensatory awards can be enforced on top of that and about why they have moved enforcement from the courts to the tribunal system. We do not oppose the penalties—in fact, they are a very good idea—but in this case, without paying the relevant sums, the penalties could be quite irrelevant.

Jo Swinson (Liberal Democrat, East Dunbartonshire)

I am delighted to be able to discuss clause 136 and the proposed Opposition amendments to it. When I took over this role from my right hon. Friend the Member for North Norfolk, who has been referred to, we were in the middle of the passage of the Enterprise and Regulatory Reform Bill, which is now an Act. I recall having a meeting about employment tribunals and the awards that were made. I vividly remember being absolutely astonished and appalled at the level of non-payment of employment tribunal awards. The research we looked at suggested that some 40% of awards remained unpaid six months after the employment tribunal had come to its conclusion.

For all the reasons that the hon. Member for Edinburgh South set out, if people go to the hassle of going to an employment tribunal, it is costly for everybody involved in terms of money, time and stress. That is partly why we are trying to encourage early conciliation and other measures that mediate and take people away from that process, but we recognise that sometimes there will be cases that have to go to an employment tribunal. When that happens, it is a pretty horrendous process for everyone who goes through it, even if they end up winning their case. Small employers also find that the whole process is very draining, again, even if they win their case.

I was flabbergasted that 40% of claimants who have gone through all that and won their case are not then paid their award within six months. One might not expect it to be 100%, the world being the way it is—there will always be circumstances where a company goes bust and difficulties arise—but I thought that that figure seemed far too high and that that needed to change. It is something that I have been keen to make progress on and work on. That is why I am delighted to see the penalty regime in clause 136 that we hope to put in place.

Research undertaken at the end of last year by IFF Research for the Department for Business, Innovation and Skills found that at that stage around 35% of employment tribunal awards remained unpaid six months after judgment and a further 16% had only been partially paid. That is still a shocking figure.

It is important to recognise that high levels of non-compliance threaten the whole credibility of the tribunal system. People who have paid to access a tribunal rightly expect that their award will be paid if the judge rules in their favour. People who try to avoid their responsibilities should not be allowed to get away with it; they have to face the consequences. This issue is about fairness for claimants and for employees, but it is also about fairness for companies that are doing the right thing, complying with the law and treating their employees properly. Rogue employers that exploit or abuse their staff and breach their employment rights should not get off scot-free.

We recognise that the reasons why awards do not get paid are complex, so no single solution will fully address the problem. I will come on to some of the activities that we are undertaking to address other elements of the problem a little later, but part of the solution is to introduce the penalty on employers for the non-payment of employment tribunal awards—including any costs awarded to cover the employee’s employment tribunal fees—and ACAS-conciliated settlements.

As well as establishing the penalty, the clause will allow the Secretary of State to appoint and authorise enforcement officers to operate the financial penalty regime. The amount of the penalty due will be linked to the size of the unpaid award, so it will vary from case to case. It will be the equivalent of half the unpaid award, including interest accrued on the award. There will be a minimum penalty of £100 and a maximum of £5,000.

The enforcement officers will decide whether a penalty should be paid. The employer will first receive a warning notice and have the opportunity to make representations—particularly in case there has been an error, for whatever reason—and to appeal if a penalty is still applied. We hope that the measure will reassure claimants that, if they are successful at a tribunal, they will receive the award decided by the tribunal judge. It should also reassure those employers that comply and do the right thing that, when their competitors do not act in the same way, that will be addressed. That will restore confidence in the whole system.

There is a question over whether people will be able to avoid paying the whole award by paying only the penalty. We heard the analogy of parking fines: will the process be like racking up lots of parking tickets, but not moving the car? It is important to recognise that, if the penalty is paid but the award remains unpaid, more penalties can and will be applied. In such a situation, the employer will not be able to benefit from the reduction of the penalty for prompt payment within 14 days if both the award and the penalty are not paid.

We want to ensure that penalties will be applied in extreme cases, but part of the thinking behind the policy is that it will encourage payment. It will have a deterrent effect on those who think that they can just not pay, or who try to pay next month or at some point that feels a little easier for them. The policy is about saying that they owe something, that it is important that the claimant is paid what they are due as decided by the employment tribunal, that they make it a priority, and that there is a significant consequence if they do not comply. The penalty is about trying to encourage swift payment, which is why it is payable to the Secretary of State rather than the claimant, with the sums going into the Consolidated Fund.

We do not intend penalties to apply if the employer is insolvent, because in such scenarios the state would become a creditor, thereby reducing the funding that would otherwise go to the employees of the business or other creditors, which is not the outcome that we want. In such cases, the penalty will ultimately become recoverable through the courts once the time to pay has run out.

I want to set out the other action we are taking to deal with these issues. We are doing more research into the situation. We have undertaken research into the amount of unpaid awards, but we are now trying to understand better the barriers to effective enforcement and we want to work with enforcement officers to address them. Hopefully, some of the measures in earlier parts of the Bill will help to improve the situation. If an insolvency has been engineered to avoid paying an employment tribunal award, or other creditors, the disqualification regime will be helpful, because the Insolvency Service will be able take that into account when considering whether someone is still fit to serve as a director. That will help with that element of unpaid awards.

Ian Murray (Labour, Edinburgh South)

Insolvency is incredibly complex—I refer the Committee to the Register of Members’ Financial Interests, which includes my involvement in taking Heart of Midlothian out of administration. A company that is already insolvent will not be fined, but if a fine tips a company into insolvency, where does that fine rate in terms of preferred creditor status, or otherwise, in comparison with their compensatory award?

Jo Swinson (Liberal Democrat, East Dunbartonshire)

I will ensure that I respond to the hon. Gentleman’s question before I conclude my remarks, but I want to give it an accurate place in the pecking order. There will be some circumstances where it is not intentional that an award cannot be paid. It might be very difficult to enable a claimant to get their award if the company literally does not have the funds to do so. If there is any intent—if the directors want to avoid paying and have therefore taken their company into insolvency—that can be considered as part of the director disqualification regime and the new powers to order compensatory awards. I will certainly get back to the hon. Gentleman, perhaps in writing, about that specific question on creditors. I will copy that letter to other Committee members, who I am sure will be interested to have the answer.

The amendments look at a whole range of different elements of the penalty. They seek to include cost or preparation time orders awarded by the original judgment in the calculation of the penalty. They also seek to provide for “naming and shaming” and that any payment made goes to the claimant first rather than the consolidated funds. Amendment 231 is about including costs for the purpose of calculating the penalty, and I understand the spirit and intention of that. However, it would not be a particular additional incentive to pay the original award. The maximum penalty, in any event, is set at £5,000 and costs or preparation time orders are awarded in very few cases—less than 1%. When they are made, they tend to be for relatively low amounts. In the grand scheme of things, that would not make a significant difference in terms of what we aim to do with this policy.

Amendment 232 is about publicising the names of employers that do not pay tribunal awards. I have some good news for the hon. Gentleman: the Government are already seriously considering that as part of a suite of measures to improve this situation. We are looking at ways to implement and run a non-statutory scheme that can better deliver the cultural change that the amendment seeks. It does not therefore need to be placed in legislation.

The hon. Gentleman mentioned the scheme that we have up and running for the national minimum wage. With a small amount of indulgence, I will update him on the latest figures. This is a good example of how transparency can help to drive good behaviour. The new scheme rules came into place on 1 October and, so far, 30 employers have been named and shamed. It is important to get across that the new rules came into place for any investigations begun on or after 1 October. It can often take several months for investigations to work through the system. Many of the cases in which notices of underpayment are currently being issued actually began being investigated before 1 October, so they do not come under the criteria for the new scheme. That is perhaps why the numbers are not quite as extensive as some might have thought. I can confirm that the vast majority of employers in these circumstances are being named, and another tranche will be coming into the public domain in the not-too-distant future. That is important.

There are some circumstances where genuine mistakes mean that the national minimum wage is not properly paid. Those employers will want to set out clearly to their stakeholders and customers why they let that happen, perhaps in the local media. In some cases, the company’s management may have changed; previous managers may not have taken the care that they should have over record keeping and payroll processes. Under new management, that company might then be able to turn over a new leaf. Those points can all be fairly put forward, but having that level of transparency is very helpful and provides an additional incentive to firms to get it right the first time. We are talking about people’s livelihood. Of course, one other way of not falling foul of national minimum wage rules, which I would always encourage firms to be aware of, is paying above the national minimum wage. Then, even a tiny mistake in pence per hour and so on would not lead to their falling foul of the legislation in any event.

Ian Murray (Labour, Edinburgh South)

The Minister highlights a key issue. If employers pay well above the minimum wage—if, indeed, they pay a living wage—they will never fall foul of the legislation. She will be as disappointed as me that, while the Finance Secretary in Scotland is promoting the living wage, he voted against putting it into Government contracts in the Scottish Parliament.

Jo Swinson (Liberal Democrat, East Dunbartonshire)

The hon. Gentleman makes his point perfectly.

We want to ensure that people are paid higher amounts when possible, because that helps with the standard of living. It helps individuals and their spending supports local economies. We should be slightly wary of legislating at a higher level when that could have a negative impact on unemployment, which is why we pay careful attention to the recommendations of the Low Pay Commission.

Many firms will be able to pay more, and I would argue that they should; but a significant hike in the minimum wage would mean that some would have to make people redundant or lose staff. There is a balance to be struck, because we all want more employment as well as more well-paid employment. Naming and shaming can be a useful tool, because reputation is important. I hope that the hon. Gentleman will recognise that there is some agreement about that, even if it is not in the Bill.

On amendment 233, the Government recognise that the introduction of a penalty should not reduce the likelihood of individuals getting their award, and priority should be given to the claimant, so that the state would not benefit from their not receiving payment. I understand those arguments, which is why clause 136 already incentivises the employer to pay the employee before paying the penalty to the state.

When the warning notice is issued, the employer will have 28 days in which to pay the award and avoid the penalty completely. The provision is designed to encourage employers to do that, and is a pretty clear incentive. An employer who paid only the late payment penalty and not the award could of course be subject to the multiple penalties, and it would rapidly not be worthwhile for them to continue in that vein.

Amendments 234 to 236 would provide for enforcement of both the original award and the penalty by the enforcement officer, and for interest to be added to the unpaid awards; but interest is already applicable to unpaid awards. Claimants can pursue unpaid awards through the county court, or the sheriff court in Scotland, and we consider that still to be the correct route; it makes for more robust and swifter action in the recovery of non-Government-imposed financial penalties.

We want people to be aware of the routes available to them already. There is a fast-track enforcement scheme in England and Wales, under which claimants can apply to send a High Court enforcement officer, similar to a bailiff, to demand payment from the employer. It costs £60, but that is repayable by the employer. Alternatively, for a cost of £40, they can ask the local county court to send an enforcement officer to get the money. For claimants who cannot afford the cost, remission of the fast-track fee is available.

Some people use those already available enforcement options with some success. They are perhaps not known about as much as we would like, which is why we think that the penalty will be an incentive to employers to pay.

Sheila Gilmore (Labour, Edinburgh East)

Some of the civil law remedies that people have for bad debts of all kinds have, indeed, always been available, but they are particularly difficult for lay people to use. Sometimes— particularly, perhaps, where the sum involved many not be very large—people choose not to enforce. That is highly regrettable, so there must be a clear way for people to get their compensation.

Jo Swinson (Liberal Democrat, East Dunbartonshire)

The hon. Lady makes a good point. That is exactly why we are introducing clause 136. We recognise that there are existing routes, and we would still encourage people to be aware of them. People may choose to use them, but many, for whatever reason, will not—the success rate is not 100% for those routes either. We therefore have this penalty, which means that the employer will have to pay the award. If they do not, they will get a penalty, and if they continue not to pay, they will get another one. The costs will mount up, to the extent that it is not worth the employer not paying. Indeed, wilfully disregarding an employment tribunal judgment to the extent that the company faced penalty after penalty would start to call into question the judgment of those running it. That would be of great interest to those involved in assessing whether people were fit to serve in a responsible position, such as the director of a company.

Toby Perkins (Labour, Chesterfield)

What would the Minister say to people who say that, if the Government are effective in pursuing this money, and we recognise that they are, why do they not provide that the first £7,000 or whatever they bring in should go to the victim, with payments after that point going to the Government in lieu of fines?

Jo Swinson (Liberal Democrat, East Dunbartonshire)

I suppose it is about the model on which enforcement is based. Currently, employment rights are generally enforced through the individual taking their claims to an employment tribunal. The onus is on the individual to enforce that. We make an exception for the national minimum wage. As we have discussed, we have not only the naming and shaming, but Her Majesty’s Revenue and Customs, which enforces the national minimum wage. It will take employers through the employment tribunal system, and it may end up issuing a notice of underpayment, which is complied with in most cases at that point. We therefore recognise that it is sensible in some cases for the state to do the enforcement.

That is the system as it is set up. We are looking to improve the situation by bringing in the penalties in the clause. The Department is undertaking further work on how rights more generally can be enforced. My right hon. Friend the Business Secretary said he was keen to look at whether there was scope for the Government to look at workers’ rights more generally. That is not at a developed stage, and it will not provide any support in the short term, so it is right that we move ahead with these penalties. However, I understand the arguments being made. We want a system that is efficient and works well. If we can introduce these proposals and find that the system works well, that is great, but it is fair to recognise that the wider issue needs to remain under consideration.

We hope the new penalties will act as a deterrent to unscrupulous employers who do not wish to pay claims. We really are talking about pretty unscrupulous employers here. It is feasible, as we see in some national minimum wage cases, that an employer has broken the law by not properly paying the national minimum wage, but that they have not done so in dreadfully bad faith—they have made a mistake. Mistakes sometimes happen, and they can have significant consequences for employees, so it is right that there should be a consequence for the employer, such as naming and shaming or paying a penalty, as happens with the national minimum wage.

We all recognise, therefore, that mistakes occasionally happen and that employers sometimes end up falling foul of an employment tribunal judgment, without necessarily being dreadfully unscrupulous. That said, if they fall foul of an employment tribunal judgment and then still do not pay the award, we are getting into a slightly different category. Clearly, they have not only broken the law, but not respected the body that made a finding in the case. The measure is designed to target that group of unscrupulous employers who refuse to deal properly with the rights of claimants who have been wronged, have won their case and deserve to be paid their money. Introducing the penalties in clause 136 is absolutely the right thing for the Government to do. I accept the genuine intention and spirit behind many of the amendments, but I hope that I have outlined why they are not necessary for the Bill to proceed. I urge the hon. Gentleman to withdraw his amendments.

Ian Murray (Labour, Edinburgh South)

I am grateful to the Minister for that explanation, and I will gratefully receive a letter on the preferred creditor status about whether the fines would take precedence over a compensatory award. Perhaps when considering it later—I appreciate that it may be a Treasury function—she might indicate whether the Government would assess, in insolvency situations, whether preferred creditor status could go to somebody due a compensatory award, particularly if there is evidence that the company has been dissolved on that basis. That would be a useful explanation.

I am still worried, though, about individuals’ ability to receive a compensatory award. Yes, there is consensus across the House that we all want the issue resolved as quickly as possible and we want 100% of awards, where possible, to be paid to 100% of people 100% of the time, without the need to go through any of these processes, and I appreciate that the Bill makes provision for a warning notice to be issued that the compensatory notice must be paid, and therefore for the penalty not to be imposed, but what we want to know is what will happen at the opposite extreme. One would hope that if a warning notice were given to an employer for non-payment, they would pay the award instead of receiving the penalty; that is the carrot-and-stick approach that we would all want, but there are still a number of steps that an employer might take not to pay that award. The Government have made no analysis of the numbers involved in such cases, or what steps they would be encouraged to consider.

The warning notice would be issued. The employer would then be able to make representations. If they continued not to pay, they would be given a penalty, and a period of time within which the penalty would be reduced if paid early. They could appeal the penalty notice, go through the appeal and have it rejected. A fine could then be levied through the process, and they could then pay the fine but not the compensatory award. My hon. Friend the Member for Hartlepool, the former Minister, has reminded me that today is the 40th birthday of the contemporary singer Louise Redknapp. In the words of her No. 10 chart-topping hit, “Let’s go round again”; the process could then start again. He is a big fan of her, and of the Stone Roses. They are at the top of the chart, along with the Average White Band.

Oliver Colvile (Conservative, Plymouth, Sutton and Devonport)

Is the hon. Gentleman confirming that he is, as the Scottish Labour party indicates, a dinosaur?

Ian Murray (Labour, Edinburgh South)

Well, with a contemporary music reference like Louise Redknapp, we are certainly not dinosaurs. Perhaps before this Committee concludes at the rise of the House on Thursday we will get a contemporary music reference from the hon. Gentleman, but somehow I doubt it. The point is that there is a constant process for the employer involving appeals, warnings, penalties and reviews, but the poor employee is still sitting there waiting to be paid. With that, I will press amendment 233 to a vote.

The Minister has said that she likes amendment 232, and might even consider implementing naming and shaming. Given that our amendment asks only for the Secretary of State to make regulations, she will have no problem voting for it, so I will press amendment 232 to the vote as well. I beg to ask leave to withdraw the amendment.

Jo Swinson (Liberal Democrat, East Dunbartonshire)

I beg to move amendment 28, in clause 136, page 119, line 3, leave out from ‘lies’ to end of line 5 and insert ‘to an employment tribunal.’

Graham Brady (Conservative, Altrincham and Sale West)

With this it will be convenient to discuss Government amendment 29.

Jo Swinson (Liberal Democrat, East Dunbartonshire)

We have obviously had two lovely little Divisions. I hope that the hon. Member for Edinburgh South will not consider that I have been “2 Faced”, if we want to continue with the Louise Redknapp song title references, in welcoming the spirit of amendment 232 but voting against it. I think that I put it clearly on the record that I did not think that legislation was needed in order to create a naming-and-shaming scheme. I am certainly considering the substance of the proposal, but that is the reason why I did not feel that amendment 232 needed support. I do not know whether anyone else will be able to shoehorn any Louise Redknapp song references into the rest of the debate. Perhaps they will have to check with the hon. Member for Hartlepool for the entire catalogue if he is such a fan.

Clause 136, as we have discussed, is about issuing a penalty to employers who fail to pay an employment tribunal award. Of course, as with any penalty, the employer will have the right to appeal if they consider that it has been issued in error. Government amendments 28 and 29 are designed to change the venue where such appeals will be heard.

Currently, the Bill suggests that the penalty appeals should be heard in the county court in England and Wales and by the sheriff in Scotland. However, we have undertaken further consideration since the Bill was introduced and have decided that the employment tribunal would be a more suitable venue. The hon. Member for Edinburgh South asked why that was. The county court and sheriff court are, unfortunately, much more sensible in terms of debt recovery, but this appeal is against the administrative process—the issuing of a financial penalty—which is why the employment tribunal is more sensible as a location for it. Of course, that is also consistent with the way in which appeals against a penalty for non-payment of the national minimum wage are heard. For those reasons, the change makes sense. Of course, because it is the employment tribunal, the fee, a type A fee, will be payable in the same way as would apply to an employer in relation to a national minimum wage notice of underpayment.

Those are the reasons why we have made the change. I hope that the Committee will support the change, which is sensible and consistent with the other appeal on penalties.