Local Democracy, Economic Development and Construction Bill [HL]

My Lords, I suspect that we agree on many of the issues raised by the three amendments but not on how to address them. To summarise, they would delete the insolvency exception to the prohibition of the so-called "pay when paid" clause, overturn the decision of this House in its judicial capacity in respect of the Melville Dundas v George Wimpey case, and introduce a statutory right for a construction firm working under a contract covered by the 1996 Act to receive adequate security in respect of the contract. My noble friend pointed out that the construction industry is unique in that the "pay when paid" clauses are prohibited by statute. The exception is for insolvency, as he said, and it is there for a good reason. It continues to allow construction firms the same protection from the risks of insolvency as exists in other industries. The decision of the House of Lords in respect of the Melville Dundas v George Wimpey case was indeed technical and there was a 3:2 split judgment, but its effect is that a creditor under a construction contract, as Wimpey had become, should not be disadvantaged compared with a creditor under any other form of commercial relationship. Finally, my noble friend suggests that we introduce an amendment which provides a statutory right for a firm in a construction supply chain to receive adequate security in respect of the contract. Where no security is forthcoming, he suggests that the payee may suspend performance until it is. In such a case, of course, a payer would have to pay an additional sum reflecting the extra costs which the payee incurred in stopping the work. That appears to us to come pretty close to a double jeopardy. Disregarding that point, by making it a statutory right for a payee in a construction supply chain to demand such security, we would create a very uneven playing field between firms in the construction industry and businesses in other industries which have no such statutory right. That brings me to the heart of the issue so far as concerns the Government. Our objection to the amendments is not technical or one of detail; it is on the grounds of broad principle. SMEs exist throughout construction supply chains. We accept that the construction industry faces difficulties in the current economic downturn, but so do other sectors and specific firms in sectors which are perhaps less immediately impacted upon. However, importantly, a great number of the industry’s customers are themselves small businesses. Manufacturing or retail businesses seeking to extend premises are but one example. It is a feature of UK insolvency law that it applies uniformly, and it is important that we do not create the position where the insolvency regime as regards parties to a construction contract is radically different from that which applies more generally across the economy. The clauses in this part of the Bill work to respect that principle, as I briefly outlined earlier. Each of the amendments put forward by my noble friend seeks to a greater or lesser degree to create a different position for the construction industry. We accept that the issue is important but we believe that the only correct way of dealing with it is on a pan-economic basis. In the other place earlier today, we made a number of very relevant announcements. A number of specific measures are being introduced to help businesses across the economy by supporting their cash-flow situation. We announced that HMRC will continue its business support service for as long as it is needed and that the service is to be expanded to allow businesses expecting to make losses to offset those against tax bills due on profits from the previous years which they are unable to pay. The 2008 Pre-Budget Report announced that the rate of corporation tax for small companies would remain at 21 per cent for 2009-10 to help small businesses during the rest of the recession. We also announced a top-up trade credit insurance scheme to help UK businesses to maintain their finances. The scheme will be available to the 14,000 businesses across the economy that already use trade credit insurance and will mitigate disruption to the supply chain and cash flow of the 250,000 companies with which they do business if their credit limits are reduced. We will also work to ensure that the regulations and procedures for dealing with troubled companies work to facilitate company rescues where appropriate. It was announced in the Budget that the Insolvency Service will consult on providing for new funding for companies in company voluntary administration—CVAs—or for administration to provide absolute priority status to allow firms in difficulties to access the funding that they need to get back on track. Extending to medium and larger companies the moratorium on creditor action against small companies trying to agree a CVA will also give them breathing space to reach agreement with creditors. Pan-economy measures such as those are the most effective and equitable way of dealing with insolvency and the issues surrounding it. That is not to say that we will not do anything for the construction industry. As noble Lords will be aware, some £3 billion of capital spending, which was brought forward in the 2008 Pre-Budget Report, and today’s announcements on funding for housing and energy efficiency in buildings are examples of how we are providing assistance. However, that is for another discussion. On the basis that we do not believe that it is right to create a position where the construction industry is treated differently from other sectors of the economy in the case of insolvency—