Corporate Insolvency and Governance Bill

Baroness Kramer Excerpts

2nd reading & 2nd reading (Hansard) & 2nd reading (Hansard): House of Lords
Tuesday 9th June 2020 Lords Chamber

[Baroness Kramer (LD) [V]]

My Lords, I have long argued that the UK needs an equivalent to the US’s Chapter 11, so I welcome the Bill. However, the history of Chapter 11 legislation in the United States has not been straightforward. Many companies turn not to federal law but to state law for greater ease of use, speed and cost. Given the complexity and the probability of unintended consequences, I join those who believe that the permanent measures in the Bill, in contrast to the temporary Covid-related measures, should be properly reviewed with a sunset clause or similar mechanism.

I also believe strongly that the Government should drop the provisions in the Finance Bill which would give HMRC, as a creditor, primacy over other creditors. If that is not dropped, small suppliers will be even harder hit in a ripple effect which our economy cannot afford and which in the long run damages the national tax take even more. I want the Government to use the Bill to give greater protection to small creditors, typically trade creditors, in an insolvency.

We know that most small businesses are at a disadvantage when negotiating with big businesses. They often find that they have to accept long payment terms if they are to win a contract. They also find themselves pressured into providing payment holidays. Small suppliers are being put at risk, especially in these uncertain times. The public sector pays its suppliers promptly. The last report from the Financial Services Ombudsman showed that only 1% of payments from public sector bodies took over 30 days and most were within 15 days.

The picture is not the same in the private sector. Late payments to small businesses rose to £23 billion in 2019 compared to £13 billion the year before, according to Pay UK. Last November, long before Covid, the Chartered Institute of Credit Management had to suspend 20 firms from the prompt payment code for failing to honour their commitment to pay 95% of all supplier invoices within 60 days. These were huge and famous companies, including GlaxoSmithKline, AstraZeneca, Unilever, IBM and Diageo. If the public sector can pay in 15 days, the big players in the private sector can pay in 15 days, never mind failing to meet 60 days. I am hoping for changes in the Bill that will strengthen the position of small suppliers. At the very least, the Government should exclude from any of their procurement processes any company that does not observe the prompt payment code in all parts of its business, not just in its government contracts. There is a very strong argument for a tougher prompt payment code and for making the code mandatory.

Secondly, under the moratorium offered in the Bill, payments due to small entities should be paid no later than the end of the first moratorium, not subject to a rolling moratorium which could run for a year or more and, frankly, sink the small supplier. If the moratorium fails and winding up follows, small entities should be pari passu with claimants who refuse to give payment holidays, on the grounds that payment holidays given by smaller entities are invariably given under duress. Many banks, for example, never give payment holidays—for example, for overdrafts—and so have priority in wind-up.

Lastly, I want to explore the issue, raised by my noble friend Lady Bowles, that SMEs can be disadvantaged if they are encouraged to exclude themselves from supplying the company in a moratorium, because that is when payment is best assured. I am sure there will be many more points as we deal with the details of the Bill, but this House understands the direction in which I am now urging the Government to move.

Corporate Insolvency and Governance Bill

Baroness Kramer Excerpts

Committee stage & Committee: 1st sitting (Hansard) & Committee: 1st sitting (Hansard): House of Lords
Tuesday 16th June 2020 Lords Chamber

[The Deputy Chairman of Committees (Lord McNicol of West Kilbride) (Lab)]

Lord Hendy? No? Then I call the noble Baroness, Lady Kramer. We will then try to get the noble Lord, Lord Hendy.

[Baroness Kramer (LD) [V]]

My Lords, I will speak to Amendment 22 in my name and that of my noble friend Lord Fox. I will also make a few comments on Amendments 25 and 40, to which I have added my name.

Amendment 22 seeks to achieve fairness for small entities which are creditors to a company entering a moratorium. Most small entities are very vulnerable if a major customer fails to pay on time. They do not have the volume of other customers to offset cash-flow problems; even in the good times nearly all of them find it very difficult to borrow from banks to cover cash flow, never mind in a situation where a major customer is entering a moratorium or, potentially, insolvency. So Amendment 22 adds these small entities to a list of priority creditors that are not subject to the moratorium delays. I would point out that the moratorium, while initially about 20 days, could stretch on to a year and beyond, so this is absolutely critical for small suppliers.

The second part of the same amendment—I admit that the language is extremely clumsy—deals with the problem that small entities are often strong-armed by their large customers into accepting excessively long payment terms compared to those that a large supplier would insist on. I spoke at Second Reading about the failure of many large companies to make prompt payment to small suppliers; the numbers are quite shocking. What I am attempting to do here is to right this underlying wrong by deeming that any payment due to any small supplier be treated as if, from the first day, it was an agreement for payment within 30 days, regardless of what is actually down on the piece of paper. In a sense, I am trying to move small companies on to an equal footing with the large suppliers to the company that is entering the moratorium, so it is two different ways. I hope that the Minister in replying will talk about this problem for small suppliers; it is very different in character to the problems for a big supplier who has many other customers, very good banking relationships and, potentially, access to the capital markets.

As I said, I have also added my name to Amendments 25 and 40. The noble Baroness, Lady Altmann, made the key points here, and I just want to reinforce them slightly. Indeed, the noble Lord, Lord Hodgson, in describing the behaviour of banks when speaking to Amendment 21, was in a sense also describing the kind of behaviour that one could anticipate that is relevant to Amendments 25 and 40.

Banks understand very well how to improve their position in a moratorium; it is quite possible to gain advantage by shaping the terms that are attached to new borrowings that take place from a bank during the moratorium—those are almost inevitable if a company is to keep functioning—and potentially to build into those new arrangements a mechanism that affects the acceleration of other payments and that levies fees and interest rates that are essentially well above market. This is, in a sense, another way of drawing more money out of the company ahead of other players. It is a way of gaming the system. I note that R3, the insolvency trade body, has written in support of the purpose of these amendments, so this is not paranoia on my part. I am a former banker and I know very well how I would have been encouraged to handle a situation like this; it is a much more broadly recognised problem. Again, I hope that we will hear from the Minister on this issue.

[The Deputy Chairman of Committees]

I now call the noble Lord, Lord Hendy.

Corporate Insolvency and Governance Bill

Baroness Kramer Excerpts

Report stage & Report stage (Hansard) & Report stage (Hansard): House of Lords
Tuesday 23rd June 2020 Lords Chamber

[Baroness Altmann (Con) [V]]

My Lords, I support Amendments 13 and 14. I have added my name to the former, as well as to Amendment 75 in this group, which I will briefly speak to.

I echo the words of many noble Lords in this debate, and I stress that I support the aims of the Bill and am very grateful to the Government for introducing so many amendments. It is testament to the power of and wisdom in this House that the Government’s amendments have significantly improved the Bill and reduced some of the risks that we highlighted during its earlier stages in our House. I particularly welcome the Minister’s amendments on security for pension schemes and the Pension Protection Fund. I declare my interests as set out in the register.

However, I must agree with some of the words of caution that we have heard so far in this debate. Yes, there may be some improvement and it is welcome that, for example, government Amendment 80 would allow Ministers to step in if necessary, should there be gaming of the moratorium and the creditor priority. However, I have to agree with the noble Baroness, Lady Bowles, and other noble Lords, who have explained that there will be gaming—it is not a question of whether. The idea that banks will not behave like that does not reflect what many of us have already witnessed over the years in the real world. As my noble friend Lord Leigh of Hurley rightly said, there is expertise in this House which can inject into the current situation the real-world experience that could be so important in averting some of the problems we alerted the Government to during the Bill’s early stages.

Financial creditors, including but not limited to banks, will be needed to potentially rescue a company that is going through the moratorium and to help it avoid insolvency. However, there are other elements such as intra-company loans, and in that case, there could be problems regarding recovery from creditors. I agree with my noble friend Lord Leigh that rescuing a business is not the same as rescuing a company—that is absolutely right, as my noble friend Lord Trenchard also explained. However, in many cases defined benefit pension schemes would not have an opportunity to recover money in future trading, should assets be stripped away and the creditor status be undermined by the leapfrogging that can occur with financial creditors. We must try to help save businesses and jobs through the liquidity crisis. I have added my name to Amendment 75 because the issue of jobs and a company’s workers is so important; they should have a role in this process.

I hope that the Government and the Minister can reassure us of the intention to alert the Pension Protection Fund to risks and to step in should there be gaming. I support the intentions behind the Bill.

[Baroness Kramer (LD) [V]]

My Lords, my name is added to Amendment 14. I cannot better the speeches from my noble friend Lady Bowles and the noble Baroness, Lady Altmann. However, I ought to add a few words, because I am probably one of a small number of people in this House and the other place who have been a creditor to a company taken through the Chapter 11 process in the United States, as I was when I worked there for a major US bank.

It is not exceptional behaviour but standard practice to seek ways to accelerate payment to get it into the moratorium period. I would have been considered remiss in my responsibilities had I not made sure that, in the various legal contracts in which lending was arranged, clauses existed that would enable me to achieve that acceleration.

As I also know from my own experience, acceleration is not the only issue; there is also the ability to make sure that a bank can take security when a company finds itself entering into financial crisis. That helps to move the financial institution’s debts much higher up the food chain. I hope that the language in the various amendments that try to deal with this problem is understood as dealing with the issue of security as a mechanism for acceleration, and not just clauses which very directly achieve acceleration.

[Lord Hodgson of Astley Abbotts (Con)]

My Lords, I put my name to Amendment 14. Before I speak to it, I draw the House’s attention to my entry in the register of interests.

I tabled a similar amendment in Committee, looking at how financial institutions and banks might game the system. When I listened to him, my noble friend the Minister seemed to give a positive answer—for which, many thanks—but when one reads col. 2094 of the Committee stage debate on 16 June, the words are not quite as strong as I had hoped. So I support Amendment 14 and want to press my noble friend a little further, for two reasons.

The first is what I might call the Pepper v Hart reason. Courts can go to debates in your Lordships’ House and the House of Commons and use Ministerial Statements and replies to discern what Parliament’s wish was when legislation was passed. Not a lot was said in the House of Commons, because it all went through in a single day, but the words of the Lords Minister, the noble Lord, Lord Callanan, have been quoted extensively and will be so in future. He will probably have a starring role in a number of law cases in the years ahead. So I hope, as we come to the dénouement of the Bill, that he will be able to lay out the case clearly, cogently and simply.

Insolvency can seem as dry as dust, but it is about people. It is about men and women who have struggled and given months and years of their life to building up a business, only to see it collapse before their eyes. Sometimes it is because of their incompetence, but often it is because of events over which they have absolutely no control, such as the pandemic. We therefore owe it to people like them to have absolute clarity about their position, their rights and their responsibilities.

I will go back to the real-life example I gave in Committee; I ask my noble friend the Minister to boil down his response when he comes to reply. A struggling company; a £10 million term loan; £1 million is in default, and a pre-moratorium demand has been made. The company goes into the moratorium. Of course, the £1 million is a pre-moratorium debt and is therefore covered, but that demand is a default on the whole loan. Therefore, using the financial services cover, the bank says, “I want the £9 million, thank you very much.” Has that hole been blocked in what my noble friend is putting before the House today? I thought he said that he was going to, but this is quite complicated. It would be helpful for the House, and indeed for the law courts in future, if he could make it clear that that is the case—that is, that banks cannot game the system and use a pre-moratorium event that is protected under the moratorium to enforce claims under the moratorium because they are financial services.

My second question concerns what I call the “Gulag issue”. In real life, in the example I gave, the act of default will mean that the company’s loan moves from its normal relationships to what is known as the “workout division”. Notwithstanding the sensitivities of the noble Baroness, Lady Kramer, the workout division is not a place for sensitive souls. It is charged, incentivised and tasked with enforcing the rights of the lender: the bank. Banking agreements have a good many pages of closely packed print, with all sorts of terms and conditions. So many times I have heard people say, “I got 1% off my interest rate and did not think about the other terms.” If your business is going to be successful because you are paying 1% less, you are in the wrong business. It is the terms and conditions that you need to look out for.

Let me give an example of how that might work. I invite noble Lords to look at their overdraft statement when they go home tonight. It will say something like this: “You will be charged 3.5% or 4% above the bank’s base rate for the time being”—what the bank’s base rate is is a good question in itself—“but for unauthorised overdrafts you will be charged 19%.” Deep in the terms and conditions for the company I am talking about, there will be a similar clause. When you default, your interest rate goes up. Do the maths. That £10 million at 19% less the 4% that you were expecting to pay—making 15%—equals £1.5 million a year, or £30,000 a week. These are the sorts of things, and there are many other ways in which banks can enforce their conditions.