Corporate Insolvency and Governance Bill

Damian Collins Excerpts

2nd reading & 2nd reading: House of Commons
Wednesday 3rd June 2020 Commons Chamber

[Damian Collins (Folkestone and Hythe) (Con)]

I start by congratulating my hon. Friend the Member for Heywood and Middleton (Chris Clarkson) on an excellent maiden speech. It made me feel slightly nostalgic, because I made my maiden speech—I was trying to work it out— 10 years and one week ago. In addition to that, I made my maiden speech immediately following the hon. Member for North Antrim (Ian Paisley), who has just spoken. The right hon. Member for Doncaster North (Edward Miliband) opened for the Opposition on that occasion as well, so there are a lot of similarities even though we are talking about a different topic today.

I rise to speak in support of the Bill. It has a lot of practical and important measures to support businesses, particularly in my coastal constituency which has many businesses in the hospitality sector. They are particularly badly affected because trade cannot resume as normal. As many Members will know, businesses in the hospitality sector do not necessarily make all their money at an even pace every month throughout the year. They are effectively losing much of the summer season when they would usually seek to raise the revenue that sees them through the rest of the year. Extra financial support at this time is therefore particularly important for businesses in that sector and I welcome it strongly for that reason.

I would like to speak about one sector that is not covered by the provisions in the Bill. I do not believe it is covered by any of the measures that have been put in place so far. It does have rather unique circumstances, but I believe it is a very important sector because of the unique role it plays in our national life—professional football. Professional football clubs are unusual businesses. They have very high turnovers but operate at very small margins. Many people would say that the big clubs in the premier league have a huge amount of money that they spend on players, but most of the income they receive is tied up in the contracts of the players who play for them. They do not necessarily have very much cash.

Clubs in league one and league two are particularly vulnerable because their revenues do not come from broadcasting. Most of the income for big clubs such as Manchester United, Manchester City or Liverpool comes from people around the world watching them play on television. For them to play behind closed doors and receive that broadcasting money gives them the money to succeed. However, for clubs that play in tier 3 and tier 4 in league one and league two, the vast majority of their income comes from playing live in front of spectators. Without that income, they have no revenue. What they have is a series of fixed costs.

The reason professional football clubs have fixed costs is that, unlike almost all other businesses in this country, they cannot restructure their debts and finances by going into administration. They are bound by the laws of their leagues to pay all their football debts in full, including player salaries and transfer fees. Unless they can meet all those costs, they will be expelled from the league. This is an application of a rule that has been the subject of court cases by HMRC and of much debate on matters to do with football club insolvency in this House in my 10 years here. That is a rule called the football creditors rule. It is a rule created by the football leagues for competition reasons to ensure that clubs cannot over-extend themselves, buy better players that they cannot really afford, go into administration to clear their debts and then resume. They have to be consistent in what they can afford through the season, but it does mean that they do not have the option of restructuring their debts. Their obligations and major outgoings are largely going to be the fixed costs of paying players.

There have already been a number of warnings that we will see this summer, because of the financial distress of lots of clubs, the mass release of a large number of players. It has been estimated that up to 1,400 players may be released without being re-signed. We had a small foretaste of that in Scotland last week when Dunfermline Athletic released 17 players.

More troubling over the next few weeks will be the fact that many smaller clubs supplement their income during the summer months when they are not playing through advance sales for the following season. Advance sales of season tickets normally come through in June, which is also when advertisers will make bookings, as will people taking out matchday hospitality packages. That money comes in in June and July and keeps the clubs going while they are not playing, but it is not going to come through now because these would be advance sales for a season that has no start date and no one knows how long it will be before things go back to anything like normal. That affects the whole hospitality sector. As I said, it is less of a problem for those in the premier league, because as long as they are playing on television, although there will be some loss of income because the package is not quite the same as it would normally be, they will still be getting their money in that way, whereas other clubs will not. There is a severe danger that some clubs will simply run out of cash in the next weeks.

[Kevin Hollinrake]

My hon. Friend is making an important point. Is he aware that some banks have a blanket restriction on lending money to football clubs and are applying that restriction to CBILS as well, so even though the Government support is not supposed to have a sector-based restriction, this is being applied to football clubs?

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[Damian Collins]

My hon. Friend makes an incredibly important point, which has pre-empted what I was going to come on to say, although I would not make the point in quite that way. There is no doubt that football clubs would count as businesses in difficulty for a lot of lenders. The clubs that will be the most severely affected will be those that are probably trading at a loss, that have a history of debt and that rely on owners’ loans to make ends meet. They are going to be in a position soon where the cash that normally comes into the business has dried up, and even if the owner has the capability they are probably left trying to put money back into the club so that it can carry on paying the players, even though the players are not playing. The furlough scheme is great for ground staff, but it covers only a small percentage of a player’s wages, even for some of those playing in league one. So these businesses, such as they are, are going to be drained of cash, with no ability to supplement it, and they will be being asked to compete in sporting competitions and leagues where unless they pay these bills they will be kicked out.

Administrators and company voluntary arrangements for football clubs have always faced that problem, whereby even if they try to honour all the creditors at the same amount and they do not pay all the football debts in full, the club loses it golden share to play and therefore the business is almost worthless. So the administrator will honour the rules of the league, which also has the dire consequence of meaning that other local businesses that supply the club get almost nothing when a club goes bust. What we saw with Bury last year is that if no one will come and put the money in, nothing can be done and the club is expelled from the league. That is the position we are going to be in. How attractive is it going to be for an owner or a new owner to put money into a club that is running at a loss, and that has no income and no prospect of any income any time soon—perhaps for another year?

Even the idea of simply mothballing these organisations until competitive football can restart is not going to be viable, because they are bound by their contracts to their playing staff and other people, which are high. I was told by someone from the Premier League that it will probably lose £300 million in broadcasting from this season, which it will have to repay. There are liabilities in transfer payments to other clubs, in this country and around the world, of more than £1 billion, which will nevertheless have to be fulfilled. So there are real problems ahead and no ready solutions on the table for these clubs. We do need a credible plan on this. The Government could initiate a conversation with the football authorities to say that the suspension of the football creditors rule, to help clubs restructure their finances, alongside some support, would be the moment for genuine reform.

What I do not believe we should do with these businesses is chuck good money after bad. Some clubs have been poorly run and in financial distress for many years, and supporting them in that way would simply be throwing good money after bad. This is an opportunity to give many clubs the support they will need to get them through the next few months, recognising that football clubs in leagues one and two are community businesses and organisations. They are valued by and at the heart of their community, and they mean a lot to their community. These clubs should be sustained because they are very important to those communities.

What I suggest—this was referred to early in the debate when Project Birch was mentioned—is that we could look at acquiring, with public money, minority stakes in football clubs, which will give them the cash injection they need to keep going. I suggest creating an independently run fund with some public money and some money from the football bodies, in a similar way to how the Football Foundation operates to fund grassroots football. With those equity stakes to keep clubs going, there should be an opportunity for a supporters trust or a community organisation to then acquire those stakes. That would give the public resources the money back and would give the communities an opportunity to acquire a stake in the club and have much greater oversight of how it is run.

With a mechanism such as that, independent directors could be appointed to the boards of clubs, to have proper oversight and real-time financial information about how these clubs are being run. One reason why clubs are constantly in debt and difficulty is that they manage to get around the rules set for Football League clubs. Clubs in leagues one and two are supposed to spend only about 60% of their income on player salaries, but last year’s report by Deloitte showed the real figure is more like 80% or 90%. With much closer scrutiny of how they are spending their money, and with oversight by independent directors, we could start to put some of those issues right.

Football probably needs an independent body—an independent financial authority—to oversee these issues. One perennial problem in football, particularly in the Football League, is that it is really run by the chairmen of the 72 clubs in it and they are not that interested in having close oversight and scrutiny of what they do. The executive of the Football League has no real power, as these people report back to the chairmen. Therefore, an independent body to oversee all that could be important. We need to think of a creative solution that will not only provide financial stability, but create reform in the finances of football to put these clubs on a more even keel and create an opportunity for community investment and ownership in the longer term as well.

Whatever model we choose, coming fast down the track will be the problem that multiple clubs will start running out of money very soon. The problems that we saw last summer with Bury and Bolton and other communities in Portsmouth, Hereford and Darlington that have been through this before could be repeated by one club after another in the next few weeks. We need to know what the plan is, because the plan is not in this Bill—great though this Bill is. It is not in the measures that have been introduced elsewhere by Government. This is a big loophole that has to be closed.

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[Richard Fuller]

I am grateful for my hon. Friend’s clarification, but my concern—I may well have read the Bill incorrectly—is that we are talking not just about majority or minority, but about where the majority or minority lies. At the moment, the majority has to be within every class of creditors, and there might be a disabusing minority within those instances. Under this legislation, an entire class of creditors could become a minority, and even though they all agree that they do not like the arrangement, for example, they will be forced to accept it. I think that that is a difference of approach. If we are giving that power to the courts, it is important for us and for the Government to be clear about the pattern that is likely to emerge, because in that respect the provision is different and new.

I think that the Secretary of State has answered my next question, but I will ask it again if I may. Will the clauses that are designed to be temporary measures sunset automatically without a subsequent affirmative statutory instrument proceeding in the House? Will they be subject to the negative procedure, or continue without an SI to cancel them? I would be grateful if the Minister could clarify that at some point, perhaps in his closing remarks if he has the time.

It is relevant to raise the issue of companies and sectors that may take time to recover, beyond the relevant period. I think that is addressed in Opposition amendments 3 to 6. What if the directors themselves cannot reach a clear judgment that fully escapes the risks of wrongful trading? What is the position of someone on a directorship in this situation who reaches a dissenting opinion to the majority of directors on the important issue of whether the organisation is able to continue trading? That is another issue of detail that the Minister may wish to address in Committee.

The impact assessment for the Bill does not appear to address the cost of debt from these changes, essentially assuming that changing what has historically been a situation that favoured senior debt to one that is a little bit looser between different classes of debt would have no impact on how much that debt might be priced at in the future. But it is my understanding that increasing risk on an instrument might cause an increase in the price on it. That may have been considered in the impact assessment and have been negligible, but it would be interesting to see what the Government have to say.

I am interested in what happens in the circumstances that arise under the chapter 11 equivalent proceedings when the Government are a debtor or a shareholder in a business. Do the Government have a voice that is different from any other creditor? The contribution of my hon. Friend the Member for Wimbledon (Stephen Hammond) was interesting in this regard, as he highlighted the part of the Bill where HMRC becomes a preferred creditor. Well, those of us who have had to deal with HMRC as a creditor in the past would not mark it down as one of the most amenable of creditors when it comes to its own interests, and that is putting it lightly. In fact, as we are seeing in this Parliament already, HMRC is acting, both in the Treasury and in general, somewhat as a bovver boy in British industry. It does not seem to like people who are self-employed and it certainly does not like people who have a loan charge. Now it seems to want to have priority in the debt structures of our companies. Where will its ambitions end? Where will this Government’s facilitation of the taxman’s ambitions end? As a Conservative, I would have hoped that they would have ended some time ago. Perhaps I can tempt my hon. Friend the Minister to comment on that.

[Damian Collins]

I am following my hon. Friend’s remarks closely. Given his opening remarks, might it not be better, if we believe in backing British business, for us to have some skin in the game? We might not get our money back every time, but overall we probably would.

[Richard Fuller]

After my hon. Friend’s comments about association football, of which I have absolutely no understanding at all, I will bow to his better judgment on this topic too, but generally I am not really in favour of the Government having skin in the commercial game. When they get active in the economy, they tend to blunder around and probably, with the best of intentions, make things worse. I am not saying that they should not have their role; certainly, right now, many people will want the Government to have a role. Many Members have rightly looked at the measures the Government have put in place to support business and praised them.

Of course, people need not just take our word for that. Ask people around the world which country’s Government have responded best to the economic consequences of the virus and they will say that the United Kingdom Government are No. 1, with Japan, America and Germany in the United Kingdom’s wake. That is a tremendous credit to Ministers, but I would not like to encourage them to make that participation any longer than it needs to be.

On the guidance for going concern judgments, the Department will have spoken with auditors about how they are approaching their going concern judgments this audit season. Does the Bill have any impact on those judgments? Does the Department already think that it might need to bring forward any other measures based on the independent judgments of those auditors?

I raise that because in the 2007 crisis, there was a feeling that the rating agencies had been captured by their corporate clients and were giving ratings that perhaps did not reflect the true underlying status of businesses. We are fortunate in this country already to have embarked on reforms of accounting and on the separation of accounting and other activities to limit that risk, but I just caution that we ought be aware of that in a year’s time when we look at those going concern judgments. We would not like those to come back on our accounting firms, which are doing the best they can.

In Committee, the Minister would be wise to give a few more details about the role of the monitor—my hon. Friend the Member for Huntingdon (Mr Djanogly) raised that issue—and what role the Department will have in monitoring the monitors. Is any change expected to that?

One other concern I have is that facilitating businesses to continue trading at a time when the economy as a whole may be recovering and uncertain has a hint about it of creating some form of zombie businesses, where people are compelled to provide supply, as is required under the Bill, but there is the increasing sense that those businesses are not going to make it. I may be expressing a concern based on widespread use of the insolvency practice, which may not come to fruition—let us hope that for many people it does not—but I wonder what the Government’s thoughts are about the risk of businesses existing in name but not actually being able to create a long-term future for themselves or their employees.

I mentioned the Opposition’s amendment 1, on the voice of employees on obtaining a moratorium. If that were tweaked, it would be an interesting issue for the Government to consider. I also mentioned in an intervention the powers of the small business commissioner. The Secretary of State was right to say, “Hold on a minute; that’s something that we will come back to,” particularly as we are going through this in one day. It is probably not something that we would want to put through so fast. Similarly the calls by the Leader of the Opposition—[Interruption.] I did it again. I am so sorry. It is so hard to forget that time.