Administration and Insolvency

Jim Shannon Excerpts

Wednesday 27th November 2013 Commons Chamber

[Steve Rotheram (Liverpool, Walton) (Lab)]

It is a pleasure to lead this debate on administration and insolvency. It is worth mentioning that the empty green Benches are a reflection not of the relevance or importance of the issue but of the incredibly busy lives that most parliamentarians lead.

The purpose of the debate is to try to persuade the Minister that there should be a

“mandatory requirement for licensed insolvency practitioners to give greater consideration to the social consequences of companies in administration”

rather than the current situation where perfectly viable businesses are simply sold to the highest bidder to be disassembled, with their assets flogged off and their work forces devastated.

The Minister will be aware that I met the Secretary of State to discuss this very issue. I fully appreciate that administrators are under a legal duty to ensure that they get a maximum return for creditors, but there is little, if any, cognisance of the detrimental effect that that can have on the very survival of a company if other factors are not explored, often with a resultant effect on a local community or a negative impact on UK plc. In other words, administrators almost invariably accept the highest bid, which is not always the best bid.

Before I begin my speech in earnest, I should like to place on record my thanks to both the Secretary of State and the shadow Secretary of State for their co-operation in September when I contacted them in a desperate attempt to save as many jobs as possible when Trigon Snacks in my constituency went into administration.

[Jim Shannon (Strangford) (DUP)]

I thank the hon. Gentleman for giving way. Before the debate, I received his permission to intervene. Does he think that in the first year of trading, before a business gets into difficulties, the Government or the Minister could give them some indication of what to do when it comes to banks, regulations, skills and rates? Those four things are so critical in the first year of any business to ensure that it gets a second and a third year and that it stops insolvency.

[Steve Rotheram]

I am certain that those four factors are important, but start-up credit is a major impediment to the long-term success of smaller, micro-businesses. One in six small and medium-sized enterprises goes bust in the UK. In 2011-12, something like 120 SMEs per day were going into administration or liquidation. Anything that Parliament can do to assist those businesses to grow and to take on additional staff can only benefit the country as a whole.

I also want to put on record my thanks to Unite the union, which, despite the Prime Minister’s constant jibing, works tirelessly to support its members and which was as determined as I was to see production remain in Liverpool. I know the Minister and her Department are aware of this case, and it is this recent episode on which I wish to focus much of my contribution tonight as it clearly illustrates the issue at hand.

Trigon Snacks was a nut production factory with an annual turnover of approximately £30 million. The company produced peanuts for pub favourite brands such as Big D and Planters, and the business had profitable contracts with a number of large supermarket chains.

Following the company’s success at winning an increased order book with Sainsbury’s, Trigon doubled its production, introducing new shift patterns for the work force. That resulted in negotiations between management and the union to reward staff with a pay rise, which they had forgone for many years to secure the viability of the company. Indeed, some of the loyal work force had given more than 30 years of service to Trigon. Everything in the garden looked rosy.

To meet the new targets, Trigon stepped up production but soon encountered cash-flow problems, due to the purchase of extra plant, material, raw stock and associated manufacturing costs. To meet that short-term liquidity problem, Trigon approached the Royal Bank of Scotland for a loan totalling approximately £1.2 million. Given the developments this week with RBS, this might be another case that requires further scrutiny from the Secretary of State as it is clear that, for whatever reason, the company, despite being profitable, was not awarded the loan. When that loan could not be guaranteed, the business was destined to fail. RBS’s decision came in August and just a month later the business was put into administration. It is also worth noting that at the time of entering administration the company’s stock value alone was £2.7 million.

Disgracefully, 64 members of staff were handed immediate redundancy notices without prior warning, consultation with their trade union officers or even the courtesy of the administrator writing to me as the local MP. That still rankles with those who lost their jobs. Those employees had given decades of service and yet they were called to the works cafeteria for a routine meeting, had their names read out and were then told not only that they were losing their jobs but that they had to go promptly to clear their desks and lockers before being escorted from the premises by security guards who had been hired specifically to oversee that draconian act.

Having met Unite officials and staff at the factory immediately after the redundancies were announced, I became aware that numerous cases of unfair dismissal were set to be lodged alongside claims for protective awards by the union. Many of those shown the door have found it extremely difficult to find alternative employment despite being skilled factory workers with a wealth of experience.

I should make it clear that I am not suggesting the administrators did anything illegal, but I believe it was certainly unethical and I told them so. It remains likely that Unite will seek 30 days’ pay for its members through protective awards, a cost that is likely to be borne by the Exchequer. However, once Trigon was in administration only two outcomes were likely. First, the administrator could look to keep the business operational by selling it as a going concern. Although that would not absolutely guarantee the future of the business, it was hoped that those who bought the going concern would maintain production at the site, look to restructure the business, re-launch the brand and invest in improvements. There was another option: it would result in the administrator accepting a bid from a company that would close the factory, sell the stock, plant and machinery, transfer production to another site and make the whole work force redundant. In other words, the fear was that an asset stripper would decimate the business for a quick profit.

In the case of Trigon, despite my best efforts and those of Unite it looked likely that the doomsday scenario would be the most probable outcome and that the administrators, Duff and Phelps, would complete a sale that would maximise a better return for creditors but that would inevitably result in the loss of production at the Liverpool factory.

That is where I think that the balance is all wrong. I know that the closure of any factory is a tragedy for that particular business and work force, but when it makes no economic sense it is even harder for those facing redundancy to accept. When the result also lands the Treasury with a hefty bill for workers’ redundancy payments and increased benefit bills—not to mention the devastation to the local jobs market, the loss of business rates and the blight of a large empty factory—questions need to be asked. I believe that the need to ensure that administrators take greater control of the social impact of the bids they accept is now even greater.

The cold reality is that none of those factors could, in law, be taken into consideration by the administrators, and I believe that that is fundamentally wrong and needs to change. Some people may argue that administrators indirectly take all those factors into consideration as they look to keep businesses alive as going concerns, but they do not have a mandatory requirement to consider the social consequences. The law only directs them to make the biggest return for creditors, no matter what the consequences might be for communities.

At the end of the day, the potential to asset-strip the Walton factory collapsed, as only one bid remained, which set out to retain production locally, and this is where I do give some credit to the administrators for working with myself and the Unite union throughout the evening to secure a deal as a going concern.

We were lucky. The Trigon factory was saved. It still exists today, in the guise of a new company called Natco, but minus the 60-odd staff originally sacked. I have not given up hope of restoring the work force to its full complement, and getting those workers who were wrongly dismissed back on site. I know that many of them are facing a bleak Christmas for the first time in 30 or 40 years, through absolutely no fault of their own, with, yes, the fiscal costs borne by the state, but the human cost is much more difficult to measure. All that is because the initial shortfall loan could not be agreed with the banks.

I am aware that when it comes to the process of administration, nothing about what I have described is extraordinary, or dissimilar to the experiences of many others in this place. This is where I believe that reform should be considered, even though I appreciate that it is a complex area of law. The primary legislation governing insolvency is the Insolvency Act 1986. As the Minister is no doubt aware, the last Labour Government radically reformed legislation in this area to modify insolvency laws through the Enterprise Act 2002.

The raison d’être of our reforms was as PricewaterhouseCoopers explains:

“The Government’s intention was to create a shift in insolvency culture, with a greater emphasis placed on company rescue and rehabilitation, fairness for all creditors and making it tougher for offending directors”.

Those reforms achieved a great deal. Indeed, as PWC went on to say, the

“insolvency landscape transformed; administrations have now largely replaced administrative receiverships as the primary insolvency procedure, and many businesses have been preserved via this route. Furthermore, other solutions have evolved to facilitate the turnaround, restructuring and rescue of businesses”.

So progress can be made—it has already been made—to change the culture within this field and I am sure that this kind of independent analysis is welcomed across the House. But now I think it is time to go further.

In the list of responsibilities laid down on licensed insolvency practitioners we need a further mandatory requirement that consideration should be given to the social consequences of every bid they receive and, critically, that they should have the ability to award a sale of the asset that offers the most protection for staff, local communities and the taxpayer.

My contention is that greater consideration is needed of the impact on the public purse and our manufacturing capabilities. It seems nonsensical to me that greater consideration is not given to the impact that insolvency has on the Exchequer—and, equally importantly, the area in which the closure is proposed. I am not suggesting that those two factors should be exclusive, or that they should be given pre-eminence in deliberations, but there must be some reflection of the wider social impacts of each bid. I am acutely aware that this will not always ensure that asset-strippers are not awarded businesses. I am also aware that it will not always ensure that British workers stay in work and that their jobs will not just be exported overseas once the sale is completed.