Lord Flight
Main Page: Lord Flight (Conservative - Life peer)Small Business, Enterprise and Employment Bill
Lord Flight Excerpts(9 years, 5 months ago)
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Lord Flight (Con)
My Lords, I will repeat and add to the comments made about the UK insolvency regime. It is fair to describe it as probably the best in the western world. It is thus rated by the World Bank. It returns more money to creditors faster and cheaper than the systems of the US, Germany or France. UK insolvency practitioners return more than £4 billion a year to creditors, including HMRC. There are some 1,700 insolvency practitioners in the UK and around 10,000 professionals who work in insolvency. Most insolvency practitioners are accountants or lawyers. They are all qualified and regulated, and have a statutory objective to maximise returns to creditors. According to the latest figures, for 2012, UK IPs saved more than 750,000 jobs and advised more than 95,000 businesses, with just under 50% continuing in some form.
Our arrangements have developed from statute law, from common law and from practice over many years. I am nervous about quite a lot of the tinkering with the system in the Bill, which is not necessarily for the better. As your Lordships will know, the professional body representing the profession is R3. The members range from senior partners of the big four accountancy firms to those who run their own small businesses. I am grateful to R3 for getting me up to speed considerably in this territory and I apologise in advance if I get some things wrong. It is not really my main territory.
It strikes me that the Treasury has not had as much dialogue with R3 as it might have done. I asked if anyone had had a meeting with the Minister and the answer was no. It is probably R3’s fault, but before this legislation gets completed it would be sensible for the Government to have a session with R3 going through its concerns in more detail.
Clause 116 appears to state that any proceeds of a claim—for example, transactions that undervalue—received by an administrator would be unavailable to the holder of a floating charge. This strikes me as unfair because the actions of a director that led to the claim will be putting the floating charge holder in a worse position, whereas the successful action will benefit unsecured creditors. This does not strike me as particularly equitable. This issue may be able to be dealt with by modifying the clause and, as far as I can tell, the clause does not automatically mean that unsecured creditors are excluded but it certainly needs a little more explanation.
Clause 124 allows an administrator to extend administration for a year—previously, it was six months—with the consent of creditors. This gives the administrator too much flexibility to let residual matters drag on if a long extension can be obtained. It is not unknown for the insolvency practitioner to get case fatigue when dealing with less interesting matters that are not at the front end, which is to the disadvantage of all creditors, and the extension could exacerbate this. I might add that this point is not especially supported by R3 but I do not see the need for an extension from six months to a year.
These two clause stand part Questions have been tagged on with my Amendment 61AJ, which goes with Amendment 61VA, and is about something entirely different. From this coming April, directors who commit fraud, are negligent or wrongly take money out of business can walk away with more than £160 million a year—money that is owed to creditors, including small businesses and the taxman. To prevent this from happening, the creditor representative groups, including the Chartered Institute of Credit Management and the British Property Federation, are calling on the Government to grant insolvency litigation a permanent exemption from the Legal Aid, Sentencing and Punishment of Offenders Act 2012. These groups wrote an open letter to the Prime Minister last October outlining their concerns but have not received a response. The issue is relevant to the Bill because it deals with tackling director conduct and returns to creditors.
From this April, the new regime for insolvency litigation will thus leave creditors out of pocket and create a system whereby directors who have committed misconduct could get away with their actions. The current funding regime for insolvency litigation also protects the public interest and public money—the two objectives that LASPO originally sought to address. It deters white collar crime and puts money back in the hands of creditors.
Insolvency litigation is a vital tool for recovering and returning money from rogue directors back to creditors, and conditional fee arrangements and after-the-event insurance are needed to fund insolvency litigation because there is often no money in an insolvent state to fund this type of action. There are many other benefits to using the current regime; the costs in a successful case are paid for by the director who has committed misconduct and, in most cases, the simple threat of the CFA-ATE regime leads to the directors or third party settling before being taken to court.
The impact of the reforms on insolvency litigation was not considered during the consultation phase of the policy, nor in the Bill’s impact assessment. The Government therefore granted a two-year exemption to allow time to seek alternatives to the current regime. Independent research, which considered virtually all cases that used insolvency litigation in 2010, has since shown that no alternatives will ensure that the same amount of money is returned to creditors. Since the report showed that there were no alternatives, the Government have changed their justification for the temporary exemption from allowing time to find alternatives to allowing those involved time to prepare for the changes. The change in justification, without any government review, is less than desirable—especially as independent evidence demonstrates that the current regime has clear benefits.
My amendment has been drafted in consultation with barristers; its wording is that of the current exemption and would therefore provide insolvency litigation with a permanent exemption from the litigation funding changes made by LASPO. This is an issue that is slightly aside from the main part of the section on insolvency but I should like to think that the Government will consult further on this territory.
I should also have started off by declaring my interests, as listed in the register.
Lord Stevenson of Balmacara
My Lords, I have little to say in response to the substantive points raised, but I would like to put it on the record that we have also received a lot of assistance from R3, and I certainly commend the suggestion made by the noble Lord that perhaps a discussion with that group might be helpful to round out the understanding of the position it is adopting in these matters.
Lord Leigh of Hurley (Con)
I hope that the Committee will allow me to come in after the Minister has spoken—I wanted to hear what she had to say. I declare of course my interests as on the register. Despite the accolades and praise I received in this place recently for my advisory abilities, sad to say they do not apply to my investment abilities. I have seen administrators and liquidators up front at the wrong end, so I have some personal experience—if not professional experience—of what happens when things go wrong. Of course, I very much welcome the Government’s work in controlling legal expenses and pay tribute to the work of the noble Lord, Lord Mitchell, on related matters. In this particular part of business life, however, there is a role for contingent and after-the-event funding. I rise simply to suggest that there may be a happy medium of a temporary exemption to allow time to see how things pan out during the Bill’s passage, if Amendment 61AJ cannot be accepted as a whole.
Lord Flight
My Lords, I thank the Minister for her helpful and constructive response. I am particularly pleased that she is happy to look at the new clause proposed in Amendment 61AJ and to meet with R3 to go through these issues.
Lord Stevenson of Balmacara
My Lords, Amendments 61ZB and 61ADG are in my name and that of my noble friend Lord Mendelsohn, who is today occupied by affairs in Gibraltar—for those who are interested in following his movements.
Our Amendment 61ZB omits the phrase “creditors’ committee or” from Clause 118. It has always been the case that officeholders in liquidations and bankruptcies require official permission to carry out certain functions as part of the process. That is for the very 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.
Those permissions are normally obtained from creditors’ committees or, where there is none, from the Secretary of State or the court. Clause 118 gives liquidators the ability to exercise any of those commonly used functions without gaining approval first. Likewise, Schedule 10 gives trustees in a bankruptcy the ability to exercise any of those 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 to protect the monetary value of the estate, and that in most cases any misconduct would be dealt with by their own regulatory structures. However, in the small number of bankruptcy cases in which creditors’ committees are used, 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 court, or even to the Secretary of State; they are likely to be local and therefore less costly to reach, and since they are stakeholders in the enterprise, in a way, they will know the background and are therefore more likely to reach quick decisions.
We therefore have some doubts over whether the need to seek permission from such a committee should be removed altogether under the Bill. What does the Minister believe will be the implications for the continued existence of creditors’ committees if this opportunity to influence the process is removed altogether?
Our amendment would not prevent an IP seeking the permission of the court or the Secretary of State, but would still leave power in the hands of the creditors’ committee. We regard Amendment 61ADG as a consequential amendment, affecting as it does Schedule 10. I beg to move.
Lord Flight
My Lords, the Government’s aim in Schedules 9 and 10 is to create a more efficient process for the Government’s official receiver to be appointed trustee of a banker’s estate—I mean a bankrupt’s estate; it might be a bankrupt banker. This would mirror the provisions for compulsory liquidation and therefore seem logical but the changes set out in Schedule 10 go further and remove the requirement for the official receiver to tell creditors whether or not they can hold a meeting to appoint a trustee. This means that creditors will not be informed that they have an up-front opportunity to appoint an alternative trustee, should they wish to do so, because there will be no process in place to inform them. The schedule would see a dramatic reduction in creditors’ power to influence insolvency proceedings and I fear that this could lead to a reduction in trust and confidence in the UK’s insolvency regime.
My Amendment 61WA—I mis-referred earlier on but Amendment 61VA also relates to this point—seeks to provide that the official receiver becomes a trustee on making the bankruptcy orders, and to omit the existing provisions which require the official receiver to decide whether to hold a creditors’ meeting to appoint a trustee and to notify the creditors if he decides not to do so. I take the view that three creditors or the proposed threshold of 10% by value of the creditors should be sufficient to requisition the qualifying decision-making process.
In addition, there is no provision in the Bill requiring the official receiver in each and every bankruptcy case to inform creditors of their rights to appoint an insolvency practitioner as trustee or for the mechanism to do so. This lack of provision disenfranchises creditors and surely flies in the face of increasing creditor engagement. Amendments 61WA and 61VA are intended to address these points.
Baroness Neville-Rolfe
My Lords, I thank the noble Lord and my noble friend for these amendments. I hope that I have understood their thinking correctly.
I will start by talking about Clause 118, which Amendment 61ZB seeks to amend. The clause removes the need for trustees to seek sanction before exercising certain statutory powers. That is a cost-saving measure, which arises, as I have already said, from the Red Tape Challenge; it receives considerable support externally and helps to achieve efficiency, as my noble friend Lord Flight explained.
The requirement for sanction was originally designed to protect creditors from an unregulated insolvency profession, preventing officeholders from taking steps that could have a negative impact on the bankruptcy estate such as continuing to trade a bankrupt’s business, which you have to look back in time to imagine. Now, of course, we have a much more highly regulated insolvency practitioner profession. Failure to act in the interests of creditors is a regulatory matter, and it would be for the trustee’s regulatory body to take appropriate disciplinary action.
The amendment would make an exception for cases where there is a creditors’ committee and the trustee wished to appoint the bankrupt to assist in dealing with certain tasks. This 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 to perform vital tasks.
Let us take the case of a bankrupt and a remote farm—which is close to my own personal experience many years ago—perhaps in winter when weather conditions are challenging. That may mean a quick decision is required to instruct the bankrupt to continue to feed the animals or to engage a vet to look after sick animals, and so on. The requirement for sanction where there is a creditors’ committee would add unnecessary delay and cost.
A further reason for resisting the amendment is consistency. If accepted, trustees would be able to exercise all other powers without permission except this one, and then only where there is a creditors’ committee. That might add unnecessary complexity to the insolvency framework.
Amendment 61ADG would have the effect of removing a part of Schedule 10, which updates the section of the Insolvency Act 1986 which itself dealt with the process of interim receivership. Noble Lords will be aware that an interim receiver is appointed to protect assets where a bankruptcy petition has been presented and there is a real risk that assets could be lost before the petition is heard.
While the official receiver is acting as interim receiver, he or she is protected from liability where they dispose of an asset which subsequently turns out not to be part of the person’s estate, provided that when they did it they had good reason to believe that it was. Schedule 10 makes amendments to extend that protection to insolvency practitioners when they are appointed to that role. Amendment 61ADG would act to remove the protection for insolvency practitioners while leaving it in place for official receivers. I suspect that that was not the intention of the amendment.
Amendment 61WA would introduce a requirement into the Insolvency Act for the official receiver to notify creditors how they may go about removing and replacing them as trustee. I am grateful for the noble Lord’s probing amendment to government Amendment 61W, which my noble friend Lord Popat will introduce later on in this debate. However, I will just say that it is intended that these matters will be dealt with by guidance to official receivers, and I do not agree that we should introduce new regulation when we are trying to cut red tape. I hope that that explanation is helpful, and that on that basis the noble Lord will withdraw his amendment.
Lord Stevenson of Balmacara
In moving Amendment 61ZC, I shall also speak to Amendment 61ZD in my name and that of my noble friend Lord Mendelsohn. I have further information to share with those who follow my noble friend’s actions carefully. He is not in Gibraltar; Gibraltar is here and he is in a meeting not far away and hopes to join us later.
The Government’s aim in Clauses 119 and 120 is to increase creditor engagement by allowing the development of communications as technology improves. The clauses abolish the power of the officeholder to summon a physical creditor meeting in all types of insolvency procedures. Instead of these physical, face-to-face meetings, the insolvency practitioner will need to hold virtual meetings through other means, such as via the phone, over the internet or through written correspondence. The insolvency practitioner will be able to hold a physical creditor meeting only if it is requested by a required proportion of creditors—10% of the value of the creditors.
Our amendments would set a threshold for calling a physical meeting at 10% of the number as well as the value of the creditors. As this is a probing amendment, I am open to other suggestions. Indeed, the noble Lord, Lord Flight, has already suggested that a minimum of three could convene such a meeting. I understand that and would be interested to hear the Minister’s response to it. The amendments also seek to encourage the holding of meetings if there are no real cost savings. I cannot quite see the point of cutting creditors out if we are also trying to make sure that they have a part to play in the processes.
We fear that the net impact of the Government’s proposal will be that, rather than increasing creditor engagement, these clauses will reduce it. The Federation of Small Businesses believes that the proposal will be detrimental to small businesses and the BPF also has concerns. As we have touched on, creditor engagement is a core part of a strong, transparent, fair and trusted insolvency regime. By their very nature, insolvencies can be complicated and confusing for those who do not deal with them often. They can also be daunting and time-consuming for creditors.
We believe that creditors’ meetings are an essential part of creditor engagement, trust and confidence in the insolvency regime. At present, meetings are usually called at the very outset of an insolvency proceeding and periodically afterwards. The meetings achieve a number of important goals, 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 around the financial affairs of the debtor. Creditors will often be able to provide details to the IP of which they would otherwise have been unaware. The first meeting in a creditors’ voluntary liquidation, under both individual and company voluntary arrangements, also gives creditors the opportunity to question the directors of the insolvent company or the debtor himself or herself. This first meeting is a useful opportunity for creditors to participate in the process and is the most appropriate and convenient forum for agreeing the basis of the IP’s fees and establishing a creditors’ committee, should that still be permitted.
The drawbacks of alternative styles of meeting are clear. For example, a report published a few months ago by the Federation of Small Businesses revealed that some 45,000 small businesses do not have broadband and that thousands of others have very slow broadband speeds. In rural communities particularly, access to broadband can be very limited; so networks of information will not exist to allow such meetings to be held in the new virtual reality. Other areas, particularly outside London, have particular difficulties and it is therefore important to bear in mind that while the new virtual reality is coming, it may not have reached us all and, therefore, the Bill is sometimes in advance of where people are now. We are worried that this approach will reduce creditor engagement and, as a result, the amount of money that ends up in creditors’ pockets will be reduced. We are also worried that part of the process will be complicated. Our Amendment 61ZC ensures that there would be a more workable threshold whereby physical meetings can be staged, if required. I beg to move.
Lord Flight
My Lords, my nine amendments in this group also relate to creditor meetings. The Government’s aim, as I understand it, is to increase creditor engagement by allowing development of communications and new technology. The fear is that, in fact, the reverse will happen. The clause would abolish the power of the officeholder to summon a physical creditor meeting in order to act in insolvency procedures. Instead of those physical face-to-face meetings, the insolvency practitioner will need to hold virtual meetings through other means, such as on phones or the internet. The insolvency practitioner will be able to hold a physical creditor meeting if requested by a prescribed proportion of creditors—10% in their value.
The concerns are that rather than increasing creditor engagement the proposal will, as I say, serve to reduce it. The Federation of Small Businesses believes that the proposal will be detrimental to small business, and the British Property Federation also has concerns. The Government are concerned that creditor meetings are sometimes poorly attended. A 2013 report by Professor Kempson found that only 4% of creditors attend meetings. The report also showed that 86% of unsecured creditors, mostly small businesses, often or sometimes attend or vote by proxy at physical creditor meetings. It is these small businesses that will be harmed as a result of the proposal. Even where physical meetings are poorly attended, they still remain a vital tool for both the insolvency practitioner and creditors in getting all the facts, making important decisions and providing any information on the insolvent business or individual.
Insolvency practitioners should be encouraged to use new forms of media to hold meetings but all options should be available, including holding a physical meeting. The proposal should be dropped and Clauses 119 and 120 should not form part of the Bill. However, two possible compromise solutions could be considered. The first is to retain the requirement to call the first meeting, a proposal that would take into account the fact that the first meeting is the most important, where creditors are most likely to attend and important decisions taken. A further compromise could be that three creditors could call a physical meeting; this would be added to the existing proposal for a prescribed proportion of 10% of the value of creditors. Therefore, a physical meeting could be called by either three creditors or 10% of the value of creditors, whichever is smaller.
In December 2014, R3 surveyed its members on the proposals and found that 86% of insolvency practitioners believed that the proposals would reduce trust and transparency; 78% believed that the proposals would reduce creditor engagement; 87% agreed or agreed strongly that virtual creditors’ meetings were not suitable in all cases; 74% said that physical meetings were useful for finding things out that they did not know previously; 65% said that physical meetings were good for getting the views or input of a large number of people; 63% said that things go wrong with virtual meetings; and 48% would describe physical meetings as more useful than virtual meetings.
During the passage of the Bill through the Commons, the Opposition tabled an amendment in Committee to replace 10% of the value of creditors to allow a physical creditors’ meeting with just one creditor. The amendment was supported by the Federation of Small Businesses and the British Property Federation. It was passed, but was subsequently reversed on Report, so basically I think that I am still arguing the same case, and I would suggest that Clauses 119 and 120 should be deleted.
There are some additional amendments which I have included for consideration, while on 8 January the Government themselves tabled further amendments to Schedule 9. I have serious concerns about those amendments and propose that they should be amended further in order to avoid a potential hiatus, cost delays and confusion to the process of appointing a liquidator. As currently drafted, the proposal also throws up practical issues around the appointment of liquidators, who are currently appointed in Section 98 meetings at the start of the liquidation process. Those are physical meetings. If these issues are not dealt with, the liquidation procedure could be crippled and thus harm the interests of creditors. While the latest set of amendments recognises the unequivocal need for the appointment of the liquidator, the amendments do deal with what happens if the deemed consent procedure is overtaken by a creditor nomination or competing nominations. It must be necessary to allow reasonable time for creditors to engage, but the liquidation should not be unduly delayed.
There is obviously some tension between the two perfectly proper principles. The detail of the process is destined for the rules, but because the two principles are fundamental, I would submit that either the proposed process should be fully explained, or a virtual or physical meeting should be required. My Amendments 61UA and 61UB endeavour to address these points. The first is to ensure that the person nominated as the liquidator under the section takes office immediately and that the deemed consent procedure will not apply in these circumstances. This is because the procedure involves allowing a specified time to elapse for creditors to object before the decision is final. If this provision were to apply, it would mean that the period of time that the liquidation would be left in limbo to enable a liquidator to be confirmed in office would be taking place at a time when prompt action is essential to deal with the issues.
The second amendment would provide that the corporate representative is able to nominate a liquidator on behalf of the corporate creditor under Section 100. Corporate representation is dealt with under Section 434B of the Act. However, as modified by the Bill, that section would not allow a corporate representative to act for the purposes of nominating a liquidator under Section 100 because the amended section would allow such representation only for the purposes of a qualifying decision procedure or a meeting. As neither of these procedures would apply to the nomination of a liquidator under Section 100, special provision should be made to allow corporate representatives to act in these circumstances.
The issue of creditor meetings and the various points under it are the main substantial territory where the profession has particular concerns about the provisions of this Bill. It is particularly around creditor meetings and creditor arrangements that it would be helpful if the noble Baroness could have a very full discussion with the professional insolvency practitioner body.
Lord Flight
My Lords, I am grateful to the Minister for agreeing to reconsider the thresholds. I say simply that, rather like the AGM of a company, it is healthy to have a physical meeting. The danger of meetings merely on the telephone is that they do not get recorded accurately and the whole process does not get off to a good start. I am quite genuinely concerned that our excellent system of insolvency runs the risk of getting into trouble if you do not kick off with a creditors’ meeting each time.
Lord Stevenson of Balmacara
I thank all noble Lords who have spoken on this group. I think that together we have arrived at a conspectus view, which has persuaded the Minister that a little more thinking on this would be welcome. I am grateful to her for that.
I do not think that we are in any sense trying to be negative about what is being proposed. This is the future—we understand that. I just think that we are not quite there yet and that the sentiment from all sides is that we perhaps need to encourage people to do things in a more innovative way but not lose some of the values in the original proposals. If we can get somewhere along that line, I would be very grateful. I am also grateful to her for her comments about broadband. We are on the same side here and we want this to happen. She made the point herself: if she has to leave her wonderful kitchen in her rural farmhouse to find an internet café in order to participate in the wider world, something is not quite right yet in the Government’s plans.
Baroness Wheatcroft (Con)
My Lords, I speak in support of Amendment 61ADD, which would bring in these powers more quickly. The Graham review did a very thorough job and made its proposals, but surely a year is long enough to see whether the industry is going to take note of what was said and respond. As the noble Lord opposite said, there is no doubt that there have been some highly dubious pre-packs and, although I am sure that our insolvency practitioners are, indeed, the envy of the world, some may not be quite as worthy of envy, apart from in respect of the fees they charge. There is a need to deal with this issue more speedily.
I also have qualms about the definition of “connected persons”. I would be grateful if my noble friend the Minister would explore whether in a certain situation where a company borrows money from the bank and the bank then sells that debt to an organisation, which may eventually end up being part of a pre-pack that buys the business, that purchaser of debt should, indeed, be classed as a connected person. At present, they would not be connected persons. This was recommended by the Graham review, which wanted to keep things very narrowly defined and not bring in debt at all. However, I think there is sufficient evidence to suggest that this is at least worth investigating.
Lord Flight
My Lords, I think there is a consensus that pre-packs need to be cleaned up, as it were. However, it would be a great mistake to get rid of them and I will cite some figures in that respect in due course. I am less than comfortable with Clause 126 as it stands, which enables the Secretary of State to make regulations where approval is required for the sale of an asset to the connected parties, although it does not appear that that is the case now. I would be concerned if onerous obligations were put on an insolvency practitioner to obtain, say, creditor consent, which is likely to take significant time and could impact the deliverability of a transaction, and which would be in the interests of the creditors. Insolvency practitioners are meant to have the expertise and experience to make sound commercial decisions. My concern is that regulation is being put ahead of commercial needs.
In reference to what the noble Baroness has just said, the Graham review made some very sensible pre-pack pool proposals for reviewing and giving either the thumbs-up or the thumbs-down to pre-pack arrangements. I think that these are starting to be adopted and that is a very useful route to go down. As has been said, the current drafting of the clause goes beyond pre-packs and captures all connected party sales in all types of administration. For example, 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 business rescue culture would be undermined.
The Government’s aim is to provide great confidence to unsecured creditors and other affected stakeholders, and a pre-pack represents the best outcome to them. The clause provides the Government with a reserve power to prohibit not only pre-pack administration sales but sales to connected parties, as has been mentioned. The concerns about the clause as it stands relate to the unintended consequences of the wide manner in which it is drafted. The Government have confirmed that the clause is aimed at pre-packs, yet it captures all types of trading administrations, which could include a straightforward business sale. For example, there may be a case in which a company could be put into trading administration and no pre-pack deal is on the table; the administrator conducts open and wide marketing, and there are a number of bids to buy the company. The administrator could be prevented by the clause from selling the business to any of the workforce of the company, because they would be considered to be a connected party. This could mean that the good and best offers cannot be accepted by the administrator, and the creditors would lose out. Jobs would also be lost and the UK’s business rescue culture undermined.
I am certainly opposed to the risk of pre-packs being prohibited. The benefits of pre-packs were identified in the Graham review and previous research. Given the proposed areas of reform to pre-packs to boost transparency and confidence, the clause to ban pre-packs—that is the intention—is greatly mistaken.
The extent of pre-packs is often overstated. There are around 20,000 corporate insolvencies in the UK a year, about 3% of which—between 600 and 700—are pre-pack sales. Yet only a small percentage of all corporate insolvency pre-packs attract public scrutiny over a perceived lack of transparency, but this has obviously affected policymakers.
Pre-packs preserve jobs. In 92% of pre-pack cases, all the employees were transferred to the new company; whereas that happened in only 65% of business sales. Average returns to secure the creditors in pre-packs were 35%, compared with 33% in straightforward business sales. In addition, the Graham review found that pre-packs certainly have a place in the UK’s insolvency landscape, preserve jobs, bring benefits to the UK, and reform would be worth while. I am therefore uncomfortable with Clause 126, which goes too far, and there ought to be a less draconian way in which to tidy up the scope for abuse of pre-packs.
Lord Leigh of Hurley
My Lords, if we cast our minds back some five or six years, all the professions at that time forecast that we would be faced with an unprecedented level of receiverships, administrations and insolvencies. It is worth reflecting—I am sure we would all agree—on the success of the coalition’s long-term economic plan and that the number of administrations has been dramatically less than anticipated by every forecaster, in particular the insolvency profession, which geared itself up for many more administrations than proved to be the case. As my noble friend Lord Flight has said, pre-packs in fact make up around 3% of the total number, which is a small number in itself.
The other great improvement in that recession—to the extent that it was a recession—compared with the previous one has been the role of the banks and accountants. Last time around, banks appointed investigative accountants to look into businesses, but those accountancy firms were the same firms that were appointed as the administrators—and stayed as administrators for many months. In some instances, that lasted years and enormous fees were taken out of companies by the same firm that had been appointed by the bank to investigate whether a business was viable. So it is pleasing to see that the role of the administrator has changed.
The beauty of the pre-pack is that it is extremely quick. I agree with the noble Lord, Lord Mitchell, that it is wholly unacceptable where Smith and Jones turns into Jones and Smith and everyone loses out, except perhaps Smith and Jones or Jones and Smith. I also agree that one needs to focus on the bad pre-packs where it all seems to be a bit cosy and there is no form of review. I welcome the Graham report. Teresa Graham served with me on the council of the Institute of Chartered Accountants in England and Wales and I have spoken to her about her recommendations. I am apprehensive about some of them. I am not convinced that the pooling idea will work, and finding six people at short notice in certain difficult parts of the country to convene and form an opinion would be tricky. I would welcome a speedy assessment of whether her proposals need to be fine-tuned or amended.
I want particularly to say that I have seen pre-packs that have in practice been extremely helpful. I am thinking of where a retailer has ended up with a very large number of branches in areas that have changed, but because of the way UK property law is run, it is impossible to get out of onerous leases by doing it any way other than through a pre-pack. The pre-pack has led to a business being trimmed down and subsequently able to run successfully. In those instances, the only loss has been for the landlord who has a tenant with an inappropriate lease. I definitely would not want to throw out the good with the bad, but I agree that we need to focus on the bad and address how the Graham report recommendations will pan out much more quickly than perhaps is envisaged.