Small Business, Enterprise and Employment Bill

Lord Leigh of Hurley Excerpts

Wednesday 21st January 2015 Grand Committee

I have heard what has been said and, if I may, I will take this amendment away and consider it urgently with colleagues in the Ministry of Justice in time for Report stage. I hope that my noble friend will take some reassurance from that and feel able to withdraw his amendment and his opposition to the clauses.

[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.

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[Lord Leigh of Hurley]

I rise to support my noble friend Lord Flight—I do not want to get into the habit but in this instance I do. I, too, pay tribute to R3—I hope my noble friend the Minister is not feeling left out here. I have also had a chance to speak to the people from R3 and meet them. I have known them for many years because when I was chairman of the corporate finance faculty of the Institute of Chartered Accountants in England and Wales, R3 was set up and I have remained in touch with it. R3 does a good job, as had been said around the Room. The insolvency profession in the UK is the envy of the world and R3 has helpfully given us some information to prove it.

All that having been said, there are instances of insolvency practitioners charging frankly eye-watering fees, in some famous instances greater than the sums they have returned to creditors, and in some instances there have been suggestions that they have stopped at the point where no more fees could be taken out of the company concerned. For this reason, more perhaps than many other reasons, I feel it is helpful to encourage creditors to meet. Creditors in these circumstances will include people who are in fact investors in a company, through mezzanine debt or something like that, and have a vested interest. As I confessed earlier on, I have been in such rooms. It is useful to see and meet fellow creditors because a dialogue will then exist between creditors outside the liquidator’s fees, and plans and actions take place. Often in such circumstances, there is, for example, potential litigation—which was discussed in earlier clauses—that might take place against a bank, perhaps, or even against a director, so meeting other creditors in the same environment is very helpful.

The suggestion that 10% of creditors should be required to call a physical meeting does not sound onerous but it could build delays into the insolvency process and increase costs. Attention has been drawn to a recent insolvency, that of a wedding gift website. In that instance, 10% of the value of the creditors was equivalent to hundreds of individuals. In the case of small businesses where debts are typically low, in value terms, it would take a large number of creditors to get to the 10% threshold. For these reasons, I support the amendment.

[Lord Cope of Berkeley (Con)]

My Lords, I, too, am sympathetic to a lot of what my noble friend Lord Flight said and what the Federation of Small Businesses and others have represented to us all, or to many of us anyway.

I am particularly concerned about the position of trade creditors who find themselves involved in a liquidation, a bankruptcy or whatever. What matters to them is not 10% of the total amount owed by the company; it is the percentage of their own turnover that matters. What can be quite a small sum in the bankruptcy as a whole may be a very large sum relative to the business of the trade creditor. At the same time, I understand that in some respects the system of meetings we currently have is a rather Victorian process, carried forward. I encourage the Government to consider looking for ways in which the process can be streamlined and brought up to date.

I want to make a quite separate point which is just about relevant to this point in the Bill. It is that once we have finished with this Bill and it becomes a law, the Insolvency Act 1986 seriously needs consolidation. When we get to the stage where sections such as 246ZF and a whole lot of others will be littering the Insolvency Act and a whole lot more as a result of this Bill—quite apart from other amendments that have been made or may be made to it—it will be a terrible muddle. I realise that the legal publishers will straighten it all out for us to some extent in their consolidated publications on legislation, but the Act seriously needs consolidation. Once all this is over, I hope the Minister will urge that on the department and get the process to move, because we all know that it is a very slow process.

Part of my interest in this is that the trade creditors need to have an idea of what is going on. If they look at the Act and discover it littered with sections such as 246ZF and so on, it will be even more difficult for them to do so. As others have said throughout the debate, it is important that there is transparency. Understanding of what is going on needs to be possible, even for those who are not doing it all the time. Of course, the creditors will have guidance from the insolvency practitioners, and I share the view of them that has been expressed. I have much less experience than my noble friend Lord Leigh; I, too, am a member of the Institute of Chartered Accountants, though by no means as distinguished a one as he, but I do share that view.

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[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.

[Baroness Neville-Rolfe]

My Lords, it is good that Gibraltar has ensured that we can enjoy the experience and comments of the noble Lord, Lord Mitchell, today. Perhaps I may start by dealing with his point about Smith and Jones—or Popat and Neville-Rolfe becoming Neville-Rolfe and Popat on a Monday morning. I think that the answer I am about to give him shows the fine judgments here. As my noble friend Lord Flight said in his last intervention, pre-packs are speedy and can be helpful. The noble Lord, Lord Mitchell, will know that an insolvency practitioner has a duty to sell the business for the best price possible, and if in the example Jones and Smith are making the best—or, as sometimes happens, the only—offer, then the best outcome may be for a sale to the existing management. Jobs can be saved and business can continue as a result. However, I have listened to what he said about pre-packs, and what we are all trying to do is get this important provision right.

Clause 126 creates a power for the Secretary of State to legislate to restrict sales to connected parties of businesses or assets of insolvent companies by administrators. A sale to a connected party is where the insolvent business is sold to a purchaser previously involved with the insolvent business. The most common form of connection is where someone is a director of both the insolvent and the purchasing businesses. A pre-pack occurs where the sale of the viable parts of an insolvent company’s business is arranged before the administration starts. The sale is then executed at, or shortly after, the appointment of an administrator. Perhaps I may respond to a point made, I think, by the noble Lord, Lord Mitchell, about the application of the clause. The clause in fact goes further than pre-packs, as I am sure he is aware. That is because, unfortunately, bad practice is not unique to pre-packing. It also applies to any sale in administration where creditors are not given a chance to hold a meeting to discuss and approve the sale.