Enterprise Bill [HL]

Lord Leigh of Hurley Excerpts

Monday 2nd November 2015 Grand Committee

[Lord Hodgson of Astley Abbotts]

My Lords, I am very concerned about the pre-pack administration idea. I understand that it has a superficial appeal in terms of saving jobs but the reality is that jobs can also be lost among the creditors. The appearance is that jobs may have been saved but very often the creditors—the small businesses that are the suppliers of the company in pre-pack administration—can be out of work. They are below the water—the part of the iceberg that you do not see. The noble Lord said that creditors have a bad deal in a pre-pack. They do not have a bad deal; they have no deal at all. Not only do they have no deal at all but the pension obligations pass to the pension regulator, which in turn is passed on to other firms.

In my experience of pre-pack administration, the arrangements are, frankly, utterly superficial and exceptionally difficult to police in terms of whether or not a fair value is being achieved for the assets that are being sold. I am not clear yet that we have got to the bottom of what I call repetitive pre-packs, in that directors and managers who are not very good businessmen go through the pre-pack arrangements at reasonably frequent intervals. I hope that this is something that the Small Business Commissioner might be able to think about because I think he will have some role to play here and we did not pick up on this point when we were discussing that part of the Bill.

I have not seen the new proposals that have been produced today but I think that the issue that the noble Lord has raised in Amendment 52ZA is something that we need to consider very carefully. I have a couple of questions for him about his amendments. Amendment 52ZA(a) states that,

“the owners of the company must approach the company’s investors for approval prior to entering any pre-pack proceedings”.

What is the difference between an owner and an investor? The investors own the company. I am not quite clear what the distinction is. I may be missing the point about what the distinction is between those two categories in terms of what the noble Lord is seeking to achieve, but I understand the force of some of the other points he is making in Amendment 52ZA(b), (c) and (d), and I think they are of interest.

Under Amendment 52ZD, which concerns the “debtor in possession”, one issue is how the company continues to trade in the circumstances, because it has to take on new obligations. One of the things most feared by company directors, and quite rightly, is trading while insolvent. Therefore, will Amendment 52ZD give directors protection because as you approach the edge of the company’s solvency, your lawyers, advisers and accountants will say, “If you cannot prove that you had thought that you could make good and pay the creditors as they fall due, you are committing a criminal offence and the law takes a very serious view of that”? Perhaps the noble Lord could explain a bit more in a minute as to how that protection is going to be provided under Amendment 52ZD and, in particular, where the company is expected to continue, how security is going to be given to suppliers working for the company and providing further services or goods for which they may or may not get paid at some date in future.

However, there is a central point in Amendment 52ZA. Notwithstanding what may have been proposed today under the new regulations, we have been slightly seduced by the attraction of pre-packs. I think that the hidden damage that they do to a lot of suppliers and smaller companies is something that we have tended to overlook. The noble Lord made an interesting point in the amendment, but there are some issues to be clarified.

[Lord Leigh of Hurley (Con)]

I rise to talk about this clause, which comes at a strange place in the Bill. We did actually discuss much of this in the Small Business, Enterprise and Employment Bill, and I made the probably too political point then that we have not seen much of insolvencies recently, but that does not mean that we will not—we will, because the cycle will turn round and there will be more insolvencies. So now is a good time to think about how to avoid some of the mistakes that were made last time round.

I had not realised that this report had been published today. I think it might be the Teresa Graham report. Teresa Graham has come up with some extremely helpful ideas, which we discussed during the Small Business, Enterprise and Employment Bill. The best ideas included having a panel appointed to approve any pre-pack and that panel comprising people either of the R3 Group or the Turnaround Management Association or some such other organisation. I think there is a need for a panel. The other suggestion was that a review needs to be undertaken by an independent third party to assess the viability of any business going through a pre-pack.

I think there are not that many pre-packs in number, but they can be extremely helpful. I declare an interest as I am on the board of a retailer—not that my business has done this. For many retailers, they are particularly helpful because of the peculiar nature of UK property law, which is that people get stuck in these long-term contracts under different conditions and the only way they can get out of these contracts is to use a pre-pack. Therefore, they have a purpose and they have a role.

If I can help, because I shared the confusion of my noble friend Lord Hodgson, I think what is meant in Amendment 52ZA by “the owners” is the majority owners, the shareholders, who must approach the minority investors. In the absence of the noble Lord, Lord Mendelsohn—if I can read his mind—that clearly makes sense but, of course, it is going to be extremely difficult where public companies go through a pre-pack, which does happen, for them to contact all the investors. In paragraph (b), where it says,

“any personnel advising on pre-pack proceedings”,

I am not sure whether that is meant to include accountancy firms, and whether personnel means internal or external. I have argued for many years that there should be much greater investigation into the role of accountancy firms in insolvency situations. They are often called in by the banks to investigate a company, but they have an incentive for their report to recommend an insolvency procedure because they are immediately subsequently appointed as the administrator, receiver or liquidator. I can see the economic argument for and benefit of that, but I have also seen instances where, frankly, the accountancy firm concerned has just pushed a perfectly good company into administration and extracted millions of pounds of fees—I do not exaggerate—through that insolvency procedure.

These amendments are welcome to the extent that they raise these questions. There is a particular problem with the interaction between current insolvency legislation and the current employment legislation, which leads to the sort of situation discussed earlier. There needs to be a much more holistic approach to both employment and insolvency law because people in such circumstances are often under extreme pressure of all sorts. It is difficult for them to clarify their legal position at extreme speed. We must try to find a way to assist people.

I particularly welcome and am interested in Amendment 52ZD, which seems to have its roots in Chapter 11. That is a proposal that merits further discussion and reflection, perhaps on another Bill at another time, but it is good to see it raised in a Bill that has the title “Enterprise”.