Small Business, Enterprise and Employment Bill

Lord Mitchell Excerpts

Wednesday 21st January 2015 Grand Committee

Moved by

[Lord Mitchell]

61ADA: Clause 125, page 103, line 40, after “(administration)” insert “, which relates to pre-pack administrations,”

[Lord Mitchell (Lab)]

My Lords, I will be dealing with this in place of my noble friends Lord Stevenson and Lord Mendelsohn. I will also address Amendments 61ADB, 61ADC, 61ADD and Clause 126 stand part. Pre-packs have become very much part of the discussions that we are having, and you read in the press about some of the activities that are occurring. The amendments that have already been made to the Bill help considerably but we want to raise some issues.

We want to look particularly at the whole area of bad pre-packs and some of the things that have been happening. At Second Reading I referred to the situation where on Friday afternoon the company is Smith & Jones and by Monday morning it is Jones & Smith; it is the same people running it, with many of the same directors and maybe even the same bank, but the poor old creditors and maybe HMRC and a few other people have just been dumped in the mean time. This is a process that we really have to address. It has become a fixed process where people make these arrangements so that if a company is failing it is possible just to push a button and get rid of all the nasty bits and continue with all the good bits as if nothing had happened. We all know examples of where this has occurred.

When you think about who loses in a pre-pack, it is the creditors most of all, but the creditors are themselves companies and have their own creditors, their own employees and everything associated with those companies. When a company goes down and creates a pre-pack, the trail of creditors and their own creditors that are then affected badly causes a lot of people to lose their jobs. When I hear people saying that pre-packs are a really good thing because they maintain employment and maintain the company, maybe they do—and there are lots of good examples—but there are also the creditors that have been left behind, including HMRC itself, which have to deal with the issue that they are no longer getting the money that is due to them. I may be wrong about this but I believe that if there are parties that have legal claims against companies that then go into a pre-pack, some of those die at that point as well. I am not so sure that that is a good thing either.

When you think about who gains from a pre-pack, first of all the lawyers gain—they always do—and the insolvency practitioners gain, as they always do. What I find hard, as a businessman who has set up lots of companies, is that the rules as I understand them—the rules of free enterprise and the capitalist system—are that if you put your money at risk and you invest in a company and you have shares and it does incredibly well, you benefit; but if it fails, you lose. To me, that is what capitalism is about. To have a situation with some of these pre-packs where the shareholders do not lose, they just come back in another guise, seems wrong. I want the Minister to reassure us that the Bill really offers protection.

Amendment 61ADA aims to clarify that the reforms are targeted solely at pre-packs. Clause 126 gives the Secretary of State a power to introduce regulations to address problems in relation to sales to connected parties in pre-packed administration. Following an inquiry by the BIS Select Committee and the Graham review into pre-packs, the Government intend to create a reserve power under Clause 126(4) that:

“The Secretary of State may by regulations make provision for … prohibiting, or … imposing requirements or conditions in relation to, the disposal, hiring out or sale of property of a company by the administrator to a connected person”,

unless there has been a third-party scrutiny of the proposed sale. This power expires at the end of the period of five years beginning with the day on which the provision comes into force unless it is exercised during that period.

Amendment 61ADB would remove the reserve power granted to the Secretary of State to prohibit pre-packs altogether. Given the sensitive nature of this subject and the potential negative impact on UK plc, we feel that, if such a move were ever to be taken, it should be subject to public scrutiny and debate in Parliament rather than simply being a reserve power for the Minister to execute.

Amendment 61ADC would ensure that new regulations made under the clause were targeted only at the bad pre-pack practice to which I have referred, which we all want to discourage, rather than applying more generally to all pre-packs.

Amendment 61ADD digs at the Government’s policy of waiting to see whether the voluntary system works and then legislating for powers. Our amendment asks for the relevant powers to be legislated for within a year of the passing of this Bill. I beg to move.

--- Later in debate ---

We believe that Clause 126 gives us the powers we need to improve insolvency procedures, as and when we need to. To respond to the question of the noble Lord, Lord Mitchell, I believe that, overall, this Bill and the other changes we are making will give us the protections we need. I hope, in the circumstances, that the noble Lord will feel able to withdraw his amendment.

[Lord Mitchell]

I thank the Minister for her reply. We all know what we want in this: to make it work, to make it fair, and to make sure that the bad practice is removed and that there are barriers to it. I thank the noble Baroness, Lady Wheatcroft. The word that stuck in my mind was about “dubious” practice, and we have to make sure that that is removed. I am also grateful for the contributions by the noble Lords, Lord Flight and Lord Leigh of Hurley.

I agree that we always have to be aware of the rule or curse of unintended consequences. I am sure that when the noble Baroness and her team take a look at what we have discussed today, they will come back on Report with all these points incorporated into the Bill—I hope. With that in mind, I beg leave to withdraw the amendment.

Amendment 61ADA withdrawn.