Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) (No. 2) Regulations 2020

Lord Sikka Excerpts

Tuesday 19th January 2021 Grand Committee

[Lord Sikka (Lab) [V]]

My Lords, I thank the noble Lord, Lord Callanan, for his speech. I am certain that there is widespread support for extending the duration of temporary measures to protect businesses from insolvency proceedings during this Covid emergency. However, these measures cannot be extended indefinitely and businesses face the prospect of a cliff edge, leading to a flood of insolvencies, job losses and damage to the supply chain. When the temporary prohibition on issuing statutory demands and winding-up petitions ends, many businesses will face pressure to pay creditors. Failure to pay will lead inevitably to further insolvencies.

The Government need to bring forward plans for long-term financial support to help businesses to navigate the post-Covid era. Many small businesses are particularly affected; the Federation of Small Businesses estimates that 250,000 SMEs are at risk. They cannot easily get trade credit insurance and will also be hard hit by the bankruptcy of their major corporate customers.

As part of the support for businesses, the Government also need to reform insolvency laws. These enable secured creditors, usually financial institutions, to walk away with most of the proceeds from the sale of a bankrupt business’s assets and leave very little for unsecured creditors. Such arrangements ensure that the risks of insolvency are not equitably shared between secured and unsecured creditors. There is no economic or moral justification for this. Banks and financial institutions hold diversified portfolios and therefore have a greater capacity to manage risks. In contrast, SMEs rely on comparatively fewer customers and have a much lower capacity to absorb risks arising from the bankruptcy of their major customers. A risk management perspective would recommend changes in insolvency laws.

Before Covid, unsecured creditors were taking a hit of around £4 billion a year and that is now bound to increase. This can be mitigated by reforming the risk-sharing arrangements. I would suggest that 30% to 40% of the proceeds from the sale of a bankrupt business’s assets should be ring-fenced for distribution to unsecured creditors, thus ensuring that they make a substantial recovery which would enable them to survive.

We also need to look at the current regulatory arrangements for the world of insolvency. Too many insolvencies last far too long and enable insolvency practitioners to milk the liquidations. Higher fees for insolvency practitioners would reduce the amounts that are available to unsecured creditors.

On 27 October, in response to a Written Question, I was told that there are 14,328 liquidations of businesses that began 15 years ago but are still not completed. None of the insolvency regulators show any concern for such a state of affairs. Meanwhile, insolvency practitioners continue to collect mega fees. Here are some examples. For Comet’s liquidation, Deloitte was charging out its partners at a rate of £1,160 an hour, and the cheapest grade of labour was charged out at £370 an hour. PricewaterhouseCoopers is a special manager assisting the official receiver in the liquidation of Carillion. It expects to make £100 million from fees, and the partners are being charged out at a rate of £1,156 an hour. At the House of Fraser administration, Ernst & Young is charging out its partners at a rate of £1,650 an hour, and the trainees are being charged out at £250 an hour. KPMG has recently been appointed administrator to Intu Properties, and its partners are being charged out at £920 an hour. Such charges harm the interests of unsecured creditors. The Government must really take steps to end this abuse.

To sum up, can the Government provide long-term plans to support businesses in the period after the end of the current temporary measures? I hope the Minister agrees that the unsecured creditors deserve a better deal. This can be done by ring-fencing some of the proceeds from the sale of the bankrupt businesses and by ending the excessive fees charged by insolvency practitioners.