Enterprise Bill

[back to previous text]

Mr. Waterson: We are all agog at this important seminar, from which I am certainly benefiting, as I think is everyone. Does my hon. Friend agree that some Labour Members may have been unaware of the potential impact of the changes on employment? They may not have known that, as he suggests, there may be more of an impetus to get rid of employees of a company, rather than to make a go of it.

Mr. Djanogly: I thank my hon. Friend for clarifying the matter. That is exactly the point that I am coming to. By moving the impetus from continuation of the business towards keeping the company going under administration, the business could suffer as the value falls. As we know, most companies in administration go into liquidation anyway. The prospect of loss of jobs would become much greater. That is a great concern about the provisions. When insolvent, the value of a company will be its goodwill, but goodwill and job security will dissolve much quicker. That is why a speedy sale of the business through administrative receivership is often preferable to dragging the process out through administration, which could make matters much worse, as my hon. Friend said.

In certain circumstances, administration does give the company, and therefore possibly its employees, a greater chance of survival. However, that is at the risk of producing much less value to creditors if things do not go well, and if things do not go well, jobs are lost anyway. As administrations tend to end up in liquidation, that is serious. Returns to creditors are affected not only by the falling value of the company. The ongoing large costs of using insolvency practitioners are inevitably larger in administration, as is clear from the costs involved in the Railtrack administration.

I have been taking a straightforward line. The reality of putting the comparative systems into practice, insolvency practitioners tell me, is a lot more subtle and complicated. Administrative receivership is portrayed in the Bill as a practice that does not give everybody as fair a say in an insolvency process as in administration. In fact, since the last recession, receivership has been used increasingly sparingly by the banks. They do not generally use it as a quick way to dissolve companies—the slash and burn style that was prevalent in the 1980s. Now they use it much more as a lever to encourage insolvent companies to get round the table and enter into a debt arrangement—for example, a company voluntary arrangement. That is the best way to ensure the survival of the business.

The removal of administrative receivership will take away such leverage and, in effect, force companies to go down the administration route. It is important to

Column Number: 544

appreciate that that is a court process which, in most cases, will be unlikely to improve on decisions that are normally taken by right-thinking people who have a good idea of what is happening to a company on a day-to-day basis. I am informed by one insolvency adviser that, in the court process, judges rarely, if ever, review the insolvency accounts, because they are not accountants. In most cases, they take a view on what the insolvency practitioner puts in front of them. That often means that companies are able to run on, with fees going to the insolvency practitioners. The point is important because it is in the personal interest, although not the statutory interest, of insolvency practitioners that administration continues for as long as possible. That is how they earn their fees. That will happen increasingly when liquidation is the most appropriate route.

Another insolvency adviser describes the proposals as receivership by another means. That is because, importantly, floating charges will not be abolished by the legislation. Many in the insolvency world who did not see how the Bill was evolving did not realise that, but it is the case. The proposals might allow unsecured creditors a bit more of a say, but how will that help when the bank has all the votes? It is rather like sitting on the Conservative Benches in this Committee. Unsecured creditors will not receive any more money at the end of the day, but everybody will incur more costs through the administration procedure. There lies one of the big gaps in the provisions. We had a great chance to address the problem of excessive costs in the system, and we have not done so.

There is a major problem getting banks to lend to start-up and small businesses. That was no doubt in the Government's thinking when they made the proposals. Having looked at them carefully and spoken to many insolvency practitioners about how they work, I fear that they could make the problem worse rather than better, because in the absence of administrative receivership, banks might become less willing to lend to small companies without increased assets cover from which they can take their fixed charges. When they decide to lend, the interest could be higher because the risk is greater. In addition, a much greater use of personal guarantees is likely, which will hardly encourage the enterprise culture. I have concerns not only about the workings of the administration process vis-a-vis the administrative receivership process, but about the wider impact that the provisions might have on enterprise.

Mr. Mark Field (Cities of London and Westminster): I shall speak briefly because my hon. Friend the Member for Huntingdon (Mr. Djanogly) has covered many points. Clearly, we shall discuss some of the Government's intentions during the next four sittings.

Mr. Alistair Carmichael (Orkney and Shetland): Four sittings?

Mr. Field: Only four sittings, I hasten to add.

Conservative Members support the underlying efforts to rationalise insolvency law. I confess to having been one of the legal fraternity, as I was a junior

Column Number: 545

lawyer in the early 1990s and was involved in several corporate restructurings. We often wished that we could have a chapter 11-type situation. That debate has continued and will no doubt be discussed more specifically.

I have two key concerns. My hon. Friend made the point that secured creditors will no longer have the same rights and that the real risk, especially for smaller companies, is that there will not be the same through-flow of money. There is great difficulty in this country in giving seedcorn capital to small companies. Taking the equity route is often impossible because venture capital outfits are not well suited to providing relatively small amounts of money, such as a few hundred thousand pounds. Debt, therefore, remains the main way in which such companies are funded in order to set up and to maintain operations in their first year or two of business.

I can understand the thinking behind the Government measure, but it has unintended consequences. A big difficulty is that, if there is no longer an opportunity for secured creditors to have a preference, companies may be starved of cash. As my hon. Friend pointed out, the other option is for individuals who are directors of such companies to act as personal guarantors, although that is also likely to create difficulties, especially for small start-up businesses.

I have recently been impressed by how many relatively young people—people in their 20s—are setting up businesses on their own. People of that age generally do not have assets, although they may have wealthy parents who could be personal guarantors—but that is less than ideal. The possibility that the banking sector is to be starved of money is clearly of great concern.

Mr. Tony McWalter (Hemel Hempstead): Does the hon. Gentleman agree that the abolition of Crown preference has the effect of introducing a significant source of new moneys into the system, which will make it more attractive for banks and others to undertake investment?

Mr. Field: I should tell the Committee that I had not briefed the hon. Gentleman, because I was about to make that point.

There is another unintended consequence of the abolition of Crown prerogative—

Mr. Waterson: Preference.

Mr. Field: Preference. If only we could get rid of Crown prerogative, how easy life would be.

In relation to Crown preference, the Government have given headline figures along the lines of £70 million. Many small companies have felt the claws of the Inland Revenue and Customs and Excise at their backs when going through financial difficulties. I should point out to the hon. Member for Hemel Hempstead (Mr. McWalter) that there is an unintended consequence even in this regard. Local Inland Revenue departments, if not Customs and

Column Number: 546

Excise, have been more amenable to smaller companies in letting them pay over a period of time and in making allowances for the cash-flow problems to which they may be subject. The real danger of abolishing Crown preference lies in that relationship with the Inland Revenue.

The affairs of many small companies will be dealt with by relatively junior members of staff who will feel that they need to perform and will find themselves criticised if many of the companies under their ward go under owing large debts to the Crown. The risk in lifting Crown preference is that, instead of having a strong relationship with the Inland Revenue so that during a certain period money need not be paid in order to assist and facilitate cash flow, such companies may go under more quickly. The Crown will realise that it has a once and for all chance of getting hold of its moneys and that if it does not do so immediately and waits for a few more months, allowing the money to go on tick, the company will go under. Thought needs to be given to that.

I would like to think that, in principle, at least in relation to corporate insolvency, we on the Conservative Benches support much in the legislation. However, as is so often the case, the devil will be in the detail. I point out to the hon. Member for Orkney and Shetland (Mr. Carmichael) that that is one of the reasons why we will spend the next 10 hours teasing out aspects of that detail.

10 am

Previous Contents Continue

House of Commons home page Parliament home page House of Lords home page search page enquiries ordering index

©Parliamentary copyright 2002
Prepared 9 May 2002