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Session 2007 - 08
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European Standing Committee Debates

Insolvency and Second Chances



The Committee consisted of the following Members:

Chairman: Mr. Martyn Jones
Bailey, Mr. Adrian (West Bromwich, West) (Lab/Co-op)
Baron, Mr. John (Billericay) (Con)
Burt, Lorely (Solihull) (LD)
Clappison, Mr. James (Hertsmere) (Con)
Clarke, Mr. Tom (Coatbridge, Chryston and Bellshill) (Lab)
Cunningham, Tony (Workington) (Lab)
Djanogly, Mr. Jonathan (Huntingdon) (Con)
Donohoe, Mr. Brian H. (Central Ayrshire) (Lab)
Jenkins, Mr. Brian (Tamworth) (Lab)
Key, Robert (Salisbury) (Con)
McFadden, Mr. Pat (Minister for Employment Relations and Postal Affairs)
Sheridan, Jim (Paisley and Renfrewshire, North) (Lab)
Teather, Sarah (Brent, East) (LD)
Hannah Weston, Committee Clerk
† attended the Committee

European Committee

Tuesday 25 March 2008

[Mr. Martyn Jones in the Chair]

Insolvency and Second Chances

4.30 pm
The Chairman: Does a member of the European Scrutiny Committee wish to make a brief explanatory statement about the decision to refer the relevant documents to this Committee?
Mr. Adrian Bailey (West Bromwich, West) (Lab/Co-op): It is a pleasure to serve under your chairmanship, Mr. Jones. This is my debut in a European Standing Committee and as a representative of the European Scrutiny Committee, so I crave the Committee’s indulgence, although I hope that I shall not need it. I would like to take a few moments to help the Committee by explaining the background to the document and the reasons the Scrutiny Committee recommended it for debate.
The Commission emphasises the importance of entrepreneurs and small and medium-sized businesses to the achievement of the Lisbon strategy for growth and jobs. About half of all new businesses fail within five years, and we must recognise that business failure is a characteristic of a market economy. However, insolvency can carry a stigma and penalties that might be undeserved and disproportionate. The Commission believes that useful lessons can be learnt from the failure of one business and applied to the success of a second venture.
The purpose of the Commission’s communication is to outline ways of encouraging a more positive attitude to entrepreneurship, of reducing the stigma of failure, and of encouraging restarts. That is to be done, first, through education programmes and information campaigns; secondly, through reforming member states’ insolvency laws in order to, for example, distinguish between fraudulent and non-fraudulent bankrupts and reduce restrictions on bankrupts; thirdly, through helping entrepreneurs to avoid insolvency and rescuing viable businesses from failure; and, fourthly, through helping entrepreneurs to start and make a success of a second venture.
The communication compares the actions that member states have taken already to reform their systems and laws and to provide help. The UK has been shown to have done more than any other country; however, about half the member states have not done anything, and none have a comprehensive strategy for a second chance policy. The Commission says that it will continue to support member states’ efforts by disseminating information about best practice and providing material to promote a better image of business failure.
In that context, last November the Government told the European Scrutiny Committee that they supported the communication’s aim of encouraging people whose businesses have failed through no fault of their own to try again. However, they believed that member states should also ensure that entrepreneurs understand their responsibilities and take them seriously. Although the laws on insolvency in the constituent parts of the UK have been modernised, the Government do not promote the message that it is reasonable to fail in business.
The Scrutiny Committee shared the Commission’s view of the importance of creating a favourable climate for entrepreneurs and the start-up of new businesses. However, it seemed to the Committee that the communication raises questions that call for debate. First, is the distinction between “honest” and “dishonest” bankrupts as clear as the Commission appears to believe? Secondly, how is the balance to be struck between encouraging entrepreneurs to start a new business after the insolvency of the first enterprise and protecting the interests of those dealing with the new venture as customers, suppliers and creditors? Finally, how appropriate is it for the Commission to be involved in the development of member states’ laws and policies in this area? I look forward to the Committee’s debate on those questions.
4.35 pm
The Minister for Employment Relations and Postal Affairs (Mr. Pat McFadden): May I, too, welcome you to the Chair, Mr. Jones?
The motion relates to the European Commission communication, “Overcoming the stigma of business failure—for a second chance policy”. The subject is important because, as my hon. Friend the Member for West Bromwich, West said, it deals with an issue at the heart of any market economy. Risk is an inevitable part of business, and a risk-free society is neither desirable nor attainable. Although we always hope for success, we must allow for failure.
The document deals with key questions. For example, what can we do to prevent failure? When it occurs, do we have the right legal framework in place? Does that framework balance the interests of debtors and creditors, distinguish between fraudulent and non-fraudulent insolvency, and, in the latter case, offer a second chance within a reasonable time frame? The outcome that we seek is a regime that protects the public but allows people who fail through no fault of their own a chance to start again. Some of our most successful entrepreneurs have experienced failure at some point in their lives. Failure should not stop such people from starting again—indeed, some would argue that their failures taught them lessons that served them well later in their business careers.
A key aspect to having the right framework for enterprise is a strong economy, which the UK has enjoyed in recent years. Indeed, the World Bank’s 2008 “Doing Business” report ranks the UK sixth in the world for ease of doing business, and second in Europe, behind Denmark. Today’s newspapers also carry reports of a survey carried out by Jane’s C ountry R isk, which puts the UK seventh in the world in terms of stability and prosperity. For those who are interested, the Vatican came top.
So how does the UK score? The document provides a league table of measures being taken by member states to meet these objectives. The table shows that the UK leads the way and that many of the proposals discussed in the document are already in operation here. One or two countries may have promised more, but when it comes to legislation being in place, the UK comes at the top of the list.
Let us look at the specifics. UK insolvency law has long recognised the need to balance the interests of the debtor and his creditors. The key piece of legislation in that regard is the Enterprise Act 2002, which made several changes. It abolished the Crown’s preferential status in bankruptcies and corporate insolvencies, and, in regard to corporate entities, it restricted the right of secured creditors to use the procedure of administrative receivership, which did not place a high priority on the interests of unsecured creditors.
The Act simplified and widened access to the administration procedure, which takes account of the interests of all the creditors involved in proceedings. When a company is in administration, it is placed under the control of a licensed insolvency practitioner and is under the protection of the court. There is a hierarchy of objectives, the first of which is to rescue the company as a going concern. If that cannot be achieved, the objective is to achieve a better result for the creditors as a whole than would be likely if the company were wound up without first being in administration. If the administrator thinks that neither of those objectives is reasonably practicable, the final objective is to realise property and assets in order to make a distribution to secured or preferential creditors.
Regarding fraudulent entrepreneurs, although our previous company law had measures to deal with misconduct, those provisions were not wholly effective and sometimes were not widely used. On that point, there are two Acts to consider. The first is the Company Directors Disqualification Act 1986, which applied to those who were involved in corporate entities. It provided that a person’s culpable conduct in running a corporate business enterprise should be addressed by the court; if the court found the conduct to be culpable, it had the power to ban a person from being involved with a corporate entity for up to 15 years. However, because there were no similar proceedings to deal with individuals trading under their own name, the Enterprise Act 2002 introduced bankruptcy restriction orders, which established a similar regime to director disqualification. Now, therefore, we have similar restrictions covering both corporate entities and those trading under their own name.
We agree that identifying and tackling dishonest conduct is only part of ensuring an effective insolvency regime. If a person’s conduct has been irresponsible, reckless or dishonest, that information should be in the public domain. There has always been a register of disqualified directors, and it has been available online for several years. We also provide an online database of persons who are subject to a bankruptcy restrictions order. Both of those registers are regularly used by the public.
With regard to individuals who become bankrupt, the Enterprise Act 2002 also dealt with obtaining early release from debts, to which the Commission’s document refers. Prior to that Act, discharge normally occurred two or three years after the bankruptcy order was made. That period was reduced to one year, or even less in some cases, with the specific intention of reducing, but not removing, the fear of failure, so as to provide a climate to encourage risk taking and to stimulate enterprise, while of course maintaining the message that people should be mindful of the risks that they are taking.
On reduced prohibitions, before the Enterprise Act 2002 was passed, a person who went bankrupt was also subject to disqualification from acting in some professions and holding some public offices. The 2002 Act contributed to reducing the fear of failure by amending some high-profile disqualifications affecting individuals who were subject to bankruptcy proceedings. I am sure that all hon. Members will be relieved to hear that, for example, the 2002 Act replaced the ban on a bankrupt from acting as a Member of Parliament to a ban only where the Member of Parliament was subject to a bankruptcy restrictions order, making a distinction between fraudulent bankruptcy and bankruptcy through no fault of the person’s own. A similar change was also made to the bankruptcy disqualification with regard to local authority councillors.
We have made provision for simpler legal proceedings for corporate entities. I have already mentioned the administration regime, with its hierarchical objectives. That has been in effect since September 2003. At the same time, the legislation streamlined administration by creating entry routes that do not require a court order and it introduced simpler and defined means of exit. In addition, the legislation requires administrators to perform their functions as quickly and efficiently as possible. The time limits were reduced generally and an overall time limit of one year was introduced.
The document also talks about creating an entrepreneurial culture. Enterprise is certainly a talent that we admire in individuals and applaud in companies; it is also a vital attribute of nations. I have mentioned the World Bank survey, which puts us in a good position, but we certainly do not want to rest on our laurels. That is why the Government recently published a new enterprise strategy with the Budget, which builds on our entrepreneurial culture still further. Among its specific measures are those relating to women-led start-ups; a national enterprise academy led by Peter Jones; and provisions on mentoring activity, concentrated in regional development agencies.
My final point is about business advice, which, particularly for small businesses, is important to their financial contribution, product development, new job creation and so on. The Government are keen that more people should think seriously about starting a business, but to minimise failure, it is equally important that they get the right access to quality help and advice. A range of information and advice is available, including on risk management, principally through the Government’s website, Business Link; businesses can also obtain offline help through the Business Link service. Similar help is provided in Wales, Scotland and Northern Ireland. There are high levels of customer satisfaction with the service: some 95 per cent. of people who used it said that they would recommend it to others.
To summarise, we actively encourage entrepreneurs by continually assessing and achieving the right balance between a failed entrepreneur and his creditors. I welcome the Commission’s focus on that area, which is where the UK is active, and where, I believe, we have a good story to tell.
The Chairman: We now have until half-past 5 for brief questions to the Minister. Hon. Members can, in fact, have a series of questions at my discretion, but they should try to keep them as brief as possible so that others can get in.
Mr. Jonathan Djanogly (Huntingdon) (Con): On the basis that questions are to be grouped and this is a broad area, there are five groups to which I should like to speak: bankruptcy, business support, administration, global issues and European initiatives.
On bankruptcy, why has the number of debtor bankruptcy petitions filed increased from 9,636 in 1997 to 52,717 in 2006? Does the Minister have last year’s figures?
Mr. McFadden: There has been a general increase. One could speculate about the reasons why, but I should not like to do that too much. There was a levelling off, I think, in the most recent figures, and but I do not want to predict the future figures, particularly with what is happening externally with the tightening of credit and so on. It may be that in a low inflation economy, people have been more willing to take risks, but it would not be too wise of me to speculate about the reasons. The hon. Gentleman is right, however, that there has been an increase in bankruptcies in recent years. Despite that, we have a healthy economy overall, and through some of the measures that I have mentioned, we will continue to foster entrepreneurial activity and risk taking in that area.
Mr. Djanogly: I may conjecture why in my later remarks, but for now I shall move on with the questions. How can the Government show that the Enterprise Act 2002 provisions for reducing a period for honest personal bankruptcy to a maximum of 12 months have encouraged enterprise?
Mr. McFadden: We did that precisely for one of the reasons in the Commission’s report: to try to recognise the difference between fraudulent or dishonest bankruptcy, and bankruptcy that is of no fault of the person in those circumstances. Restrictions can apply for up to 15 years, and we felt that it was right to reduce the period to one year so that after that period someone would have a chance to start again. It stands to reason that the provision increases the chances of someone starting again when compared with the previous period of two or three years, precisely because before the 2002 Act came into force, the restrictions would have been in place longer.
Mr. Djanogly: I shall stick with the question of honest and dishonest bankruptcy, because the ESC was keen to examine it. Can the Minister say how many dishonest, reckless or culpable bankrupts have had bankruptcy orders of more than 12 months, three years or 15 years?
Mr. McFadden: No, I cannot. I shall write to the hon. Gentleman.
Mr. Djanogly: Finally on the question of bankruptcy, is it the case that the Government’s proposals to abolish compulsory advertising of bankruptcy will make it easier for someone to go bankrupt because of consumer debt and non-repayment but will do little to help business? Is that not irresponsible, given the huge levels of consumer credit in this country?
Mr. McFadden: I said that information should be available to people if they want to find out who has been subject to procedures and I set out how that regime operated. It is important that such information is available. Again, in doing that we should distinguish between honest and dishonest bankruptcy. The important point is that the Commission’s document shows that most people when asked, “Do you believe someone should have a second chance?”, will say yes; but when asked, “Would you be confident doing business with someone who had previously been involved in insolvency?”, confidence levels are much lower. That is one of the challenges to be met when creating an environment in which people who get into business difficulties through no fault of their own can have a second chance.
Mr. James Clappison (Hertsmere) (Con): As a member of the European Scrutiny Committee, I ask the Minister answer the third of three questions posed by that Committee, because he did not mention it in his thoughtful, detailed remarks. How far is it appropriate for the Commission to be involved in the development of member states’ laws and policies on this subject?
Mr. McFadden: That is a good question. Even without the Commission’s report on this matter and its helpful efforts to help to spread good practice, we would still be trying to create the best possible regime to deal with insolvency and some of the issues raised.
Given that the UK is held up in the report as an example of good practice in this area, it might be helpful to point out the legislative framework that exists here to some of the countries in the group of 27 nations. The Commission could play that role. Whether it has had a significant impact on our legislation is probably a different question. Broadly, in this area, it is best that member states decide their own legislation. However, there is a useful role in pointing out good practice in some countries to others where the legislative framework is perhaps not as well developed. For example, the report says that no distinction is made in some member states between dishonest and honest bankruptcy, and the same restrictions apply to everyone. Perhaps we can play a role in having our legislative framework pointed out to others.
Mr. Clappison: I am grateful to the Minister for drawing the distinction between co-operation and making law. To what extent does he consider that the Union has competence to make law relating to insolvency in member states? Can he identify the legal provision in the treaty which gives it any such competence?
Mr. McFadden: I am not aware that the report is intended to lead to new legislation at a European level. Its purpose was to show the variety of legal frameworks that were in place throughout the Union. The purpose of the league table, which is on page 12 of the document, if memory serves me right, is to show the regimes that are in place in different states. I am not aware that the report will lead to a new directive or a new legislative proposal at European level.
Mr. Clappison: Again, I am grateful for that reply, but the Minister will be aware that the stated purpose of reports can sometimes lead to legislation being made by the European Union. Against that background, does the European Union have competence to make law, whether by regulation or directive, in the field of insolvency?
Mr. McFadden: The hon. Gentleman may be right to suggest that one thing can lead to another, but I am not aware that that is the intention. I do not believe that the EU has competence in insolvency matters, even if it wished to legislate. On this occasion, the matter may have to stay in the field of best practice and pointing out what might be done.
Mr. Clappison: I am grateful to the Minister for that and for his earlier remarks on competence. What would be the policy or attitude of Her Majesty’s Government towards an extension of EU competence in the field of insolvency law, should such an approach be made? As he said, experience teaches us that one thing can lead to another.
Mr. McFadden: I am being drawn into hypothetical situations. The wisest course for me on all such matters would be to say that we would judge any proposal on its merits at the time, and not to get drawn into hypothetical questions on where the EU may or may not legislate.
Lorely Burt (Solihull) (LD): I have four questions. I shall leave it to your discretion, Mr. Jones, as to when I can put them. First, I would like the Minister to elaborate a little, if he could, on how we know that a bankruptcy is not the entrepreneur’s fault. One in 20 bankruptcies are judged to involve fraud, but how is the degree of incompetence or fault that relates to a bankruptcy assessed? Is there a sliding scale? I can imagine that blame may be apportioned differently according to the view of the different people involved, and I am keen, if we are to legislate on whether a bankruptcy involves fault, that we have an objective assessment of how that is worked out.
Mr. McFadden: The procedure is well established. The Department’s companies investigation branch looks into reports of directors allegedly acting outwith the law. They would be investigated and, if the allegation were proven to be true, disqualified for a fixed period. That has existed in law for some time. It is a well-established procedure, and I referred to some of the background in my opening remarks.
Lorely Burt: I think I understand. My big concern is serial liquidators. I have a number of examples of those in the west midlands, where I come from. Serial liquidators already get away with far too much, and I am anxious to ensure that legislation will not give them additional succour. They do such a lot of damage: their suppliers go bust through no fault of their own while they skip off to the next project and set up a similar organisation. Will the Government look at what we can do to protect customers and suppliers from serial liquidators?
Mr. McFadden: That is a good question. Many people write to me, as the Minister, about such activities. The law must strike a balance. Sometimes people who find themselves in the position of being owed money by a business resent the fact that the directors of the business start up a new one, sometimes even with a similar name or in a similar line of work. The chance to start again is at the heart of the debate and the European Commission document.
Leaving aside the Commission, the chance to start again is enshrined in our own company law and in limited liability law. I understand the hon. Lady’s point, but we have to make a distinction. For somebody who goes bust for market reasons or because of honest business failure—the failure was not fraudulent—the chance to start again has always existed in law. I mentioned, for example, the 1986 and 2002 Acts. I understand that sometimes people who are owed money resent that distinction, but it is important that we maintain a legal distinction between them and directors who have been disqualified. If it is proven that someone has broken the law and is disqualified, he could not start again in a similar line of work. The law tries to enforce that distinction, which is where the companies investigation branch of the Department and the 1986 Act come in. It is important to retain that distinction, because without it people who go bust through no fault of their own would not have the chance to start again, which I am not sure would be good for our business environment.
Lorely Burt: I understand the ethos and culture that the Minister is talking about and agree that it is very important to give our entrepreneurs a second chance following bankruptcy, as long as they do not have a history of similar events. Presumably, if they do, under these rules, they would be judged to have acted, if not directly fraudulently, certainly imprudently. Presumably, insolvency laws and the length of time before they can return as a director to the entrepreneurial field will reflect that.
Mr. McFadden: It is not a matter of numbers. This is not, “Three strikes and you’re out”, or something similar, but about how business people and company directors conduct themselves. Sometimes, the Department has to close down a company started by a disqualified director who should not have started it—that is a clear breach of the law—but business failure, in itself, is not a breach of the law, even if it has happened more than once. I do not want to mislead the hon. Lady or give her the impression that because a person has been insolvent more than once, the law will step in. The circumstances of the business failure and the conduct of the directors—whether they have breached the law—will be crucial, not whether business failure has happened before.
Lorely Burt: This is my penultimate question, for the avoidance of doubt: can the Minister visualise how the proposals will translate into practice? The notes give the example of Denmark, which has created an early-warning system for companies getting into trouble in order to give them advice. Has he thought about how early support for viable enterprises might work? For example, they could focus on bankruptcy prevention and the provision of expert advice. Would that expert advice and timely intervention come from Business Link perhaps? Will he throw any light on how that might work?
Mr. McFadden: I do not think that this is all for the future; some of those measures are in place already. Business Link offers very good and valuable advice to those starting up for the first time as well as to those who have been in business before. The hon. Lady talked about advice available to those getting into trouble. The banking statement of principles sets out, for example, the obligations on the bank and businesses, some of which relate to exchanging information. If someone is getting into trouble, the bank can call for an independent review of the business, which might help to identify difficult but necessary details to be faced up to.
Provisions from the Government and banks are in place for when someone seeks business advice. For example, the advice for start-ups, on the Business Link website, includes a list—a useful list, I think—of the most common mistakes that businesses make, which perhaps is one reason customers of Business Link value its service quite highly. Satisfaction levels are at around 88 per cent., if memory serves. The percentage level for those who would recommend the service to someone else is in the mid-90s, so there is good-quality advice. It is important that more people use Business Link. It is a very good service, and the more people use it, the better.
Lorely Burt: I shall not try your patience, Mr. Jones, with alternative examples of entrepreneurs who have used Business Link, but I would not give the glowing description that the Minister has given. In my final question, I should like to ask about the role of banks. I am interested to know what, if anything, the Government intend to do to encourage banks to be less risk-averse. When I borrowed money from banks, as an entrepreneur, I felt as though my home, my husband and kids were guarantees—and I was not in difficulty. One almost feels as though everything that one could ever possibly own comes into the equation before banks will lend money. Do the Government plan to do anything to get banks to ease restrictions on lending, particularly in light of the current economic circumstances?
Mr. McFadden: I am not quite sure what the bank would have done with the hon. Lady’s children, by way of security, or what their value would have been against the business—very high, I am sure.
I speak from memory, so I say this with a note of caution, but I think that the World Bank’s 2008 “Doing Business” survey, to which I have referred, ranks the UK as No. 1 when it comes to getting credit. That might not correlate with the hon. Lady’s experience, but, whatever difficulties she might have had, it seems that the World Bank thinks that, internationally, we are doing quite well on access to credit. As I have said, a statement of principles governing how banks should deal with businesses, start-ups and financing was agreed in 2005. That was intended to at least make it clear where everyone stands. Of course, it does not mean that all businesses will always get credit, as banks will have to judge risk. We know that they are judging risk with a very careful eye in the current environment, but, internationally, as far as the World Bank is concerned, the UK is a good place to do business.
Mr. Djanogly: The report spends some time considering business support and tax issues, so may I ask a few questions on that? How many businesses use the HM Revenue and Customs time to pay service to delay tax payments? What is the Minister’s assessment of its success?
Mr. Djanogly: On that point, I remember the then Secretary of State for Trade and Industry coming to the Select Committee on Trade and Industry in about 2002 to explain that those 3,000 schemes were to be rationalised, but here we still are with them all. I note that they cost £2.5 billion of taxpayers’ money. However, they are so complex that only one half of 1 per cent. of SMEs use them and find them satisfactory. Can the Minister shed any light on why that rationalisation has taken so long?
Mr. McFadden: I can assure the hon. Gentleman that the rationalisation work is proceeding, and I am glad that he has kept his eye on it for some years.
There was such a proliferation of schemes as a lot of them were locally based and people were trying to do very similar things in different areas. By having a concentration and a reduction in the number of schemes, we will make it easier to navigate that sector. When it comes to something like Business Link, the work that we have done there has paid off in increased business satisfaction and I am sure that that will also be the case with business support.
Mr. Djanogly: The report talks about the VAT registration threshold and, of course, in this country that threshold has not been increased since 1993; the threshold is £60,000. Does the Minister intend to raise that threshold to reduce the tax burden for SMEs? Also, what does he think of the commissioner’s proposal to allow member states to exempt from VAT businesses with turnover of less than €100,000?
Mr. McFadden: The hon. Gentleman knows very well that issues relating to the VAT threshold and all taxation matters are matters for my right hon. Friend the Chancellor and for the Treasury. I am sure that they will read his question with interest, but the threshold is not a matter for me to deal with; it is a matter for the Treasury, and I am sure that it will consider all these matters when it comes to Budgets.
Mr. Djanogly: I would have hoped that the hon. Gentleman would have had some say with the Treasury on the matter. Perhaps he could have advised us if that is the case, but we are obviously not going to receive that advice today.
At the start of the document, the commissioners say that achieving the Lisbon strategy for growth
“will only be achieved by creating a supportive environment for small and medium-sized enterprises (SMEs) and a more entrepreneurial culture.”
How is that compatible with the Government increasing small business corporation tax and increasing capital gains tax for entrepreneurs by 80 per cent?
Mr. McFadden: On capital gains tax, the Chancellor has announced his final proposals. They include lifetime relief of some £1 million, if I remember correctly, and capital gains tax in the past could, of course, go up to 40 per cent., so we have both a better system now and an internationally competitive system. It is important, of course, that we maintain dialogue with business about these matters and that we try to have the fairest possible system of taxation, taking into account the interests of the economy as a whole. That dialogue takes place on an ongoing basis and it is a very important part of my Department’s work to ensure that that is the case.
Mr. Djanogly: Administration is vital to save companies where trading on can be a better option than going into an insolvency process. However, insolvency practitioners generally are telling us that they feel that the changes set out in the 2002 Act have proved to be inadequate. Will the Government be acting in response to those comments?
Mr. McFadden: Again, we maintain an important dialogue through the Insolvency Service with insolvency practitioners. I cannot give the hon. Gentleman any announcements today on future changes. We believe that the 2002 Act made important changes, for the reasons that I set out in my initial remarks, and those changes have been recognised by the European Commission in its document. Of course, we will always keep an eye on how any regime or any legal framework is operating. However, I am not announcing any new policies today.
Mr. Djanogly: On more global issues, paragraph 15 of the communication from the then Minister for Competitiveness notes that UK banks have a role to play, and that was mentioned by the hon. Member for Solihull. To what extent does the Minister consider that the global “credit crunch” will affect British companies, and how are the Government going to help British companies to overcome any lack of access to credit, given that in his response to the hon. Member for Solihull the Minister was talking about the historic position rather than the current and future positions?
Mr. McFadden: Along with other central banks, the Bank of England has shown itself to be very alive to the current international situation; it has shown itself to be willing to step in and offer what help it can. I am sure that the situation is watched closely by the Bank and by my colleagues at the Treasury, which would be the Department most closely involved in any Government or central bank action in response to the current global credit problems.
Mr. Djanogly: In the context of the credit crunch, does the Minister think that the UK falling from being the fourth most competitive nation in 1998 to the 15th in 2004, according to the World Economic Forum, will impact on insolvency and second chances for British business?
Mr. McFadden: We could trade surveys for the rest of the afternoon, but the hon. Gentleman knows that the World Bank classed us sixth in the world for ease of doing business, and that the survey reported in today’s newspapers by Jane’s Country Risk classes us joint seventh. Internationally, the UK is a good place to do business. We are in a robust and strong position to deal with whatever issues the global credit challenges throw up. They are global challenges, and the Chancellor set out in the Budget the importance of maintaining stability through that period. The policies that he set out are absolutely the right way to respond to what are difficult circumstances for all countries.
Mr. Djanogly: I have a few questions about the European initiatives that appear in the document. What figures does the Minister have for the number of small and medium-sized enterprises in the UK which have been financed by the European Commission’s competitiveness and innovation framework programme? Does he consider it to be a success?
Mr. McFadden: In the same communication that I will send to the hon. Gentleman about the numbers that he asked for, I shall try to include those other numbers for him, too.
Mr. Djanogly: I thank the Minister for that; it is going to be an ever-expanding letter by the sound of things.
How have the Government used the Commission’s joint European resources for micro to medium-sized enterprises—JEREMIE—initiative to use structural fund money to help small and medium-sized enterprises?
Mr. McFadden: I am not sure. I shall write to the hon. Gentleman about how we used the JEREMIE initiative.
Mr. Djanogly: Finally, Members will keep in mind that this is a European Committee, so we have to speak a little about Europe. What figures does the Minister have for the number of UK participants in the Commission’s Erasmus-type exchange programme for business apprentices, which the Commission pushes heavily in the document?
Mr. McFadden: I shall add those figures to the letter.
Motion made, and Question proposed,
That the Committee takes note of European Union Document No. 13832/07, Commission Communication, Overcoming the Stigma of Business Failure—for a Second Chance Policy—implementing the Lisbon partnership for growth and jobs; agrees that it is desirable to make a distinction between honest and dishonest failure; acknowledges the Commission’s assertion that Member States need to encourage entrepreneurs who have failed through no fault of their own to try again; and further acknowledges that the interests of creditors of the failed business, and potential creditors, suppliers and customers who support the new venture need to be sufficiently protected.—[Mr. McFadden.]
5.18 pm
Mr. Djanogly: I had not intended to speak first on the motion, but given the number of participants, I think I am there.
I welcome this European Committee sitting as an important opportunity to review solutions to some of the major problems that face businesses in our country, especially small and medium-sized enterprises and those entrepreneurs who have honestly failed once, or perhaps more than once, but still have the potential to succeed. The Minister explained the rationale for helping such people. Given our faltering economy, relatively high interest rates and mortgages, the credit crunch limiting companies’ access to funds, high factory-gate inflation and fuel costs rising way above inflation—not helped by punitive Government taxes—it is timely to debate the threat of insolvency and its implications.
Successful economies are built on successful businesses. To start successful businesses, one needs a catalyst, which is most often an entrepreneur—an individual with a good idea, who has the confidence in himself and the macro-economic environment in which he wishes to operate to turn that idea into a real business. I have no doubt that the UK possesses in abundance the creative, intelligent and business-savvy minds needed to generate many potential entrepreneurs. We need to question, however, whether the UK has at present the regulatory regime that is fit to encourage potential entrepreneurs to set up and successfully grow their own businesses, a necessary part of which is having the confidence in the system to be able to start again when they have already failed once.
We agree with the European Commission's assertion that member states need to encourage entrepreneurs who have failed through no fault of their own to try again. Some member states have already started to do that. For example, the French association, Re-cr(c)er, created with the backing of the French chamber of commerce and industry and the French association of bankers, has specific programmes for boosting the confidence of restarters who underwent business failures. Do such industry backed schemes exist in the UK, where it seems that the incentives to start a new business are increasingly outweighed by the risks?
Miles Templeman, director general of the Institute of Directors, has complained that since the Government came to power,
“the burden of regulation on business has increased substantially”.
He further points out that
“whereas in 1998 the UK was judged to be the fourth most competitive nation, by 2004 we had tumbled to fifteenth place according to the World Economic Forum.”
The total cost of regulations on business since this Government came to office stands at £65.99 billion. There is now the equivalent of 14 new regulations for every working day that the Government have been in power. Small businesses spend an average of seven hours a week complying with Government paperwork. The national chair of the Federation of Small Businesses, John Wright, sums up the situation:
“the Government has beaten small businesses over the head for the last six or seven years”.
Furthermore, the UK has the longest and most complex tax code in the world. A report on stimulating entrepreneurship and business growth, "Enterprising Britain: building the enterprise capital of the world", singles out small and medium-sized enterprises in particular as suffering at the hands of this Government’s steadily increasing tax burden. One example of that burden is that the compulsory VAT registration threshold of £60,000 has not been increased since 1993. The number of VAT-registered enterprises has increased every year in which the Labour Government have been in power. Many regard the failure to increase the VAT registration threshold as another example of a stealth tax. The Trade Minister, Lord Jones of Birmingham, once said that business men and women listening to the Prime Minister—in his days as Chancellor, of course—would wonder why he missed the golden opportunity to boost UK competitiveness and cut the corporate tax burden.
As we might expect, such unfavourable economic conditions have had an adverse effect on businesses, particularly SMEs. I raised that point with the Government during the debates on the Enterprise Bill in 2002, when we were analysing the impact of that Bill. I warned then that
“Over-regulation will cause companies to leave the marketplace, which will mean less choice for consumers and higher prices.”—[Official Report, 10 April 2002; Vol. 383, c. 104.]
My warning appears to have rung true. Although the number of SMEs has increased, the start-up rate has fallen significantly. In addition, businesses are struggling to grow: the number of businesses that had achieved an annual turnover of more than £1 million five years after creation fell from 48 per cent. in 1997 to just 16 per cent. in 2006. It now takes an average of 14 years for a company to reach an annual turnover of £5 million.
Research carried out on behalf of the European Commission has also shown that, between 2001 and 2003, the UK recorded sizeable net job losses in small and medium-sized businesses. Not only were the job losses in UK non-financial SMEs the largest of any EU member state, such losses were also in marked contrast to the trend in other EU countries: in almost all other member states, job numbers in SMEs increased. That serves as a reminder of how other countries have encouraged and helped their SMEs and have done a much better job of recognising the importance of this sector of the business community than our present Government. In that regard, the Government have failed to help the SMEs, which employ 50 per cent. of the working population in the UK and are hugely important to the country's economy.
According to the most recent figures available, debtor bankruptcy petitions filed have increased from 9,636 when the Labour Government came to power in 1997 up to some 52,700 in 2006. The growing financial pressure on individuals is also highlighted by the rising number of individual voluntary arrangements being sought. In Wales, for example, this is the seventh consecutive year that both the number of bankruptcies and the number of IVAs have increased.
“The government needs to revisit this proposal if it is to ensure that it really helps to boost enterprise”.
He argues that abolishing compulsory advertising of a bankruptcy would do no more than
“open a floodgate of people declaring themselves bankrupt in order to cope with personal debt.”
He sums up the feelings of many businesses in the UK today by concluding:
“The government is out of step with how bankruptcy is used in this country.”
I made the point in 2002 that bankruptcy regulation needs to be implemented with a view to encouraging and protecting business, not to enhancing careless risk-taking and excess consumer credit, which, given the huge levels of consumer credit and rising interest rates, could present an easy way out of debt for thousands—so much for being a Government of prudence.
The Insolvency Service seems to agree that the current requirement that one must advertise a bankruptcy is not a major deterrent to potential entrepreneurs. An article published in September last year entitled “Changing attitudes to bankruptcy” outlined the main factors contributing to the stigma of bankruptcy. The three most important were: first, problems in obtaining a bank account; secondly, not being able to repay creditors; and, thirdly, a resulting poor credit rating. There was no mention of the mandatory advertising requirement.
In the 2002 debate, my view was that we had a major problem in this country with getting support for business, especially in the form of banks lending to business start-ups and smaller companies. According to the Financial Services Authority, today just two of 17 high street lenders are prepared to offer basic bank accounts to undischarged bankrupts. The Government’s attempts to tackle the problem have been ineffective. They have encouraged the growth of roughly 3,000 business support schemes in the UK, which cost the taxpayer some £2.5 billion a year, but those support schemes are constantly changing and wasteful, and so complex that they deter the very people who they are meant to help. Just 0.5 per cent. of SMEs both use state support and are satisfied with the service.
The credit crunch could exacerbate the problem, of course, yet the Government’s response to date, not least in their handling of Northern Rock, has been little short of pitiful. The European High Yield Association, a well informed group of institutional investors, bankers and lawyers, has warned that the Government’s measures for dealing with the restructuring of insolvent companies are insufficient.
The Conservative party is advancing several measures that we believe will provide real solutions to the real problems faced by entrepreneurs and SMEs in the UK. First, measures are being designed to drive out the “regulate first” culture in Whitehall. My hon. Friend the Member for Rutland and Melton (Alan Duncan) has just launched an independent taskforce led by Sir David Arculus, which is looking into an overhaul of the regulation machine. All aspects, including the use of targets, management and training, will be examined in order to make regulation the last resort rather than the first option.
We are also looking at effective ways to tackle the financial exclusion faced by potential entrepreneurs and those who have become bankrupt. As already mentioned, the Insolvency Service has declared such financial exclusion to be one of the three main factors in contributing to the stigma of bankruptcy and in deterring individuals from starting a business. Those who have been excluded from mainstream credit because of a poor credit history, or, for example, because they have been declared bankrupt, often turn to illegal lenders who typically charge extortionate rates of interest and are often connected with illicit activities and antisocial behaviour. We shall commit to ensuring greater co-operation with the police and other public bodies to crack down on illegal lenders. Coupled with that, we also want to increase competition in the home credit market, which would allow individuals access to fairer and cheaper credit deals, which would then give them the financial freedom necessary to pursue a business venture.
Upon filing for bankruptcy, all bank accounts are closed, and bankrupts need to make alternative arrangements for receiving wages, cashing cheques and paying bills. Insolvency practitioners report that gaining access to a bank account can be a significant hurdle for undischarged bankrupts and can actually compound their problems by forcing them to use expensive alternatives such as cheque-cashing services that charge a high fee. We support R3’s proposal that the Government should work much more closely with high street banks than they presently do to widen the provision of basic bank accounts to undischarged bankrupts.
The EHYA supports the idea of introducing funding measures to support distressed companies. In the US, the bankruptcy code provides a super-priority status for post-bankruptcy petitions—it is called debtor in possession lending. A specialised market has evolved for rescue funding for businesses in trouble and, as a result, struggling businesses have found it easier to secure the funding that they need to survive. In the UK, no such market exists, because there are no legislative provisions to prioritise rescue finance. If the UK is to provide the same amount of support and encouragement to small and growing businesses as that given in the US, we need to assess the merits of implementing a US-style funding scheme. It is the ability of struggling businesses to access additional investment, rather than another headline-grabbing, but ineffective business support scheme, that will give businesses the help and second chance that they want.
R3 advises that
“the availability of funding is crucial to ensuring that insolvent companies can reorganise successfully and be rescued from financial difficulty”.
The Conservative party has set up a taskforce led by Doug Richard, a serial entrepreneur and former “Dragons’ Den” panellist. The taskforce’s review will be published in May, but the underlying conclusions are that the present information system does not work and that business schemes should be business led rather than politically driven. That will cut the red tape associated with running a business, release entrepreneurs from the regulatory shackles placed upon them by the current Administration and, ultimately, help them not to fail
The Committee acknowledges and aims to protect the interests of both creditors of failed businesses and potential creditors. In 2002, with such creditors in mind, I raised concerns about the number of companies entering administration. The insolvency process is lengthy and costly. For almost 5,000 companies that entered administration or liquidation more than 10 years ago, the process is still ongoing. The wasted costs associated with that are exorbitant, while goodwill in the business is steadily reduced. The end result is that creditors are returned a much lower proportion of their investment in an ill-performing business. The Government have not done enough to address that problem since the Enterprise Act 2002 and show little sign of looking out for the interests of potential investors, without whom much of the business in the UK cannot function and entrepreneurs cannot be given a second chance.
We support the use of IVAs as a frequent alternative to companies entering administration. They are one of the great successes of the 1986 Act and, time and again, have saved people from bankruptcy and creditors from losing their money, and enabled entrepreneurs to be given a second chance without the albatross of a previous bankruptcy hanging around their neck. We believe that IVAs should be encouraged, rather than the ability to go bust for a few months through the Government’s weak proposals for non-advertised bankruptcy. However, in the past few years, so-called IVA factories have aggressively marketed their products, while failing to state their fees clearly and openly, which has resulted in consumers losing faith in the IVA regime. The Conservative party is calling on the Advertising Standards Authority to enforce the rules governing the marketing of IVAs more rigorously. We are also calling on the relevant public bodies, such as the Law Society, to examine the quality of advice given by IVA advisers to individuals more vigilantly.
No formal scheme is currently in place in the UK to educate people who have previously been bankrupt to help them to understand the causes of their financial problems and how the situation could be avoided in the future. In Canada, for the past 15 years, a scheme has been in place whereby those who declare bankruptcy must attend two financial counselling sessions before they are eligible for automatic discharge from bankruptcy. The objective is to include a rehabilitative element in the process to prevent future bankruptcies. A study conducted just after the scheme’s introduction found that 67 per cent. of bankrupts who had undergone that mandatory education believed that it would have a considerable impact on their ability to keep their financial affairs in order. We believe that the Government should explore the idea of having a mandatory financial education programme for bankrupts. EU member states such as Luxembourg have implemented similar schemes.
Finally, we are advancing a reform of the UK’s tax system to make it simpler, fairer and, when affordable, lower for UK businesses. For example, we have committed to remove all estates of less than £1 million from inheritance tax requirements. That would simplify the tax affairs of millions of people and would lower tax bills for families, which is an especially important consideration for SMEs. We are also committed to voting against any small company corporation tax rises. Tax is rarely the cause of insolvency, but it can be a relevant factor.
We are grateful for this important and timely debate on saving businesses, and I hope that I have shown not only the deficiencies in the Government’s proposals, but the Conservative party’s practical, viable and entrepreneurial alternative to what is currently on offer.
5.36 pm
Lorely Burt: You might be relieved to hear that I shall confine my remarks to the document, Mr. Jones, rather than giving a party political explanation of how the Conservative party would do things were it in charge.
Like the hon. Member for Huntingdon, I welcome the opportunity to discuss the document. There is no question but that we must encourage entrepreneurs and foster a culture in which a bankruptcy is not the be all and end all of one’s entrepreneurial life. However, we should put the matter in the context of European culture, and ask whether a one-size-fits-all document on how we should relate to bankruptcy and subsequent events is appropriate for the 27 member countries in Europe.
The debate papers and, indeed, the hon. Member for West Bromwich, West say that the failure rate of new businesses in their first five years is 50 per cent. I understand, however—I hope that the Minister will reflect on this—that the figure in the UK is closer to 80 per cent. In other words, 20 per cent. of new companies will not reach their sixth birthday. If that is the case, there is probably a marked difference in survival rates across the European countries, which indicates that there are considerable cultural differences in when people set up companies and in their attitudes to risk.
I have deep concerns, which I have expressed to the Minister, about relaxing the rules further, because of the predatory activities of serial liquidators. We need to protect creditors, customers and suppliers. Despite his comments, I still feel a great deal of anxiety, particularly for suppliers who might find that they are losing out while someone who has gone into liquidation is able to start up a business, sometimes with stock that they bought at a fraction of its real price to give themselves an uncompetitive advantage in future.
As the hon. Member for Huntingdon said, it is important that we consider the current economic climate. With bankruptcies on the increase, will the risk of honest bankruptcies increase? I think that it will, because of the worsening economic climate. However, the risk of reckless bankruptcies will also increase, which is concerning.
Mr. Djanogly: The hon. Lady raises the question of honest and dishonest bankrupts. The Minister could not give us the figure for the number of dishonest bankruptcies, which severely holds us back in this debate. My understanding is that the figure for dishonest bankruptcies is quite low and that, to whatever extent the Government have provided for honest and dishonest bankruptcies, the measures have not worked. She may have a view on that.
Lorely Burt: I am grateful to the hon. Gentleman for those comments. As I understand it, the only reliable figure is that one in 20 bankruptcies has been adjudged to have had an element of fraud connected to it. However, how much of the reckless behaviour could be considered to have had an element of fraudulent intent is still a cause of anxiety, despite the Minister’s reassurances.
Mr. Brian Jenkins (Tamworth) (Lab): We have often cited the figure of 5 per cent., or one in 20. It would be much more interesting to know the amount of money that was owed by that 5 per cent. of bankrupts when they went into liquidation, because the fraudulent bankrupts tend to be the ones that run up very large debts.
Lorely Burt: I am grateful to the hon. Gentleman for that useful intervention.
Returning to the capitalisation of the new enterprises, I am still unsure how discharged bankrupts will acquire capital from banks to start again without providing strong guarantees. Indeed, the hon. Member for Huntingdon referred to the difficulty of acquiring even a basic bank account after bankruptcy. There is still a degree of risk aversion, despite the fact that we may be the best in the world in trying to promote risk taking. It still concerns me that, if we want discharged bankrupts to be encouraged to try again, there must be some financial ability or service that they can use to achieve capitalisation to facilitate a new business.
The Minister responded to my questions. However, I did not get any sense that the United Kingdom Government have much of an appetite to go further in respect of bankruptcy legislation or in providing more help. I am sure that he will address that in his closing remarks, but I have the feeling that perhaps he sees the UK as something of a paradigm for other EU organisations or countries.
The entrepreneurial spirit in this country is hugely commendable. It seems that, if we are not ahead of everyone else already, we are pretty close to leading the other EU countries. If we are not planning any major alterations in response to the recommendations in the paper, would it not be more appropriate to give the other EU countries, in respect of their overall cultural attitude towards risk, capital and bankruptcy itself, the freedom to sort out for themselves what they think is the best way ahead, rather than imposing something from a European document or by way of an instruction?
5.44 pm
Mr. Jenkins: One or two points were made in the discussion that I want to hammer home. I appreciate the document; I very much like it. Bankruptcies and restarts are all part of the economic regeneration of our type of society. However, the document itemises certain activities undertaken by certain European countries as good practice. I should like the Minister to give us an assurance that his Department will consider those examples of good practice to see whether we can incorporate them in our regulations.
I have had some experience of start-ups. In a previous life, I led a successful council. We put together a small unit of 20 areas and took in people who wanted to start their own business. The rent was simple: in the first month it was zero and it moved up over the year. However, as part and parcel of the package, those people, supported by the local college, had to take a course to enable them to understand how a business is run—how bookkeeping works, what regulations are in place, how to evaluate whether the business is successful—so that they could launch their business with a secure understanding of what they were going to take part in.
Those people are generally sole traders and they may take on one other person in their very small business. Hopefully, however, they will grow and become a part of our local economy. Are we prepared, as a nation, to consider undertaking such practices and putting them to our further education colleges or schools to develop entrepreneurial skills and to get young people to understand what the programme will be about? Provision is sporadic. How can we get a more consistent approach?
It is right—the document points it out—to say that there is still a degree of stigma attached to bankruptcy in this country. Although the press will cover the large-scale fraudulent cases, not everyone is the same. We are certainly not talking about individual bankruptcy, with people running up debt on their credit cards. We are talking about business enterprises that have failed.
I welcome the document, but will the Minister clarify one or two points and say where we are going to take it from here, rather than just let it lie on the table?
5.47 pm
Mr. McFadden: I shall try to be brief and will, perhaps, bring us back to our starting point, which was the European Commission document on insolvency practice throughout the European Union, with its comparison of how different countries deal with it, and the questions asked by my hon. Friend the Member for West Bromwich, West in his opening remarks.
The starting point was that there should be a distinction between honest and dishonest bankruptcy, that the legal framework should recognise that distinction and that there should be an opportunity for honest bankrupts to get a second chance. On those criteria, the UK scores well; indeed, it scores better than any other member state, because of the legal reforms that we have made. Can we do more?
Mr. Djanogly: I have to say, again, that the Minister has, as of yet, given no evidence to show what the implications of the 2002 reforms have been, in terms of those that have been made bankrupt for long periods, or whether those reforms have been a success—although they certainly create a difference between honest and dishonest bankruptcy.
Mr. McFadden: The verdict and the scorecard are in the document that we are debating. The European Commission's verdict is that, in respect of all the things that it has outlined and recommended that member states do, the UK has done more than any other. That is not my verdict and it is not my claim; it is the claim made in the document that we are debating.
Mr. Djanogly: Is the Minister honestly saying that the creation of the new laws is a success?
Mr. McFadden: I am referring to the document that we are debating. If the hon. Gentleman finds the concept difficult, let me explain it to him in simple terms. On page 12 of the document, there is a table. That table sets out various actions that the European Commission recommends that member states take to satisfy the questions that it poses. The table shows that the UK has taken more of those actions than any other member state. If he still has difficulty with that, I can explain it again, but I believe that I have done it two or three times now.
Mr. Djanogly rose—
Mr. McFadden: I do not want to have another exchange with the hon. Gentleman on the matter, because I am not sure that it would add to the sum of knowledge held by either of us. The question was posed, can we do more? I am sure that any member state could do more, but, as I said, the document states that we are in a good position, compared with other member states.
The hon. Member for Solihull asked about access to bank accounts. People who have been subject to insolvency have access to bank accounts, but of course it will be at the discretion of the bank or lending institution whether those people have access to credit or overdrafts with such accounts.
My hon. Friend the Member for Tamworth asked about enterprise and young people. Perhaps it would help him if I say that more than 5,500 schools and colleges participate in the young enterprise programme, which currently reaches more than 320,000 young people a year from primary school right through university. I referred to what was happening in my own constituency through activities involving young people, and I am sure that all hon. Members have examples in their constituencies. It has been shown that young people who go through that kind of experience are more attracted to business than would otherwise be the case.
The hon. Member for Huntingdon gave a wide-ranging speech. He painted a picture of bleak and terrible economic circumstances in the UK. He talked about job losses, and he praised the French position on entrepreneurship. I am sure that that will be of interest to his colleagues.
When the hon. Gentleman spoke about job losses, I wondered whether he was talking about the UK today, with an employment rate of some 75 per cent., or whether he was harking back to when his party was in power and we had two recessions and some 3 million unemployed. Did he mean the unemployment rate today of 5 per cent., or the unemployment rate when his party was in power? Of course, he is entitled to his view of the country’s present economic situation, but perhaps I could conclude by saying that it is an awful lot better today than it was when his party was in power.
Question put and agreed to.
Resolved,
That the Committee takes note of European Union Document No. 13832/07, Commission Communication, Overcoming the Stigma of Business Failure—for a Second Chance Policy—implementing the Lisbon partnership for growth and jobs; agrees that it is desirable to make a distinction between honest and dishonest failure; acknowledges the Commission’s assertion that Member States need to encourage entrepreneurs who have failed through no fault of their own to try again; and further acknowledges that the interests of creditors of the failed business, and potential creditors, suppliers and customers who support the new venture need to be sufficiently protected.
Committee rose at seven minutes to Six o’clock.
 
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