Business Failure and Insolvency


The Committee consisted of the following Members:

Chair: Miss Anne McIntosh 

Barclay, Stephen (North East Cambridgeshire) (Con) 

Blackwood, Nicola (Oxford West and Abingdon) (Con) 

Blomfield, Paul (Sheffield Central) (Lab) 

Connarty, Michael (Linlithgow and East Falkirk) (Lab) 

Crabb, Stephen ( Lord Commissioner of Her Majesty’s Treasury)  

Dakin, Nic (Scunthorpe) (Lab) 

Dinenage, Caroline (Gosport) (Con) 

Heaton-Harris, Chris (Daventry) (Con) 

Lavery, Ian (Wansbeck) (Lab) 

Murray, Ian (Edinburgh South) (Lab) 

Simpson, David (Upper Bann) (DUP) 

Swinson, Jo (Parliamentary Under-Secretary of State for Business, Innovation and Skills)  

Uppal, Paul (Wolverhampton South West) (Con) 

Mark Etherton, Committee Clerk

† attended the Committee

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European Committee C 

Monday 4 March 2013  

[Miss Anne McIntosh in the Chair] 

Business Failure and Insolvency 

4.30 pm 

The Chair:  Does a member of the European Scrutiny Committee wish to make a brief explanatory statement? 

Chris Heaton-Harris (Daventry) (Con):  Nothing gives me greater pleasure than to serve under your chairmanship today, Miss McIntosh, and it will be a delight to make a brief explanatory statement on behalf of the European Scrutiny Committee. 

It might be helpful to the Committee if I explain the background to the proposal to reform existing EU insolvency rules and why the European Scrutiny Committee recommended an opt-in debate. [ Interruption. ] Please excuse me, Miss McIntosh. I am slightly out of breath, having run here from the Maltesers Comic Relief reception downstairs—that is how important this matter is to me—and I hope that the debate is brief, so I can get back to it. 

Since June 2002, EU cross-border insolvencies and mutual recognition of insolvency proceedings of member states have been managed by the EU’s regulation on insolvency proceedings. The 2002 regulation applies whenever a debtor has assets or creditors in more than one member state and determines which court has jurisdiction for opening insolvency proceedings. Main proceedings have to be opened in the member state where the debtor has its COMI, or centre of main interests, and the effects of such proceedings are recognised throughout the EU. Secondary proceedings can be opened where the debtor has an establishment, and the effects of such proceedings are limited to the assets located in that state. 

The regulation provides for co-ordination of the two sets of proceedings. In mid-December 2012, the Commission published a 10-year report on the regulation, together with a draft amending regulation—the document we are debating opting in to today. The emphasis of the new proposals is on encouraging cross-border business rescues to assist with economic recovery and growth throughout the EU. 

The Commission’s report concludes that, although the 2002 regulation is well implemented and mostly effective, amendments to the regulation are necessary to modernise, clarify and improve its framework. The amendments include broadening its scope to cover rescue and restructuring proceedings, together with a wider range of proceedings for individuals; clarifying rules on jurisdiction for opening proceedings; better co-ordination of main and secondary proceedings; improving awareness of national insolvency proceedings and registers; facilitating the lodging of foreign creditor claims; and co-ordinating “groups of company” proceedings. 

As the draft regulation is based on a title V justice and home affairs provision, it will not apply to the UK unless the UK opts in within three months of publication,

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which expires on 10 April 2013. The Committee therefore looks forward to hearing the Minister’s assessment of the practical benefits and disadvantages of UK participation in the draft regulation, where possible informed by responses to the Government’s call for evidence and their impact assessment, if it has been published. 

The Chair:  I thank the hon. Gentleman for that statement. We will try not to have a joke at his expense, albeit for our own comic relief. I call the Minister to make her opening statement. 

4.33 pm 

The Parliamentary Under-Secretary of State for Business, Innovation and Skills (Jo Swinson):  It is a pleasure to serve under your chairmanship, Miss McIntosh, and to follow the hon. Member for Daventry (Chris Heaton-Harris), who set out why the European Scrutiny Committee recommended the documents for discussion by this Committee. It is helpful to have the chance to scrutinise the documents. I hope to be helpful to the Committee in setting out what the Government believe are the main issues at stake. 

The proposed regulation will modernise the existing regulation on insolvency proceedings, following the European Commission’s recent evaluation. As hon. Members will know, Europe has changed considerably since the regulation came into force in 2002, when the EU consisted of only 15 member states. The euro had been introduced in 12 of those member states only the year before. The Single Market Act had been in force for nearly 10 years. 

Late last year, I had the pleasure of addressing the Committee on proposals for the Single Market Act II, and we briefly discussed insolvency in anticipation of the proposals before us today. Modernisation of the regulation on insolvency proceedings is required to ensure that it reflects current needs. The EU now has 27 member states, which will increase to 28 later this year. It has a population of 500 million people and 21 million companies. The Commission reports that 1.7 million jobs are lost from 200,000 firms going bust in the EU each year. The benefits of having an insolvency regime that helps to save viable but distressed businesses are therefore significant, as I am sure hon. Members will agree. 

Insolvency is a vital part of the economy, and it ensures that when a company or an individual fails, assets can be distributed to maximise the returns to creditors. It also provides a vital service in the conduct of failed businesses, ensuring that when a company fails through no fault of the directors or proprietor, they can have a second chance. Where businesses trade across the borders of member states, there must be a mechanism to administer insolvency proceedings across those borders. The rescue of viable companies gives a better return to creditors and preserves jobs. I know that all hon. Members believe that that is important. 

Europe has traditionally been seen as quick to liquidate distressed businesses, and the Commission sees that as damaging for single market growth. Many EU member states, including the UK, have introduced new rescue procedures, but the regulation needs to be modernised to ensure full coverage for those procedures. The Government, UK businesses, individuals and insolvency

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professionals need to work together to ensure that the single market reaches its full potential. The Government have consulted widely with stakeholders, and they have expressed to us the view that fundamental change is not needed because the regulation has worked reasonably well in facilitating the efficient handling of cross-border insolvencies in the EU, and radical change could undermine the existing insolvency framework. 

The proposed amendments address the shortcomings identified in the Commission’s report in five specific themes, which I will briefly outline. First, scope. The definition of insolvency proceedings will be amended to include both hybrid and pre-insolvency rescue or restructuring proceedings. Secondly, jurisdiction. The rules for determining the jurisdiction for opening insolvency proceedings will be clarified, with a specific duty upon the court or insolvency practitioner opening proceedings to consider the debtor’s COMI jurisdiction and to seek further information when required. Thirdly, on secondary proceedings, which the hon. Member for Daventry mentioned, the efficiency and co-ordination of insolvency proceedings will be improved through new rules on co-operation between courts and insolvency practitioners in different member states. Having a mechanism for synthetic secondary proceedings protects the rights of creditors in other member states without the expense of actually holding secondary proceedings. 

Fourthly, on the publicity of proceedings and the lodging of claims, requirements will be introduced to publish relevant court decisions in all insolvencies in a publicly accessible electronic register. The digital-by-default principles that the Government adhere to are relevant here. We recognise that in the past 10 years the digital world has moved on significantly, and we want to ensure that there is interconnectivity of national insolvency registers via the European e-justice portal. Standard forms for foreign creditors will also be introduced. They will be used when lodging claims, which will reduce costs. Finally, on groups of companies, the proposal provides for co-ordination of the insolvency proceedings relating to different members of a group of companies. 

The question for the Government is whether the UK should opt in to the draft regulation and be bound by its final terms. The Government will make the opt-in decision ahead of the 10 April deadline, taking into account evidence from stakeholders on the proposed regulation’s impact on UK interests. The Government have not yet made that decision, but stakeholders have expressed broad support for the Commission’s proposals. We will ensure that we listen to and reflect carefully on this debate when we make our decision. 

My officials have conducted a short call for evidence on the regulation, which closed on 25 February, to gather further evidence from UK stakeholders on the impacts for businesses, debtors and creditors in the UK. Responses from stakeholders have been universally supportive of the proposals and of the UK opting in. In particular, it was suggested that if the regulation did not apply to the UK, that could make the UK a less attractive place to do business. Businesses with cross-border interests might relocate to other member states so that any insolvency proceedings would be universally recognised across the EU. 

The UK insolvency regime is well regarded internationally. It is ranked in the top 10 by the World Bank for the speed of procedures and the amounts

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returned to creditors—above that of Germany, France and Italy, as well as the US. We should be proud of that and be willing to share best practice with our colleagues in other EU states. 

The UK economy has benefitted from the operation of the existing insolvency regulation. We have become the jurisdiction of choice for some of Europe’s largest company restructurings, earning billions of pounds in professional fees when many firms are shedding jobs. I hope the Committee will have an interesting discussion on the proposals. We welcome the opportunity to scrutinise them in advance of the Government making a decision on whether to opt in to them. 

The Chair:  We now have until 5.30 pm for questions to the Minister. I remind hon. Members that they should be brief. It is open to them, subject to my discretion, to ask related supplementary questions together. 

Ian Murray (Edinburgh South) (Lab):  It is a great pleasure, Miss McIntosh, to serve under your chairmanship for the second time. The hon. Member for Daventry was slightly out of breath when making his statement. He plays in the parliamentary football team so it is disappointing that one flight of steps made him so out of breath. I also play in the team, so you will realise why we do not win many games. 

I have some questions for the Minister. Will she update the Committee on the overall response from stakeholders on the inclusion of the scheme of arrangement? Many respondents to the consultation raised that in terms of the definition of proceedings. What analysis has the Minister made of the possible impact on reducing bankruptcy tourism, which we discussed at a previous European Committee on insolvency regulations? I also have two specific questions. Will the proposals have any impact on pre-pack administration, which has caused significant problems in the United Kingdom for high street stores that have found themselves in difficulty? What is the Minister’s response to the European Scrutiny Committee report that that may harm insolvency proceedings in the United Kingdom in the longer term? 

Jo Swinson:  I am happy to respond to the hon. Gentleman. Football is clearly the sport of choice this afternoon, and I feel rather left out. I do not play in the parliamentary football team, but if I did, it would win even fewer games. 

I confirm that a draft impact assessment was published with the call for evidence, and will be further refined, based on the evidence we receive. The stakeholders are generally supportive of the proposals, but the scheme of arrangement is not included, and we know that UK stakeholders would not be in favour of that. It is worth pointing out that schemes are not exclusively insolvency procedures, and they do not fit easily with the notion of COMI, which I referred earlier, to determine the jurisdiction, which is fundamental to the regulation. Schemes use governing law of the obligations that are being modified. 

The hon. Gentleman also asked about bankruptcy tourism, which basically occurs when a debtor relocates to another country to take advantage of a more favourable bankruptcy system—for example, one that has a shorter discharge period. He is right that that was mentioned in our discussion some months ago. We do not believe that

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that is a significantly large problem in the UK, and in a year there are only a couple of hundred cases out of more than 30,000. It is not exclusively a UK issue, and it does not seem to be a large one, but clearly we should take care about that. 

One of the five points I mentioned was jurisdiction. Existing case law makes clear the jurisdiction in which a proceeding must be brought, but the changes that will clarify that in the regulation will be helpful. Of course, bankruptcy proceedings can be accessed in a member state according to the facts of the case. However, making the jurisdiction point clearer should help prevent sham locations, even though that is a small issue overall. 

The hon. Gentleman’s final point was about pre-packs. Many hon. Members have raised concerns about this. The issue is always about striking the right balance. We must make sure people have genuinely set up in business and that there are genuine reasons why a business has run into difficulty. That may or may not relate to the abilities and actions of specific directors, and it would not necessarily be helpful to prevent them from continuing and buying such a business, if that is the best result for creditors. However, I recognise the concerns that have been expressed. 

It is worth reminding the Committee that, because UK insolvency proceedings are already high quality and well respected, the regulations would not necessarily have a big impact on what happens here. I would not expect them to have a big impact on pre-packs, but not opting in could have a negative impact on insolvency practitioners. Opting in would not particularly resolve the concern that various Members have expressed, but many stakeholders have said that it would be positive for the UK. I hope that answers the hon. Gentleman’s questions. In the absence of any others, we may be able to proceed to the debate. 

The Chair:  Are there any further questions? 

Chris Heaton-Harris:  Just one short question. The Minister has ably answered all the points put to her so far, as she normally does. I have a question about phoenix companies and second chances for honest bankrupts. The Commission is going down a path that might not necessarily fit in with the path the UK has trodden in the past. What conversations have taken place on this important matter? Those of us in this place who have run companies know that firms in a competitive economy really do not want to see competitors go bust, only for a phoenix company, with similar directors but owing no money, to start up immediately. 

Jo Swinson:  The hon. Gentleman raises an important matter, and my right hon. Friend the Secretary of State and I have expressed concern about it. A variety of insolvency issues are being explored. Shortly before Christmas, I announced a review of insolvency practitioner fees, about which concern has also been expressed. My right hon. Friend has asked, in more general terms, that the current insolvency provisions be looked at to see how they can be improved. That includes, for example, the complaint mechanisms for people who think an

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insolvency practitioner has not dealt properly with a particular circumstance. Insolvency practitioners play an important role in assessing companies, and directors who are found to have acted negligently or inappropriately can be recommended for further investigation. Ultimately, there is the sanction of disqualification from serving as a director, and there are significant numbers of disqualifications each year. Obviously, that is relevant to phoenix companies, and disqualification can be appropriate in some cases. That is the way in which abuses can be tackled. 

The Commission has not said whether it will make other legislative proposals, but it will do further analysis and have further discussions with the European Parliament and the Council of Ministers before issuing a public consultation. We may hear more from the Commission, but we do not yet know the timetable. 

Harmonisation has been mooted in one of the documents before us. The Government do not believe that that is in the UK’s interests. We already have an excellent insolvency regime, and we do not want it to be levelled down in pursuit of harmonisation. We think that that would not be the best way forward. I hope that that answers the hon. Gentleman’s question. 

Ian Lavery (Wansbeck) (Lab):  In her opening speech, the Minister mentioned that the regulations required modernisation. Can she explain how the changes will modernise the current Council regulations? 

Jo Swinson:  I outlined in my opening remarks the five key areas, including scope. Some of them do not have a huge impact on the UK. Scope is a good example. The UK proceedings that come within the scope of the regulation will not change, but some other EU countries’ proceedings will. Because we already have an excellent insolvency regime, the changes will have less impact on the UK than on some other member states. Another example of modernisation is the need to take into account the fact that in the past 10 years, significant improvements have been made to the digital exchange of information. Moving to electronic information that is available and transparent would not have been appropriate in 2002, but it absolutely fits for 2013. Those are some examples of modernisation. 

It is also fair to say that the changes are fairly technical. They are about updating, improving and modernising the regulations, rather than making radical changes. Most people found that the regulations already worked well but was not as up-to-date as necessary in a few areas. The Commission consulted not just the UK Government but UK stakeholders, a significant number of whom responded, because a significant proportion of insolvency practitioners for the whole of the EU are based in the UK, due to our widely respected regime. Working with those stakeholders, the Commission have proposed these necessary tweaks in order to modernise the regulation, not as a radical departure from what was there. 

Motion made, and Question proposed,  

That the Committee takes note of European Union Document No. 17883/12 and Addenda 1 and 2, a Draft Regulation amending Council Regulation (EC) No. 1346/2000 on insolvency proceedings; and welcomes the opportunity to consider whether the UK should opt in to the draft Regulation.—(Jo Swinson.)  

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4.53 pm 

Ian Murray:  At the beginning of questions, I did not think that the Minister’s athleticism was such that she could not play in the UK parliamentary football team. I believe she runs marathons, which is certainly more than I do. Perhaps the hon. Member for Daventry and I could run a relay race, but I am sure that we would not get round a marathon course. 

We support the motion and the thrust of what is happening, particularly the changes through the European Union, but it must be stated at the outset that most of the changes would benefit the UK. We already have a good insolvency regime here. The 2013 “Doing Business” report ranks the UK eighth in the world in resolving insolvencies. We already have a robust regime. 

The reason why I asked the Minister about bankruptcy tourism and the jurisdiction issue is that I have done a bit of research. I appreciate that she said that tourism occurred in only about 200 cases a year out of the 30,000 dealt with, but there are issues with the website, irishbankruptcyuk.com, being advertised. A recent report in The Guardian suggested that a solicitor in Leicester had helped Irish clients escape more than €1 billion in debt by taking advantage of our booming trade in bankruptcy tourism. Although bankruptcy tourism might represent only a small number of cases out of the whole 30,000, it is important to put it on record that it is happening, and the sums are quite vast. Many of the people whom the Guardian journalist spoke to about the issue had businesses that were insolvent and going through proceedings through no fault of their own, for a variety of legitimate reasons, but they had been left with little option. One individual stated that they were googling to find a solution and they came across the website, so they were able to come to the UK to liquidate their business on the more favourable terms available in the UK, rather than in Ireland, where insolvency proceedings are more draconian. That was why I mentioned bankruptcy tourism and why the jurisdiction issue—one of the five raised by the Minister in the call for evidence—is important for the UK economy, as well as for the creditors and debtors of the businesses that have been made insolvent. We need to avoid flight to another jurisdiction to look for more favourable bankruptcy proceedings. 

I asked about the scheme of arrangement, but the Minister has dealt with that admirably, in that it is not generally supported for these proposals. We are supportive of the proposals and will not press the issue to a vote, but I want to ask the Minister in all seriousness, as I did in a previous European Committee sitting when we discussed bankruptcy tourism and insolvency, whether this is an issue that the Prime Minister would seek to repatriate from the EU. Furthermore, if he did repatriate, would he repeal this measure? I ask in all seriousness

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whether, as the debate about the EU rages, these welcome measures for the UK insolvency regime would be strengthened or weakened should that debate about negotiating repatriation happen. 

The Chair:  If there are no further contributions, I will call on the Minister to sum up this little debate. 

4.57 pm 

Jo Swinson:  Thank you, Miss McIntosh, and I am delighted to respond. 

The hon. Member for Edinburgh South is correct that I run marathons, although the debate this afternoon has not ended up being a marathon. I am not sure that I should use the present tense for running marathons; I have certainly run two in the past but that is not to say that I am committed to continuing. 

The bankruptcy tourism mentioned by the hon. Gentleman is important and he is right to highlight it. We may be talking about a small number of cases, but some involve large debts, in particular some of the Irish cases he mentioned—some of the larger property owners in Ireland had very sizeable debts. For that reason, it is possible, where the relocation is evidently a sham, for the court or the official receiver to refuse an application; they can apply for an annulment of the order. The proposals to increase transparency are key in this area. Remaining vigilant is important, but ensuring that more information is in the public domain will facilitate the taking of appropriate action by the authorities. 

The hon. Gentleman tempts me into speculation about the repatriation of powers. Absolutely, we must ensure that power rests at the right level. That is why the Government are not keen to have, for example, harmonisation of these powers throughout the EU, but we recognise the value that the regulation brings to UK competitiveness, in particular because of our strong service industry of insolvency practitioners. Therefore, the measures work to our advantage, so I would argue that this is one area in which, if looking at the types of powers and where they should lie, repatriation would not be in the UK’s interest. We have more to gain by working closely with our EU counterparts to ensure there is a strong and high-quality insolvency regime that can work across borders. As I outlined, that means that UK companies and insolvency professionals can secure significant amounts of business. 

I thank the members of the Committee for their consideration of the points in today’s debate. I am sure that the hon. Member for Daventry will now be able to get back to his charitable endeavours. 

Question put and agreed to.  

5 pm 

Committee rose. 

Prepared 5th March 2013