My Lords, the regulations before us extend the life of temporary measures to 30 June this year, but the Government have failed to provide any road map to show how businesses can negotiable the cliff edge that is inevitable whenever the regulations end. The past 15 months should have been used to develop such a strategy, but none is in sight at the moment.
Covid-related loans have been welcomed by many businesses and have enabled them to manage and survive the crisis. Such support has been welcomed by big and small businesses, including easyJet, British Airways and many others. Of course, some loans will never be repaid. However, this loan-centric policy is also storing up more problems for the future. In time, the loans and interest thereupon will need to be repaid. The repayments will deplete business cash flows and dampen business recovery, employment and investment in productive assets.
A better policy option would have been to take an equity stake in businesses wherever possible. This would mean that business cash flows would not be depressed and would instead be available for investment in productive assets. In time, the Government could sell their equity stake to recoup their investment if they so wished. Of course, the equity stake would need to be written off if the business in question did not survive. However, that risk is no different from a situation where the business has been supported by government loans. Even now, there is nothing to prevent the Government converting their loans to an equity stake wherever possible. I hope that the Minister will agree with this proposal and the Government can therefore avoid the problems that will surely arise and affect many businesses.
In previous debates, I have asked the Government to help unsecured creditors. Under insolvency law as it stands now, unsecured creditors recover little of the debts owed to them. This in turn affects their survival, jobs, investment and local prosperity. There is no economic or moral reason for enabling secured creditors —mostly banks and other financial institutions—to walk away with most of the proceeds from the sale of a bankrupt business’s assets. This leaves little for unsecured creditors and hits micro-businesses and SMEs particularly hard. Their prospects of survival are strangled by inequitable insolvency laws.
The current insolvency laws do not provide equitable risk-sharing and the biggest burden is borne by those least able to carry it, namely micro-businesses and SMEs. Such entities are not diversified and therefore cannot absorb the risk arising from the collapse of a major customer. In contrast, banks hold diversified portfolios and are in a position to absorb risks arising from the default of loans. Insolvency law needs to be changed. At least 40% of the proceeds from the sale of bankrupt businesses’ assets must be ring-fenced for
distribution to unsecured creditors to give them a chance of survival. If the Minister does not agree, I hope he will explain why SMEs are being penalised by the current insolvency laws.
There is no legislation in place to prevent insolvency practitioners enriching themselves by prolonging insolvencies and charging exorbitant fees. In some cases, partners are charging more than £1,500 an hour for their services; I have seen the invoices. Government statistics show that around 14,328 insolvencies were not finalised, even after 15 years. This is a licence to loot and no regulator has done anything to check it. It is no good saying that a creditors’ committee can act because many insolvencies do not require the prior approval of creditors. In any case, small businesses are too busy looking for replacement business and do not have the time to attend such meetings. Even if they did, the votes cast by banks and private equity would override their concerns. The cost of administration and the liquidation fees are directly borne by unsecured creditors. In other words, higher fees for insolvency practitioners reduce the amounts that can be recovered by unsecured creditors. I hope the Minister can explain why secured creditors do not bear the cost of insolvency —the insolvency practitioners’ fees, in other words.
I urge the Government to provide an insolvency road map so that more businesses can survive the coming crisis, which will not end soon but will roll on for quite a few years yet. We need a strategy in place now.
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