My Lords, I declare an interest. I am chairman of the Secondary Legislation Scrutiny Committee, which has reviewed these regulations, but I speak this afternoon not as its chairman, nor indeed for the committee at all; I speak entirely in a personal capacity.
My noble friend the Minister will be aware of my interest in these matters, and it would be right for me to begin by thanking him and his officials, led by Paul Bannister, for the time they have given me and other interested Members of your Lordships’ House over the past few months to look at aspects of the particular problem we are dealing with this afternoon. Indeed, they have given us not just time but action in the sense that we have had some really sensible regulations about pre-packs, which have become a feature of choice and often with connected persons. The regulations which the Government have produced have done much to block that loophole and, judging by my postbag, they seem to be working well so far, although, as the noble Lord, Lord Sikka, has pointed out, the point of maximum strain will of course come when we reach the end of the subsidies, whenever that may be.
I have a couple of points to make this afternoon. The first is about how we judge when “can’t pay, won’t pay” moves to “can pay, won’t pay”. My noble friend the Minister will say that paragraph 7.3 of the Explanatory Memorandum says that that is when the court is satisfied that the company’s inability to pay is not due to coronavirus. That may a possibility for a large and well-resourced company, but it is certainly beyond the resources of a small or medium-sized enterprise to go to court to try to prove this issue, which is pretty hard to prove anyway. I do not think that the Government should think that this offers anything other than the
largest companies a proper balance in the argument about “can’t pay” and “can pay, but not bothering to pay”.
Of course, one understands, and has an instructive and instinctive view, that one should be helping people whose lives, efforts and companies have been set back by the pandemic, an issue over which they have no control. Of course you feel sympathy for them. However, we always have to balance that sympathy with the knowledge that this is a zero-sum game. One person’s gain is another person’s loss. I may be a supplier and may therefore be caught up in this; I may be unable to get paid and my business may be affected. It is always tempting to think that one should be trying to help those who are in difficulties and forgetting those who are strong. We need to avoid, or at least to minimise, situations where businesses that are already weak—perhaps for reasons beyond coronavirus, although that has created an additional strain—are kept afloat at the expense of suppliers and landlords.
In summary, we need to avoid taking policy decisions that benefit the weak and weaken the strong. When my noble friend winds up, it would be helpful if he could give us a stream of consciousness that will guide us as to how the Government judge all this. I understand the magic references to constant review in the Explanatory Memorandum; viable but cash poor is in there as well.
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It would be helpful if the Minister could broaden out, in a slightly philosophical way, how his department is considering the matter and how it will make judgments in the future. Please, it must not fall back on saying, “It’s up to the court”, because the court is a court and not always as well able to judge commercial matters as the Government and advisers to them. That is my first point.
My second point concerns the position of landlords. They are always unpopular; nobody likes paying rent, and people always try to avoid it. However, we need to remember that big and small landlords provide the foundations for a huge swathe of our industrial, commercial and residential activity. As before, this is not just an academic exercise. The pensions that many of us enjoy, or hope to enjoy, are underpinned in large measure by real estate values. If we allow this sector to be savaged, the impact will be felt by pensioners up and down the country. Our environment, our neighbourhoods and in particular our high streets will depend for their vitality on a continuing flow of real estate investment. If we allow landlords to become too much the target, we run the risk of damaging those important factors.
My noble friend needs to be aware—I am sure he is already—that the position of landlords under the present regulatory regime, the landlord restructuring plan, is giving cause for concern. At this point, I need to declare a second interest, in that I have a shareholding in a family investment company that rents out commercial property—happily, to date, without any of the problems to which I will refer, but the Committee needs to be aware that I have that conflict.
I will have just a word on the specific challenges, for which I would be grateful for my noble friend’s reaction this afternoon or, if he feels that I have gone too far
off-piste and his brief is not ready for this, I am happy to receive a letter, and I am sure other Members of the Committee will be happy to do so too.
Noble Lords interested in the area will be familiar with what are called, in current legislation, cross-class cram-down provisions. These prevent a small group of creditors greenmailing—holding a restructuring plan to ransom. In that sense, they seem reasonable enough and sensible, but they also enable one group of creditors to bully another into accepting unfair terms. There are many constraints on individual classes of creditors, and landlords can have difficulty obtaining appropriate compensation or protection. First, it is very costly. The Virgin Active restructuring cost about £3 million. It has to happen very quickly. A real estate company or landlord has three weeks to get its case together, brief its Silks—its legal advisers—and get to court. Once again, these are sufficiently high hurdles that small and medium-sized companies just cannot go there. Big ones can, but smaller ones are left behind. Secondly, life being what it is, unscrupulous firms facing difficulties can make their financial affairs even more difficult in advance of such an issue, so it is even more problematic, costly and complicated for a landlord seeking to obtain protection to go to court and get it.
There is also the concern that landlord restructuring plans can go much further than what is needed just to save the business, if that business is in danger of going into administration. It is what is known in the legislation as the relevant alternative. A firm in trouble has an incentive to plan its financial performance as part of a restructuring likely to lead to administration and so set landlords in particular, but also other creditors, at a disadvantage.
My last point on this matter, and the Government understand this, is that there are not now the protections against connected parties. In company voluntary arrangements, less than 50% must be connected parties. There is no such provision in this measure. With a landlord restructuring plan, 70% of the connected parties —shareholders, creditors, whatever—could vote in favour, with the landlord unable to obtain redress for it.
Those are just some of the issues bubbling up as part of the situation that we face and which the Government now need to think about. What could be the solution? Without diving too deeply into the detail, I point out that the Government have powers under the Corporate Insolvency and Governance Act to introduce further secondary legislation to address these challenges specifically. First, they can amend the rules governing cross-class cram-down provisions. Secondly, they could introduce the 50% unconnected creditor test for LRPs, which, as I have mentioned, presently applies to CVAs.
When my noble friend responds, he may claim that there has been only a limited number of cases of this abuse so far, but, as the noble Lord, Lord Sikka, and I said earlier, the point of maximum danger will be when the pandemic measures are withdrawn, if we extend beyond 30 September. Acting then will be too late: the horse will have bolted. However, if the Government decide to act now, there is a reasonable prospect that the new regulations could be in place in time to keep the horse in the stable. I look forward to hearing my noble friend’s reaction.