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Administration and Insolvency

Volume 571: debated on Wednesday 27 November 2013

Motion made, and Question proposed, That this House do now adjourn.—(Gavin Barwell.)

It is a pleasure to lead this debate on administration and insolvency. It is worth mentioning that the empty green Benches are a reflection not of the relevance or importance of the issue but of the incredibly busy lives that most parliamentarians lead.

The purpose of the debate is to try to persuade the Minister that there should be a

“mandatory requirement for licensed insolvency practitioners to give greater consideration to the social consequences of companies in administration”

rather than the current situation where perfectly viable businesses are simply sold to the highest bidder to be disassembled, with their assets flogged off and their work forces devastated.

The Minister will be aware that I met the Secretary of State to discuss this very issue. I fully appreciate that administrators are under a legal duty to ensure that they get a maximum return for creditors, but there is little, if any, cognisance of the detrimental effect that that can have on the very survival of a company if other factors are not explored, often with a resultant effect on a local community or a negative impact on UK plc. In other words, administrators almost invariably accept the highest bid, which is not always the best bid.

Before I begin my speech in earnest, I should like to place on record my thanks to both the Secretary of State and the shadow Secretary of State for their co-operation in September when I contacted them in a desperate attempt to save as many jobs as possible when Trigon Snacks in my constituency went into administration.

I thank the hon. Gentleman for giving way. Before the debate, I received his permission to intervene. Does he think that in the first year of trading, before a business gets into difficulties, the Government or the Minister could give them some indication of what to do when it comes to banks, regulations, skills and rates? Those four things are so critical in the first year of any business to ensure that it gets a second and a third year and that it stops insolvency.

I am certain that those four factors are important, but start-up credit is a major impediment to the long-term success of smaller, micro-businesses. One in six small and medium-sized enterprises goes bust in the UK. In 2011-12, something like 120 SMEs per day were going into administration or liquidation. Anything that Parliament can do to assist those businesses to grow and to take on additional staff can only benefit the country as a whole.

I also want to put on record my thanks to Unite the union, which, despite the Prime Minister’s constant jibing, works tirelessly to support its members and which was as determined as I was to see production remain in Liverpool. I know the Minister and her Department are aware of this case, and it is this recent episode on which I wish to focus much of my contribution tonight as it clearly illustrates the issue at hand.

Trigon Snacks was a nut production factory with an annual turnover of approximately £30 million. The company produced peanuts for pub favourite brands such as Big D and Planters, and the business had profitable contracts with a number of large supermarket chains.

Following the company’s success at winning an increased order book with Sainsbury’s, Trigon doubled its production, introducing new shift patterns for the work force. That resulted in negotiations between management and the union to reward staff with a pay rise, which they had forgone for many years to secure the viability of the company. Indeed, some of the loyal work force had given more than 30 years of service to Trigon. Everything in the garden looked rosy.

To meet the new targets, Trigon stepped up production but soon encountered cash-flow problems, due to the purchase of extra plant, material, raw stock and associated manufacturing costs. To meet that short-term liquidity problem, Trigon approached the Royal Bank of Scotland for a loan totalling approximately £1.2 million. Given the developments this week with RBS, this might be another case that requires further scrutiny from the Secretary of State as it is clear that, for whatever reason, the company, despite being profitable, was not awarded the loan. When that loan could not be guaranteed, the business was destined to fail. RBS’s decision came in August and just a month later the business was put into administration. It is also worth noting that at the time of entering administration the company’s stock value alone was £2.7 million.

Disgracefully, 64 members of staff were handed immediate redundancy notices without prior warning, consultation with their trade union officers or even the courtesy of the administrator writing to me as the local MP. That still rankles with those who lost their jobs. Those employees had given decades of service and yet they were called to the works cafeteria for a routine meeting, had their names read out and were then told not only that they were losing their jobs but that they had to go promptly to clear their desks and lockers before being escorted from the premises by security guards who had been hired specifically to oversee that draconian act.

Having met Unite officials and staff at the factory immediately after the redundancies were announced, I became aware that numerous cases of unfair dismissal were set to be lodged alongside claims for protective awards by the union. Many of those shown the door have found it extremely difficult to find alternative employment despite being skilled factory workers with a wealth of experience.

I should make it clear that I am not suggesting the administrators did anything illegal, but I believe it was certainly unethical and I told them so. It remains likely that Unite will seek 30 days’ pay for its members through protective awards, a cost that is likely to be borne by the Exchequer. However, once Trigon was in administration only two outcomes were likely. First, the administrator could look to keep the business operational by selling it as a going concern. Although that would not absolutely guarantee the future of the business, it was hoped that those who bought the going concern would maintain production at the site, look to restructure the business, re-launch the brand and invest in improvements. There was another option: it would result in the administrator accepting a bid from a company that would close the factory, sell the stock, plant and machinery, transfer production to another site and make the whole work force redundant. In other words, the fear was that an asset stripper would decimate the business for a quick profit.

In the case of Trigon, despite my best efforts and those of Unite it looked likely that the doomsday scenario would be the most probable outcome and that the administrators, Duff and Phelps, would complete a sale that would maximise a better return for creditors but that would inevitably result in the loss of production at the Liverpool factory.

That is where I think that the balance is all wrong. I know that the closure of any factory is a tragedy for that particular business and work force, but when it makes no economic sense it is even harder for those facing redundancy to accept. When the result also lands the Treasury with a hefty bill for workers’ redundancy payments and increased benefit bills—not to mention the devastation to the local jobs market, the loss of business rates and the blight of a large empty factory—questions need to be asked. I believe that the need to ensure that administrators take greater control of the social impact of the bids they accept is now even greater.

The cold reality is that none of those factors could, in law, be taken into consideration by the administrators, and I believe that that is fundamentally wrong and needs to change. Some people may argue that administrators indirectly take all those factors into consideration as they look to keep businesses alive as going concerns, but they do not have a mandatory requirement to consider the social consequences. The law only directs them to make the biggest return for creditors, no matter what the consequences might be for communities.

At the end of the day, the potential to asset-strip the Walton factory collapsed, as only one bid remained, which set out to retain production locally, and this is where I do give some credit to the administrators for working with myself and the Unite union throughout the evening to secure a deal as a going concern.

We were lucky. The Trigon factory was saved. It still exists today, in the guise of a new company called Natco, but minus the 60-odd staff originally sacked. I have not given up hope of restoring the work force to its full complement, and getting those workers who were wrongly dismissed back on site. I know that many of them are facing a bleak Christmas for the first time in 30 or 40 years, through absolutely no fault of their own, with, yes, the fiscal costs borne by the state, but the human cost is much more difficult to measure. All that is because the initial shortfall loan could not be agreed with the banks.

I am aware that when it comes to the process of administration, nothing about what I have described is extraordinary, or dissimilar to the experiences of many others in this place. This is where I believe that reform should be considered, even though I appreciate that it is a complex area of law. The primary legislation governing insolvency is the Insolvency Act 1986. As the Minister is no doubt aware, the last Labour Government radically reformed legislation in this area to modify insolvency laws through the Enterprise Act 2002.

The raison d’être of our reforms was as PricewaterhouseCoopers explains:

“The Government’s intention was to create a shift in insolvency culture, with a greater emphasis placed on company rescue and rehabilitation, fairness for all creditors and making it tougher for offending directors”.

Those reforms achieved a great deal. Indeed, as PWC went on to say, the

“insolvency landscape transformed; administrations have now largely replaced administrative receiverships as the primary insolvency procedure, and many businesses have been preserved via this route. Furthermore, other solutions have evolved to facilitate the turnaround, restructuring and rescue of businesses”.

So progress can be made—it has already been made—to change the culture within this field and I am sure that this kind of independent analysis is welcomed across the House. But now I think it is time to go further.

In the list of responsibilities laid down on licensed insolvency practitioners we need a further mandatory requirement that consideration should be given to the social consequences of every bid they receive and, critically, that they should have the ability to award a sale of the asset that offers the most protection for staff, local communities and the taxpayer.

My contention is that greater consideration is needed of the impact on the public purse and our manufacturing capabilities. It seems nonsensical to me that greater consideration is not given to the impact that insolvency has on the Exchequer—and, equally importantly, the area in which the closure is proposed. I am not suggesting that those two factors should be exclusive, or that they should be given pre-eminence in deliberations, but there must be some reflection of the wider social impacts of each bid. I am acutely aware that this will not always ensure that asset-strippers are not awarded businesses. I am also aware that it will not always ensure that British workers stay in work and that their jobs will not just be exported overseas once the sale is completed.

I am sure that my hon. Friend is coming to the end of his speech, but he is absolutely right about social responsibility being an important part of the way in which insolvency is handled, and I welcome that point. Does he agree that, bearing in mind the example he gave of the way in which the bank has behaved, it is vital that banks change their behaviour so that they take greater responsibility to stop insolvency in the first place?

I could not agree more with my hon. Friend, because that is exactly the scenario that I am painting with this company. Trigon was a viable, profitable company with a short-term cash-flow problem that could not get a bail-out from the banks, which, we should not forget, are owned by the people of this country, who rely on those companies to provide them with suitable jobs.

We must ensure that there is a chance, as in the case of Trigon, where a factory was at the heart of one of the most economically deprived areas in the UK—that is true of Liverpool, Walton and there are areas of social deprivation in my hon. Friend’s constituency too—that other bids are considered that would keep people in work and maintain UK production.

Liverpool city council has been successful in attracting new industries to our city. In north Liverpool, we continue to work to attract inward investment and businesses, and do all that we can to ensure that our workers are in full-time employment, but that is incongruous if the net result is that we haemorrhage jobs from profitable companies, which we give to asset strippers to break up, and sell brand names for products that are manufactured abroad, then import the same products back into the country.

Was there any opportunity for the company to access moneys from the Government to prevent that situation in my hon. Friend’s constituency?

The Secretary of State and the Department—I spoke to some officials—were as helpful as they possibly could be. If we had had a longer lead-in period or the company was in administration for a longer period there might well have been investment or pots of money—local enterprise partnership moneys, for instance, or regional growth moneys—that could have been used. Unfortunately, things happened very quickly and it was not possible to access moneys to ensure that the shortfall of £1.2 million was covered.

If the Minister is not willing to hear my request for a mandatory requirement for administrators to consider the social consequences of each bid, will she not consider the requirement in regard to the consequences for UK industries? That is not protectionism but pragmatism. We simply cannot afford to do nothing and watch good British businesses suffer. For instance, since the global financial crisis, the impact on the retail industry has been severe. According to the Centre for Retail Research in Nottingham, in its update entitled “Who’s Gone Bust in Retail 2010-13”, since the global financial crash, 249 medium and large-sized retail businesses have failed financially, affecting more than 22,100 stores and close to 250,000 employees. We all know the names of those companies—most of them are household names, but they have become infamous for going out of business.

Not all of those companies were profit-making enterprises in the way Trigon was, but undoubtedly some businesses were wound up that produced a short-term return for asset strippers but that, in the long term, could have been kept alive, and there was no consideration of the long-term social consequences for everyone affected by closure. In other words, I contend that some creditors will have done well out of these administrations, but the workers, the local communities and the economics of the area will have suffered most from their failure, and we must do more to protect society and British industry.

In conclusion, I expect that the Minister might try to explain that this is a very complex area of law and that it would be difficult to introduce changes as there would undoubtedly be knock-on consequences. I do genuinely understand the problems of best intentions—I spoke to the Secretary of State about this—and the law of unintended consequences, but I am sure the hon. Lady will agree that it would be wrong not to look at what could be done to improve current legislation. The status quo is not good enough.

I congratulate the hon. Member for Liverpool, Walton (Steve Rotheram) on securing the debate, and, if I may say so, on his rather fantastic contribution to Movember. As we are now nearing the end of the month, I implore him, perhaps on behalf of other hon. Members, not to get the razor out on Sunday so that we can continue to enjoy his fine moustache. What a fantastic cause to raise money for.

I recognise the interest that the hon. Gentleman has shown in insolvency issues, and in particular his concerns about the impact that insolvency has on local communities when jobs are unfortunately lost. He outlined particularly eloquently the human cost that is paid by those involved in such businesses when they unfortunately enter insolvency. This is especially keenly felt in the run-up to Christmas. In the example he talked about, Trigon Snacks, those 64 individuals are in a very difficult situation, having, sadly, lost their jobs. I extend my full sympathies to those individuals and their families.

I recognise the efforts and discussions that the hon. Gentleman has had with the administrators and the union in this case. He was right to highlight the positive role that unions can play in such situations. It is all too easy for unions to be demonised in industrial relations, with headlines that tend to focus on circumstances where industrial relations break down and are negative, whereas the day-to-day experience is often of a much more positive and constructive working relationship, helping to create future success for a business that is going through difficulty. Although clearly for the 64 individuals who have lost their jobs there is a heavy price to pay, it is worth noting the success of at least making sure that 110 of those 174 jobs have been saved as a result of the business being sold as a going concern. The input of dedicated constituency Members of Parliament in such cases is not to be underestimated and is cause for congratulation.

I understand the hon. Gentleman’s concerns about some of the practices surrounding administration, and I will try to set out what the Government are doing to address some of them. He said that the social consequences should be explicitly recognised in the objectives of administrators, and he rightly highlighted concerns where it is the case, or sometimes the perception, that a company is asset-stripped and sold off to the highest bidder without any apparent concern for the wider consequences.

I would like to provide reassurance by going through the hierarchy of objectives for administrators. The top priority that they have to bear in mind is business rescue—to rescue a financially troubled company as a going concern. That is well aligned with the wider social objectives that the hon. Gentleman seeks to promote, including the interests of employees and other stakeholders. Generally, the best way of making sure that creditors can be paid and jobs can be saved is to ensure that the business can continue as a going concern. If that is not possible, the administrator is required to achieve a better result for the creditors of the company as a whole than would be achieved in an immediate winding-up. Only if neither of those things is possible is it their duty to realise the property and the assets for the benefit of the secured or preferential creditors. We have a system that places priority on business rescue, which is incredibly important and ultimately the best way to secure the jobs of the individuals who are working for a company.

Regrettably, to have a chance of rescuing a failed company, urgent and robust action sometimes needs to be taken to restructure and to reduce costs. That does not necessarily mean that it is the fault of the administration procedure per se; it may be a reflection of the economic reality of a company that cannot meet its obligations. Thankfully, the number of administrations and liquidations has been on a downward trend in recent years. In the 12 months that ended in the third quarter of this year, there were 2,303 administrations, which is about 300 fewer than in the previous 12 months, and the number of liquidations was about 8% lower over the same period.

The hon. Gentleman and the hon. Member for Sefton Central (Bill Esterson) asked about the behaviour of the banks. This is not only about what happens when an administration procedure is reached but what we can do to prevent businesses from getting into this situation in the first place. The hon. Gentleman outlined the scenario of Trigon Snacks, where so much stemmed from the declining of a request for a loan. I am sure he will understand that I cannot necessarily comment on the specifics of that loan application, but this is an issue on which we share some general concerns. In fact, this week the BIS entrepreneur-in-residence, Lawrence Tomlinson, published a report in which my right hon. Friend the Secretary of State has taken a great interest and has referred to the Financial Conduct Authority and the Prudential Regulation Authority, which looks at the role of banks particularly in relation to the support they give to business. The report focuses on significant concerns about the conduct of the Royal Bank of Scotland. We are looking carefully at the evidence in the report to see whether further issues need to be raised within the regulatory bodies regarding insolvency practitioners and whether any legislative framework issues need to be addressed in relation to the behaviour of banks.

Generally speaking, our insolvency regime is highly regarded internationally. A recent World Bank report rated it seventh—above those of the US, Germany and France—on resolving insolvency. That is partly a reflection of the flexibility of our regime for prioritising business rescue, which helps to preserve value and jobs. That focus, rather than any specific obligation to consider particular affected parties over others, helps to balance everyone’s interests and to create a better business environment, which improves the prospects for preserving these jobs in the long term. However, I absolutely recognise the concerns that the hon. Gentleman raises about this case and others.

Let me turn briefly to some of the other issues raised about insolvency. On the effectiveness of the regulatory regime, we believe that stronger oversight powers would help to improve confidence in it. We will therefore introduce proposals, when we can find time in the legislative programme, to strengthen the powers of the Secretary of State as oversight regulator.

Concerns have been expressed about the pre-pack administration process, particularly where there are sales back to connected parties. In the light of these concerns, I announced in July that Teresa Graham had been appointed to undertake an independent review of the pre-pack procedure, which we expect to be completed by the spring next year. There have also been changes to introduce a revised practice standard for pre-packs, known as SIP16, which is now in place. The complaints mechanism has been streamlined, with a new single complaints gateway to help to make the complex array of regulatory bodies easier to complain about.

The issue of fees charged by insolvency practitioners has been raised. Professor Elaine Kempson recently provided a review of fees that was published earlier this year, and we intend to make an announcement on the way forward in due course.

The hon. Gentleman said that in recent years significant progress has been made on insolvency to improve the situation. I hope that he is reassured that this Government are very aware of the issues he raises and are taking action on a number of fronts to make further progress in various areas to ensure that all insolvency procedures can deliver the best possible outcomes in difficult circumstances—

House adjourned without Question put (Standing Order No. 9(7)).