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Debt: Insolvency Laws

Volume 718: debated on Thursday 11 March 2010


Asked By

To ask Her Majesty’s Government what action they will take to prevent foreign companies using “pre-pack” insolvency laws to avoid debts.

My Lords, the Government recognise the concerns surrounding the use of pre-pack administrations and foreign companies relocating to the United Kingdom. It is important that we rigorously monitor the system and root out any abuse.

I thank the noble Lord. On 23 June last year, the noble Baroness, Lady Vadera, answered my Question on this point by saying that the Government would look for any evidence of abuse or misuse. Given that Wind Hellas recently wriggled out of debts of £1.3 billion, can the Government give us any assurance that pre-packs will be allowed to be used only where a company is registered and trading in the UK and will continue to trade and be of benefit to British people in terms of work after the pre-pack has come into force?

My Lords, we are aware of the concerns that were raised by the Wind Hellas case. It is important to note that that case went before the High Court, which determined that what had happened was properly carried out and in the interests of creditors. However, our monitoring of pre-packs is thorough. Since 1 January 2009, we have been monitoring all pre-pack administrations, whether coming from a foreign firm or otherwise. We will be announcing the results of those data shortly. If we find that we are not seeing appropriate compliance with SIP 16, we are minded to take strong action.

Would not the simple way of dealing with this pre-pack tourism be to introduce a requirement under which no company could go for a pre-pack unless it had been registered in the UK for a minimum period, say a year or 18 months?

My Lords, we have to recognise that the legislation relating to this matter is governed by European law. Our policy as a Government is to be as open as possible, to encourage businesses to relocate to the United Kingdom and not to put up any unnecessary barriers to that investment. However, it is also vital that our Insolvency Service is rigorous. Independent studies by the World Bank have shown that the United Kingdom’s insolvency framework is highly regarded—above that of the United States, Germany and France—particularly on the basis of its protection to creditors, the costs of proceedings and the speed with which the process is able to be carried out.

My Lords, does the Minister agree that a pre-pack can be enormously helpful, even where a foreign company owns the British company and the assets, by effectively sanctioning an unbundling of a company that includes many solvent and useful trading entities, which can then continue to the benefit of the UK economy? Will the Government please not do anything to damage the concept of a sensible, workable pre-pack, which benefits the economy, for the sake of correcting this one error?

The noble Lord makes a very good point, with which I agree. The important advantage of a pre-pack, particularly in people-type businesses such as an advertising agency or a football club, is that in a difficult insolvency situation it enables the value of the business and, most particularly, the jobs to be retained. Up to 91 per cent of pre-packs lead to a situation where all the jobs in that business are preserved. We need to make sure that pre-packs are properly enforced through the regulations, but they are not the problem; the problem is the insolvency.

My Lords, bearing in mind that the debts held by football clubs in the English leagues are greater than the debts of all the other European football clubs put together and that an increasing number of English clubs are owned by foreign investors—in some cases, we do not even know whose companies these are—is the Minister confident that the football authorities are aware of the pre-pack difficulties and advantages? Will he initiate discussions with the football authorities to ensure that they are familiar with this way forward?

I thank my noble friend for raising that point. Sound business practices apply to football clubs as they apply to all businesses and I will ensure that they are made fully aware of the potential of the pre-pack approach.

To what extent have foreign-owned companies availed themselves of the Government’s various financial and liquidity assistance schemes? What solvency problems does the Minister anticipate as these schemes unwind?

My Lords, we monitor this very closely. We have noticed the very high profile in a small number of cases, but we are not seeing any significant trend relating to foreign firms. However, we monitor all pre-pack administrations and we are not complacent. One important fact is that, in this recession, we are seeing a marked reduction in the overall level of insolvencies in the corporate world compared to what happened in the last recession; although we are not complacent, at this stage in the economic downturn we are seeing about one-third of the number of businesses going into insolvency compared to the third quarter of 1992. That is a reflection of the measures that we have taken to dampen the significant impact of this recession.

My Lords, the Question is about corporate debt, but will the Minister tell us whether the Government are as careful of private insolvency? I ask that because, in common with, I suspect, a great many other people, I received two recorded telephone messages assuring me that they were not advertisements but that I needed to know that Her Majesty’s Government were prepared to take away all my debt. That astonished me the first time; I thought that it was a joke. I now wonder whether it was a harbinger of the general election.

If the noble Lord would like to write to me to make me fully aware of the proposals that he heard on the telephone, I will look into it.