(4 years, 4 months ago)
Lords ChamberMy Lords, I am also minded to support Amendment 1, moved by the noble and learned Lord, Lord Hope of Craighead, because it should not be too difficult a task for the directors to undertake and would be likely to save time afterwards, once the monitor starts his work. However, given that the noble and learned Lord has expressed satisfaction with what the Minister wrote to him, far be it from me to doubt his learned judgment on that matter.
I speak in support of Amendment 2 and the other amendments tabled by my noble friend Lord Leigh, to which I have added my name. I declare my interests as listed in the register. I know a little about corporate restructurings, having worked in corporate finance and mergers and acquisitions for some 40 years. I thought that the amendments proposed in Committee by my noble friend made obviously good sense, and I have heard nothing from the Minister that causes me to change my mind—at least, so far.
As I mentioned in Committee last week, this question was discussed during the debates on the Enterprise Act 2002. My noble friend Lord Hunt of Wirral said in the debate in Committee that
“the greatest asset of a company is the people whom it employs … I believe that rescuing the company on its own is a pointless objective … the objective of preserving all or part of the company’s business would be beneficial to the employees of the business, creditors of the company who may be paid out of the proceeds of the sale of the business or from future profits, and of course it would be beneficial to the economy as a whole”.—[Official Report, 29/7/02; cols. 764-65.]
My noble friend Lord Hodgson of Astley Abbotts said on Report that
“by inserting … ‘and the whole or part of its business’… an administrative receiver or administrator”
would be empowered
“to deal even-handedly with the whole or part of the company’s business.”—[Official Report, 21/10/02; col. 1102.]
Of course, the views of my noble friends in 2002 related to a different Bill from the one before your Lordships’ House today, but I nevertheless believe that their comments are equally relevant to the points we are considering now. New Section A6(1)(e) requires a monitor to say that in his view it is likely that a moratorium would result in the rescue of the company as a going concern. Even if the monitor thinks that the company’s business, or some part of it, would be rescued if the company could obtain a moratorium, this would not provide sufficient grounds for the court to grant a moratorium.
Under the Enterprise Act 2002, obtaining a moratorium through administration is not as restrictive as proposed under the provisions of the Bill. It is necessary for an administrator to show that there is a reasonable likelihood of achieving one of three statutory objectives: rescuing the company as a going concern; achieving a better result for the creditors as a whole than would be likely on a winding up; and realising property in order to make a distribution to secured or preferential creditors. The second of those objectives is the one most often relied on as it includes the rescue of a business or one or more of several businesses when, as is often the case, it is impossible to show that the company as a whole can be rescued.
Prior to 2002, the position was the same, although the purposes of administration were not precisely the same. They were: the survival of the company and the whole or part of its undertaking as a going concern; the entering into of a creditors’ voluntary arrangement; the sanctioning of a scheme under Part 26 of the Companies Act; and a more advantageous realisation of the company’s assets than would be effected on a winding-up. Again, the last of those four options was the one relied on where, even though a company was doomed because of the burden of debt, its business or a part of its business could be rescued.
Under the new moratorium procedure, the only type of restructuring proposal that can be advanced is one that involves a company rescue. This means that the options available in a moratorium are significantly more limited than they would be in an administration. Perhaps the Minister can tell the House whether the Government are deliberately trying to restrict the use of moratoriums and do not want to give the directors that degree of freedom if they are trying to save the business but not the company.
However, very often when a business is successfully rescued the company may also be rescued, although that category of company would not be able to use this new procedure. I understand that the Government believe that if rescuing a company’s business were sufficient grounds for a moratorium to be granted, the company would be tempted to use the moratorium to prepare for a pre-pack administration. If this is the case, perhaps my noble friend the Minister could explain to the House why the Government think so.
As my noble friend Lord Leigh has already explained, companies as legal entities are hardly ever saved in an insolvency situation and the connection between widening the grounds for entering a moratorium and the possible abuse of the pre-pack mechanism is, I believe, tenuous at best. Pre-packs have developed as a mechanism for selling a company’s business immediately after it goes into administration, so that the administrator—not the directors—is responsible for breach of duty if the business or assets are sold for less than fair value. The moratorium is surely intended to prevent creditor action, but creditor action has never been a check on an abusive pre-pack. It would be a pity if the moratorium were to be limited to cases in which a debt restructuring is the only way forward, rather than other forms of business rescue.
In conclusion, I think that the Minister has shown great wisdom in introducing so many amendments to dispense with Henry VIII powers, which the Government had thought they might wish to include—although I share my noble friend Lord Leigh’s reservations about some of them in the event that they may restrict the Minister from providing enough comfort on the points that he and I have raised.
My Lords, I refer to my entry in the register of interests and shall speak to Amendment 13 in my name. In this group the Government have brought forward helpful amendments to seek to prevent bank debts and other financial lendings that are accelerated during the moratorium from gaining super-priority status. This is a welcome change. However, serious risks remain of gaming to give current or future lenders access to super-priority, avoid pension liabilities and incentivise insolvency over rescue for certain creditors.
Amendment 13 would remove the exemption which payments in respect of pre-moratorium debts arising under a contract or instrument of financial services have from the payment holiday and from super-priority in the event of an insolvency process. Notwithstanding the Government’s amendments, real concerns remain that lenders may be able to circumvent their intent by the drafting of their lending agreements; the definition of accelerated debt could be sidestepped so that lenders can continue to bring forward debt and benefit from super-priority. It is unclear, for example, whether on-demand debt that is called during the moratorium would be caught by the definition of accelerated debt and debts accelerated prior to the moratorium would continue to be granted super-priority.
Adding to these concerns is the width of the definition of financial institution debt which would qualify for super-priority, covering intra-company loans, for example. In addition, finance debts due prior to or in the moratorium continue to be exempt from the payment holiday. Debts due to the pension scheme are not, would not be payable and would be outranked in subsequent insolvency. That exemption and the super-priority given to that financial debt, which are permanent provisions within the Bill, will inevitably lead to novel forms of moral hazard when it comes to pension liabilities.
This is a fast-track Bill containing permanent, major changes and scrutiny has consequently been fettered, but government Amendment 80 in this group gives a power enabling the Secretary of State, by regulation, to change the definition of moratorium debt and priority pre-moratorium debt. This is a welcome concession by the Government, because it implicitly recognises the arguments that many noble Lords have made that it allows the Government to respond to actual experience of gaming and perverse behaviours. Will the Minister confirm that the intention of Amendment 80 is to allow the Government to quickly address the risks other noble Lords and I have identified when they emerge and to change the definition of moratorium debt and priority pre-moratorium debt in response? Will the Government commit to monitor closely the impact of the provisions on moratorium debt and priority pre-moratorium debt, and to consult relevant bodies on the real concerns around super-priority status, the definition of accelerated debt and the implications for pension scheme debt?