Enterprise Bill

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Mr. Waterson: The clause is important and deserves a stand part debate before we move on. It involves the partial abolition of administrative receiverships, which has not met with universal support. I think that the Minister quoted the British Bankers Association earlier—it seems a long time ago—as saying that it was in favour of the proposals, but I do not think that that is strictly accurate. Certainly it is not accurate so far as the clause is concerned, although it may have been for a different aspect of the Bill, in which case I apologise profusely.

In the BBA's response to the White Paper, it said how successful administrative receivership had been, describing it as

    ''an engine for reconstruction and enterprise in the UK''.

It went on to describe the importance of secured credit as making it possible to put someone in place quickly, with a view to restructuring a company, saving jobs and getting the business moving again in a cost-effective way.

Mr. McWalter: Does the hon. Gentleman agree that people put in place quickly often act strongly in favour of the bank, and do not necessarily bear in mind the needs of all the creditors, or even of the continuing existence of the business?

Mr. Waterson: I am aware that that argument is made. However, in a separate submission, the BBA referred me to figures published in April 2000 that showed that 75 per cent. of cases handled by bank specialists involved the recovery of the company. That is encouraging. The BBA said that

    ''British banking is highly based on rescue, unlike the American system, which is based on asset. By terminating AR, Banks are moved toward a system in which higher risk ventures, like independent start-ups, will be shunned by loaners''.

My hon. Friend the Member for Huntingdon made that point in an earlier debate. According to the BBA, it is not only the banks that will suffer, but the start-ups and the people looking for venture capital for higher-risk ventures, who may find it more difficult to raise the loans that they need.

The BBA also raised the issue of speed, stating:

    ''In times of financial crisis, the swift appointment of an AR enables the situation to be quickly dealt with. An AR, say, who comes in at 5.00 on a Friday afternoon will have the weekend to prepare for Monday morning, and the beginning of the rescue process.''

It goes on to mention the system being bogged down

    ''with business and administrators sitting around, waiting for Courts to act and allow them to go in.''

We will unarguably lose some flexibility by scrapping ARs in their present form for most situations. The BBA response to the White Paper also stated:

    ''this will lead to an environment in which finance for the vast majority of businesses which do not get into difficulty may become less flexible, more expensive and probably less available.''

If I may say so, we have here a classic example of the law of unintended consequences; something of which the Government have proved themselves to be masters on all sorts of subjects.

The BBA is not alone in expressing disquiet about

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the proposal. Freshfields Bruckhaus Deringer, the law firm, stated:

    ''we believe that by abolishing administrative receivership and muddling the objectives of an administration, a cost-effective and successful rescue tool will be lost, and a more complex and consequentially more expensive administration regime will be introduced.''

That, again, comes from people who deal with the subject on a day-to-day basis.

I, like other hon. Members, have also received views submitted on behalf of9 the Royal Institution of Chartered Surveyors, the Association of Property Bankers and the Investment Property Forum, who all have concerns about clause 241, particularly about the exemption threshold of £50 million. That figure has a suspiciously round ring, and I would be interested to hear the Minister tell us by what thought processes that figure was arrived at. That threshold is intended to enable project finance companies to appoint administrative receivers. Those bodies say that they believe that the threshold should either be removed or reduced to what they consider to be a realistic figure of £10 million.

The Association of Property Bankers suggests that the majority of the projects with which it is involved are funded at below the £50 million threshold. That is also an issue that has been raised with me by the British Bankers Association. If I say that the £50 million is an arbitrary figure, I do not intend to be gratuitously offensive. I am sure that the Minister would agree that it must be an arbitrary figure, but I ask him to give some thought as to whether he could listen to the representations being made by those bodies; they know their own business, and they suggested amendments—they have not yet been tabled but may be tabled on Report—that would reduce the figure to £10 million.

The Minister deserves some credit for having listened to City voices on the question of continuing administrative receivership in certain circumstances. I know that the City of London Law Society has been active in trying to persuade Ministers and officials to exempt project finance deals and public-private partnership deals. I do not want to discuss the political aspects of public-private partnerships; we shall have plenty of other opportunities to debate that. However, a recent article in Legal Week stated:

    ''The rationale behind continuing to allow administrative receiverships in large-scale private projects is that they rely heavily on bank finance 'step-in' rights to allow them to complete work under the control of the banks should deals be threatened the collapse.''

At least partially, the Minister and his colleagues seem to have listened to the representations of those who regularly deal with the rules.

I understand that administrative receiverships will continue to be available for holders of pre-existing floating charges, so the two parallel but separate regimes will continue for the foreseeable future. We have the capital markets arrangements, or project companies with step-in rights, where the intended or actual debt is more than £50 million. We have public-private partnerships or utility project companies with

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step-in rights. We also have members of recognised clearing houses or investment exchanges, companies undertaking money market contracts and member companies of financial markets. I am sorry only that the hon. Member for North-East Derbyshire (Mr. Barnes) is not here to hear about the City of London's success in lobbying the Government on those specific exemptions. More specifically, special administration regimes are to be kept in place for water and sewage undertakings, Railways Act administrations, air traffic services, Greater London Authority public-private partnerships and building societies.

We welcome those exemptions, as far as they go, but it is clear that a sufficient body of opinion, enough to make a stand part debate worth while, has reservations about scrapping administrative receivership. On reflection, the Minister might think that, having left open the wide range of exemptions that I have described, the option should simply be left open. Perhaps he can give us some idea of the number of situations that could arise with the £50 million limit, and how many more deals would be covered if it was reduced to £10 million.

We are not talking about a vast number of administrative receiverships. However, the proposal has its supporters; those people believe that it gives them the ability to sort something out in a failing company in quick time when other measures might be too slow and expensive, and ultimately unsuccessful. We want to probe the Minister's thinking on the rationale behind the scrapping of ARs and on the exemptions that he has put in the Bill, particularly the £50 million limit.

Mr. Djanogly: When we discussed clause 239 stand part, I spoke at some length on the issue, acknowledging that it could be discussed then or now. I am not going to go over it again. However, having reached the end of the debate, I have had the concerns that I then had about the ending of administrative receivership confirmed. On the whole, as my hon. Friend the Member for Eastbourne said, administrative receivership has been a successful regime. If anything, banks now tend to use it not as a way of beating companies over the head but as leverage to bring people to the negotiating table in order to find a sensible way forward.

The end result here is going to be a new administration system that will contain certain characteristics of the old administrative receivership regime, but with the addition of court involvement, extra costs and extra time delays. I still have grave doubts about it.

I should be grateful for the Minister's comments on the workings of one of the exceptions; chapter 72C of the Insolvency Act 1986, the exception for public-private partnerships. The clause is not self-explanatory; neither are the explanatory notes. Is it the case that where public money is involved in a public-private partnership, the Government's new principles of protecting unsecured creditors and wanting companies to trade on are effectively thrown out of the window, with the Government retaining the

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right to slash and burn with their administrative receiver?

If that is the case, I shall be grateful to hear the Minister's view. Is it not a question of double standards; it is acceptable for the Government to act in one way, but business cannot act in the same way?

Mr. Alexander: Even though there have been only a limited number of contributions, the debate has ranged widely. In order to put into context some of the more detailed issues that we shall consider during the rest of the afternoon, I shall reflect that in my comments. For clarity, clause 241 will prohibit the appointment of administrative receivers by inserting a new chapter IV to part III of the Insolvency Act 1986. Part III of that Act is about receivership generally; the new chapter IV also includes five exceptions to the prohibition.

Administrative receivership allows the holder of a floating charge whose security covers the whole or substantially the whole of a company's property to enforce that security by appointing an administrative receiver, usually referred to in Scotland as the receiver, as I said earlier. It effectively places control of a company in the hands of a single secured creditor, who has little or no duty to consider the best interests of other creditors.

The impression left by the recession of the early 1990s is that administrative receivership was often used to pull the plug on a company with no thought given to whether, with breathing space, the company could trade out of its difficulties and survive. By prohibiting a floating charge holder from appointing an administrative receiver and ensuring that the collective administration procedure is used, we shall move firmly in favour of a procedure in which all creditors have the opportunity to participate and under which the administrator must act in the interests of all creditors. However, we are not interfering with the existing corporate lending agreements.

Holders of floating charges created before the Bill comes into force will still be able to appoint administrative receivers if they want to. It could be that they will want to use the new procedure. If so, we have provided that holders of existing charges may appoint an administrator to take advantage of the new procedure. We recognise that some very specialised financing structures are used in business today for which the ability to appoint an administrative receiver is vital in order to maintain control and ensure continued cash flows or capital repayments to the appointer.

That is perceived to be necessary by City financiers and their advisors to allow these structures to raise the amounts of finance—at the sort of interest rates—that they currently raise, and which are often significantly more favourable than through traditional commercial lending. So, in addition to the prohibition on the appointment of an administrative receiver in new section 72A, the Bill provides five specific exceptions, which will allow the appointment of an administrative receiver in particular circumstances.

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4.30 pm

A specific query was raised by the hon. Member for Eastbourne in relation to the threshold of £50 million. I start with the obvious point that the financial threshold outlined highlights the fact that these are specialised financial structures. The provisions are not aimed at normal, everyday, commercial lending, and the figure in respect of capital market arrangements was arrived at following discussions between my officials and the City of London Law Society. Therefore, we see no reason why the threshold is inappropriate. It is set high enough to limit the scope for use as an avoidance mechanism by normal commercial lenders, but we have the power to amend it, if that turns out to be necessary.

 
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