My Lords, one of the key aims of the Enterprise and Regulatory Reform Bill is to encourage long-term growth. Key to this is promoting the rescue of potentially viable companies that are facing short-term financial difficulties.
Suppliers are a company’s lifeblood. Companies cannot continue to operate without them yet, under existing legislation, suppliers can currently take a number of unreasonable actions when they hear a business is in trouble. Struggling companies can often be faced with extortionate payments, being moved onto more expensive tariffs or with certain key suppliers withdrawing their services altogether. This behaviour frequently leads to the unnecessary liquidation of potentially viable businesses, which is bad news not only for creditors but also for jobs and the economy. The company R3 has estimated that a change in the law could result in approximately 2,300 additional business rescues a year and increased returns to creditors.
It is true that Section 233 of the Insolvency Act 1986 currently prohibits utilities suppliers from withdrawing supply but it does not stop any other supplier, no matter how crucial, withdrawing supply or imposing a higher tariff or payment before agreeing to continue to supply. It also fails to prevent any supplier from raising its tariff once a business enters insolvency. These actions can prevent any chance of business rescue, damn the business to closure, and reduce dividends for creditors. We suggest that this legislation should be updated in the following ways to help rescue more businesses and save jobs.
Certain suppliers often use the advent of insolvency to extract “ransom payments” before they continue to supply the company. Furthermore, while utilities suppliers
listed under Section 233 cannot withhold supply, there is nothing to prevent them moving an insolvent company onto a much higher tariff. We suggest that Section 233 should include a provision to prevent the exercise of contractual termination provisions on the grounds of insolvency alone, and should prevent suppliers of essential services from using their position to extract so-called ransom payments as a condition for continued supply, provided that the company continued to pay under existing contractual terms.
While original sellers of utilities services are prevented by the Insolvency Act from terminating their contracts on insolvency, on-sellers of telecoms services and equipment are not covered by the legislation, even though they are every bit as important to the business community—increasingly, these days. In addition, other services, such as IT and software suppliers, which are vital to business survival in the 21st century, are freely able to stop supplying a company on the ground of insolvency. Section 233 sets out the suppliers to which these provisions apply—currently, gas, electricity, water and communications. We suggest including in this list certain additional suppliers deemed essential for the continued operation of the business, particularly IT suppliers and on-sellers of utilities that are not covered by the original definition. A precedent for this change was set by Regulation 14 of the Investment Bank Special Administration Regulations 2011, which prevents suppliers of essential services such as financial data, computer hardware and data processing from withholding supply in the event of administration.
Finally, it is important to note that these changes expose suppliers to minimal risk, because they are paid as a priority, ahead of all other creditors during the insolvency. This is not about special treatment for insolvent businesses, but about preventing suppliers taking advantage of an insolvency and leapfrogging other creditors, at the expense of the business’s survival.
I turn to Amendment 58HZA in the group. The Finance Act 2009 established a duty on HMRC to produce a report each year on its adherence to its charter, which sets out the rights and obligations of taxpayers. Our amendment asks for HMRC’s annual report to consider a particular issue, consumer debt, and to relate that to the objectives in its annual business plan. One of the recurrent themes raised during the debates we held recently in your Lordships’ House on the Financial Services Bill was the need for the new regulatory structures to have the consumer at the centre of their thinking and practice. We have had not dissimilar debates on earlier sections of this Bill in relation to the new Competition and Markets Authority, to which we will return on Report.
This amendment is in the same vein, although the target is the HMRC, and is relatively uncontroversial and not particularly burdensome because it simply requests the HMRC to report additionally about what it is finding about levels of personal debt in the UK. This will be useful data for all those interested in this area, and might over time help to sensitise HMRC to what impact it is having on those struggling with unmanageable personal debts. I declare my interest as chair of StepChange, the leading debt charity. Its figures show that its median client owes more than
£20,000 to five different creditors, with the bulk in credit cards and personal loans, and other consumer credit products. They also include mortgage arrears, rent arrears and, increasingly, fuel and utility debts, income tax and council tax. Nearly half the people who StepChange help report that unemployment or a reduced income was the main reason for their debt problems. However, people also say that life events such as illness and separation can quickly overwhelm family finances and cause or contribute to mounting debts. What StepChange finds, in fact, is that debt is rarely a problem in isolation—there are nearly always other factors that need to be addressed, including a particular concern of ours, which is the link between problem debt and depression. Nearly a half of StepChange’s clients say they had been worrying about their debts for a year or more before seeking help from a debt service provider. Around a third told the charity that their debt problems had weakened their relationships or led to a break-up. Nearly half said that debt had shattered their self-confidence to support themselves and their family.
Things changed in the personal debt world in about 2006-07, but the pre-crash boom in consumer credit also remains a key part of the UK debt narrative. Even after several years of near-zero lending, the total of outstanding secured and unsecured debt is still some 91% higher than it was 10 years ago. It is a pretty bad picture. Recent research by the Financial Inclusion Centre concluded that some 6.2 million households are currently either already in financial difficulties or at risk of getting there. And it is going to get worse. The IFS estimates that real median household incomes will fall by 7.1% between 2009-10 and 2013-14 as a result of low growth and fiscal tightening—the largest decline since the 1974 to 1977 fall of 7.5%. Recent research published by the Joseph Rowntree Foundation predicts an increase in both relative and absolute poverty between 2009 and 2020. Unemployment remains at a stubbornly high 8.3%, or 2.65 million people, and more than one in five young workers are without a job. That is particularly worrying as we know that time spent not in employment, education or training as a young adult can have a scarring effect as well as reducing lifetime earnings.
At the same time, we are experiencing an extended period where households are facing rising costs for essential goods and services. Food, fuel and transport costs are rising sharply, and we will sooner or later face a rise in interest rates, which are unnaturally low at present. Figures from the Financial Inclusion Centre show that, if living costs rise by more than £50 per week, it would double the percentage of households, currently 30%, who have no spare cash at the end of the month. That is the rather grim background to our amendment. I apologise for taking the Committee’s time, but it is important to get the context so that we can focus more closely on the amendment.
We need to know more about personal debt—how it arises, and how people cope with it. HMRC is a major player in this area, and it is important that it participates in the research that is needed and contributes to finding solutions to the problems that currently exist. Reporting on the situation that it finds each year would be a great step forward. I beg to move.