My Lords, this amendment is in my name and that of my now lost noble friend Lord Mendelsohn. Given that most of his supporters have now left the Room in the vain hope that he might turn up, I think we will stop running this riff—but I am still very worried about him.
This is a probing amendment focusing on small businesses and high-tech businesses, and is intended as an opportunity for a debate on whether there is a case for introducing some elements of the Chapter 11 insolvency regime that exists in the USA, with particular reference to small businesses—perhaps more to microbusinesses—and those specialising in higher-tech areas. I will make a point about that at the end.
It is well known that, in the US, a company experiencing financial difficulty—or its creditors—can file with the federal bankruptcy court under Chapter 7 or Chapter 11. In Chapter 7, the business stops operating and a trustee sells its assets and distributes the proceeds to creditors. However, in most cases Chapter 11 is invoked, where the original management continues to run the business as a debtor in possession, but all major business decisions must be approved by the bankruptcy court.
In most cases the company will try to develop a plan to try to return to profitability, and compromise with creditors at the same time. If a plan is not developed, the company is liquidated. The rescue plan, if there is one, has to be voted on by the creditors and stockholders, and confirmed by the bankruptcy court. Even if creditors or stockholders reject it, the court can still confirm the plan if at least one impaired class of creditors has voted to approve it, and it concludes that the plan treats objecting creditors and stockholders fairly.
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I have simplified that account. Obviously the situation is much more complicated than that, but those are the essential points that are relevant to what I want to go on to say—which is that a successful Chapter 11 is a restructuring and a continuation of the operation, rather than a liquidation and a closing of the operation. The idea, which is valuable, and which we should think hard about in relation to the UK system, is to give companies protection from creditors, under the
supervision of the court, allowing them the much needed breathing space to restructure. In successful cases, jobs are protected and the value of business assets is retained.
Are there things that we can learn from this? Obviously, an important aspect is the automatic stay, in relation to aggressive acts by creditors or others. This is designed to hold the business together through the plan process and provide the company with a “breathing spell” from creditors—preventing them from taking actions against the company. We do not have that, per se, in Britain, although we aspire to it in some ways. It is a good part of the process, and if we could achieve a culture change that reflected it, maybe we would not need so many of the procedures that are now involved.
As we say ourselves—although in some cases we do not act on this—creditor participation is vital. We have already mentioned areas in which the UK falls down in this respect, where the banks can appoint an administrator out of court without creditors being able to participate, and also the strange case of the missing creditors in the pre-packaged administrations, where creditors’ prior approval to a sale is not normally sought.
There is an additional facility that I have not mentioned. Under certain conditions in a Chapter 11, lenders who provide funds to the company during the restructuring process can leapfrog existing secured creditors if the company eventually goes into liquidation. In other words, in return for putting funds into a vulnerable operation, they are given priority when the assets are realised. That is quite a clever way of getting new or existing investors to put more money into a struggling company—and obviously, that can dramatically increase its chances of survival. I would have thought that, both more generally and in the case of micro-businesses—particularly for high-tech companies, where the value of the assets may not be immediately obvious—this might be an attractive proposition. Could the Minister respond to that point when she replies?
On balance, I agree that the UK’s insolvency regime is fit for purpose. Indeed, that must be the case, as there are still reports of “bankruptcy tourism”. However, there are elements of Chapter 11 that are attractive, and aspects of the process that the UK might do well to import, if we are going to review insolvency processes in general. I hope that this discussion has prompted some thoughts in the Minister’s mind, and that some of our suggestions might feed in to discussions in the department. I am not expecting this amendment to lead to immediate action today, but there are some points here that we do not quite yet understand enough to be able to think about how they might form part of our process. I do think that there are issues there that we are missing out on. I beg to move.