In a paper published by the Free Enterprise group today, George Eustice MP has called on the Government to change insolvency regulation to better defend entrepreneurs who take risks...
The Financial Times commented on the paper in the following article:
Tories call for bankruptcy law reform
By Helen Warrell, Brian Groom and Elaine Moore
A group of Conservative MPs is calling on the government to reform the UK’s bankruptcy laws so they are fairer to small businesses and sole traders, which they say are liable to exploitation by banks.
Proposals on how to change the law – to be published on Friday by the Free Enterprise Group of Tory MPs – include updating the Law of Property Act so banks have fewer powers over borrowers’ assets, and extending the administration procedure to small businesses that are not registered as limited companies or partnerships.
The call for reform is being led by George Eustice, David Cameron’s former spokesman, who launched a private members’ bill on the issue when it became clear that the Tories were dropping plans for a radical overhaul of insolvency laws soon after they came into power.
While in opposition, Mr Cameron had called for the introduction of US-style Chapter 11 rules that would give companies “breathing space” to restructure during difficult times without having to face liquidation. But business leaders either opposed the plans on the basis that they would create more bureaucracy or that they would make little difference.
Mr Eustice told the Financial Times that banks were able appoint receivers who were “totally unregulated” to seize assets from struggling businesses and close them down.
“As we emerge from recession, this is going to be a growing problem because…the greatest period of conflict between borrowers and lenders comes as you’re coming out of the downturn, because that’s when banks have the most options and that’s the moment that they clear their books of highly geared debts,” he said.
The Tory MP said that the UK needed to change its business culture so that the “value of failure is recognised” and fledgling entrepreneurs were not discouraged from trying new ideas and taking risks.
Mr Eustice’s proposals won support from organisations representing small businesses, which said they could help overcome the fear of failure that discourages entrepreneurs, but insolvency practitioners were more sceptical.
Adam Marshall, policy director at the British Chambers of Commerce, said the ideas were a “step in the right direction” and urged a broader move towards a US-style Chapter 11 system that would give struggling companies time to turn themselves round.
He said the main objection – that Chapter 11 could lead to “zombie companies” with no chance of rescue staying in their management’s hands – could be overcome by having cut-off dates or points at which an administrator could step in.
But Frances Coulson, president of R3, the insolvency industry trade body, said extending administration procedures to unincorporated companies, mainly sole traders, would be unnecessary and expensive.