Companies (Miscellaneous Provisions) (Hansard, 22 October 1991)

§ Mr. Ian Taylor (Esher)

I beg to move,

That leave be given to bring in a Bill to give a company's directors standing authority to allot equity share capital to lending bankers to discharge indebtedness; to protect a lender in such circumstances from the shadow director provisions of company law and insolvency law; and for connected purposes. There has been considerable controversy in recent months about the alleged behaviour of the banks in respect of the method of interest charging, and account charging, for individual and corporate borrowers. Indeed, I raised the matter myself in the House in a debate on the Finance Bill on 30 April 1991. Subsequently, the Government carried out an inquiry, and no direct allegations against the banks were upheld; nevertheless, there was considerable disquiet among many private and corporate borrowers.

It is true that many companies have been highly geared. It is justifiable to make criticisms of directors who have allowed their companies to borrow more than they should have done, in commercial terms. However, bankers were often not prudent in what they encouraged companies to borrow, often on terms that left the companies exposed when the recession came upon them.

Many directors of companies into which receivers have gone, at the instigation of the bank as secured creditor, have complained to me that by acting precipitately the bank lost any opportunity to enable the company to recover and therefore to provide the bank with the opportunity to recover the full value of its loans. In many cases, banks, having put in receivers, recovered less than they had originally expected to do through this secured charge.

Under this government, record numbers of new companies have been created in a climate attractive to entrepreneurs over the last 12 years as a whole. Net creation, as opposed to collapse, of companies is still positive. There are still more companies being created than there are going under. Yet, bearing in mind this background, total business failures, including receiverships, were up 71 per cent. to 33,532 in the first nine months of 1991, the largest increase in 11 years. The percentage of collapses to active companies as a ratio could rise to 2 per cent.

It is widely accepted that receiverships increase in number when a recession is ending, as banks begin to see hope that they can recover their loans against improving asset prices, rather than assuming that, if the company itself recovers its position, will also improve—which is the stance I should prefer them to take. Dun and Bradstreet has been quoted as saying: business failures continued to rise sharply for two years after the first signs of a recovery in 1981. In those circumstances, the Opposition cannot say this time that this recession is continuing if the number of receiverships now paradoxically goes up.

To quote the late Sir Kenneth Cork on banks acting too quickly, he said not long ago that the banks should try to support their customers, to many of whom they lent too much money anyhow, through difficult times in the hope of saving the business. I get the impression they are not doing that and are pulling up the carpet much too quickly. Banks seem still to prefer putting in a receiver to the more constructive procedure provided by the Insolvency Act 808 1986, which is to put in administrators. I am sad that the banks have not taken up the administration route, which is a much more constructive route, enabling there to be a package of measures that could rescue the core of the business.

The figures on administration are not very encouraging. Between January and March of this year, the last figures available to me, there were 64 administrative appointees in Great Britain. If we take the 12 months to March 1991, there were only 237 for the whole country. I am delighted that the Minister for Corporate Affairs is on the Treasury Bench. I know that he takes a particular interest in encouraging this modest version of what the Americans have in chapter 11, which enables the reconstruction of a company to take place in a protected atmosphere against creditors.

The Bill's proposals, which I believe are important, are several. They would provide directors with standing authority to allot equity for debt. Far-sighted boards have already obtained the permission of their shareholders to do that, but often it is not those companies that are in difficulties and under pressure, if times have become difficult. Any reconstruction will need subsequent shareholder approval because of the second company law directive, which has been on the statute book for a very long time. Yet at least in those circumstances shareholders can be offered some hope, whereas if they are merely told that the receiver has gone in, it implies that there will be little left for them, as ordinary shareholders. That is an important point. If banks consider, when they are completing their investigation of a company, that substituting that company's debt for equity is appropriate, there is a chance of rescuing the company and, in the long run, of benefiting the overall position of the bank.

By making the process more transparent, pressure could be brought on banks to consider equity swaps more favourably. That could be a particular factor during a period of administration. Banks should be encouraged to use the procedure for putting in an administrator rather than a receiver. That would enable a much more organised discussion to take place on the reorganisation of the company's balance sheet and prospects.

It is important that banks are seen to play a constructive part in any reorganisation, because many potential new equity investors would be reluctant to put new equity money into a company if it were used merely to bail out the banks' existing lending. Therefore, it is not credible to believe that new equity investors would invest in a company that would then repay its existing borrowing.

Equity injection, as an alternative, has other merits. Insolvency procedures are expensive and often badly reduce the value of the charge that the company has on fixed assets. As we all appreciate, insolvency proceedings are also expensive in human costs. If a receiver goes into a company, that has a dramatic impact on the employees and the owners.

My Bill would tighten the shadow director provisions, so that banks would have a clearer understanding of the risks that they take during a reorganisation. That is important, because in many cases banks have said to me that they perceive that the risks of becoming involved in a debt equity swap are too great because of the risk of being deemed to be shadow directors. It is theoretically possible in law for a bank to be regarded as a shadow director. If 809 it is involved in the potential of taking equity in a company, it is much more concerned that that might actually happen.

Under section 251 of the Insolvency Act 1986, a shadow director is defined as a person in accordance with whose directions or instructions the directors of the company are accustomed to act". In normal circumstances, a bank providing advice to a company would merely be regarded as providing advice on a professional basis. In the event of a reconstruction, where the bank is intimately involved in the running of the company as well as the reorganisation of its affairs, it is possible for it to be thought that the bank is actually running the company. If that were to be the case, the bank would feel extremely exposed unless the laws on shadow directorships were clarified in respect of bankers. That is what I want. I want greater clarity in the laws as they would apply if a bank were actively to consider taking what would inevitably be a substantial equity stake in a company as an alternative to putting that company into receivership.

It must be realised that the shadow director provisions under the Companies Acts and the Insolvency Acts are severe. Although I do not in any way wish to give banks permission to indulge in wrongful trading—to use a definition in the 1986 Act—I want further clarification to limit the liabilities that would be faced by banks in the event that a reconstruction properly entered into nevertheless ultimately failed.

Although an equity for debt swap would affect a bank's capital ratios, the Bank of England must already be taking a close interest in the provisions that banks now have on the loans outstanding to companies. The National Westminster bank made recent provisions of £902 million for bad debts to United Kingdom private and corporate 810 customers. Therefore, receiverships can be a double blow for banks—not only do they lose value in terms of their loans to companies, but they lose value if the owner-shareholders are put into personal financial difficulty.

Although the banks should not emulate the German banks, serious considerations are involved. The object of the Bill is to put pressure on the banks to consider debt equity swaps, to encourage directors to negotiate these with banks, to promote the use of administration, and to give reasonable comfort to bankers that they will not automatically run foul of the tough shadow director provisions.

We have a climate that is favourable to companies and we want to avoid the direction and regulation that another Labour Government would introduce. We all have an interest in ensuring that banks fulfil their responsibilities to companies.