Another example of a politician not understanding how small businesses work

Craig Barrett 10.45am

I was fascinated as ever to read yet another article about rescuing businesses by a politician seeking to depict banks as villains and distressed entrepreneurs as martyrs. Though I agree with the sentiment - namely that we should encourage entrepreneurial spirit - the overall framing is flawed.

The article in question, by the Tory MP George Eustice, appeared yesterday on ConservativeHome. Mr Eustice seems to have a fundamental misunderstanding of the nature of business rescue in this country, commenting unfavourably on the provisions of the Enterprise Act 2002 and the administration regime. The legislation has its flaws but it has been been to operate effectively by participants in the insolvency sector.

Making the same mistake as Peter Mandelson did when concocting the regime, Mr Eustice has gazed dewy-eyed across the Atlantic towards Chapter 11 of the US’ Bankruptcy Code and decided therein lies the solution. The debtor retains the right to retain control of their assets once a business has begun to fail, and has the luxury of court protection against interference.

Yet the best comparison I can think of would be for us to have allowed Gordon Brown to remain as Prime Minister in perpetuity until he had turned around the economy, without fear of interim challenge.

In fact, UK businesses have always enjoyed a flexible rescue culture, irrespective of legislation.

Working on the correct basis that it is rarely in anyone’s interest - including that of the bank - to see a company fail, the London Approach (as it used to be called) pioneered debt restructuring so as to make it possible for a business to survive and often without entering an insolvency process.

Mr Eustice comments that the terms attached to debt often become more onerous as part of a restructuring but omits to mention that these new terms are often a trade-off for write-down of total debt and/or an extension of the term of the debt. A business is given some breathing space but in exchange for ensuring that a bank does not make too much of a loss. Banks are commercial organisations that need to turn a profit - and they will only do so if they are allowed to strike deals on commercial terms (particularly as so many people seem to howl with grief when state-owned banks lose money).

For a bank, appointing an administrator or a fixed charge (LPA) receiver is a last resort - either the business or asset is a basket case or, more rarely, management has adopted the ostrich approach and only an outsider could rescue the situation.

In either case, it is not as straightforward as Mr Eustice might believe. An administrator owes a duty to all creditors and a fixed charge receiver - while being under a contractual obligation to the mortgagee - also owes a wider duty in respect of value of the asset over which he as appointed.

To suggest that a fixed charge receiver is tantamount to an old style administrative receiver is to stretch a point somewhat - fixed charge receivers have no ability to trade, which was the keystone of administrative receivership.

Yes, the costs of receivership are borne by the borrower but only in the sense that they become part of the overall debt. Why should a bank bear the cost of enforcement in order to recover what is owed to it? Mr Eustice appears to be suggesting that borrowers who default should somehow escape paying for the recovery costs relating to their own breach of contract.

I also fail to understand why Mr Eustice suggests that an insolvency practitioner would be required to seek permission from a court before selling a business or an asset. Mr Eustice is clearly unaware of the pressures the courts are currently under. It takes several months merely to get a date for an initial hearing. How would a business trade during this time? Who would fund it? The only way to keep a business going while an administrator waits months for a court hearing would be to ask the bank to fund it - the same bank that Mr Eustice seems hell-bent on attacking.

These proposals also pay no regard to one of the prime considerations of Britain’s business rescue culture - that of rescue. The flexibility inherent in the system means that businesses are often sold on without interruption to service - the uncertainty of awaiting a court verdict on a sale proposal would cause most customers of a distressed business to trade elsewhere, thus eroding whatever value remained. By being able to act quickly, an insolvency practitioner can maintain value to the benefit of all creditors.

Finally, to suggest that administration protection should be extended to sole traders or partnerships misses the key point that as these businesses have no requirements to make public filings, counterparties would have no visibility of their financial position. If a businessman wants the protections available, incorporation is the only way to ensure that protection. Widening the administration protections for sole traders and partnerships would actually result in more abuse of the system than any measurable overall benefit.

In fact, had Mr Eustice done a bit more digging, he would probably have concluded that the retail banks are currently being very supportive of businesses. It is possible to argue that a recession is good for the overall economy as it assists with trimming dead wood and streamlining and strengthening sectors.

Currently, the most pressure on SMEs comes from HMRC’s seeking to ensure prompt collection of taxes. If Mr Eustice is concerned about business survival, might I suggest that he has a quiet word with officials at HMRC?

Britain’s small and medium-sized businesses are what will return the country to prosperity. Therefore we must do all we can to encourage them. However, banks who lend to such businesses share a similar entrepreneurial spirit and we must ensure that an appropriate balance is maintained between the interests of creditors and the interests of debtors. Sadly, Mr Eustice has, like so many others, chosen simply to attack the creditors.

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