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Tue, 4 August 2020

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Insolvency changes today must not store up problems for tomorrow

Insolvency changes today must not store up problems for tomorrow

Businesses that are struggling to keep their heads above water, need to know that the lifeline measures in this Bill won’t be pulled away too soon, says Lucy Powell MP | Credit: PA Images

4 min read

The reforms in the Insolvency Bill are only a small part of the rescue and recovery package that businesses need to come through the pandemic.

With half a million businesses at risk of insolvency as a result of the Covid-19 crisis, its vital that ministers do all they can to protect jobs and livelihoods. 

That’s why Labour supports emergency legislation which continues its passage through Parliament today to ensure businesses get the support they need now and in the long-term, and to make sure the number of insolvencies over the coming weeks and months are as few as possible. 

As the lockdown phase is eased, the challenges ahead are becoming clearer. More must be done to rescue more businesses, to ensure the recession is short and the recovery is as strong as possible, and to stop a second and third wave of insolvencies arising from unmanageable debts and creditors. 

We believe action now will save more businesses and protect the taxpayer from the future cost of failure through slower growth, lower tax returns and higher unemployment.

Every previously viable business that needs to call on these insolvency changes because of the crisis, is a business that has been failed by government.  

We argued for important safeguards to be placed in the Insolvency Bill in the House of Commons last week, and we will push ministers to deliver on these in the House of Lords in the coming days. 

Businesses that are struggling to keep their heads above water, need to know that the lifeline measures in this Bill won’t be pulled away too soon. 

We have long been calling for corporate governance reform.

The collapse of Carillion was a national scandal. Corporate greed and very shaky, indebted finances led to the taxpayer paying the price of directors’ failure, while those directors and shareholders reaped all the gains during the good times. 

The collapse of Thomas Cook exposed these failings, and the taxpayer further. In the aftermath, Ministers consulted on changes to insolvency law.

Some of these changes are in this Bill, but so far Ministers have failed to include measures to ensure greater accountability of directors in group companies which sell failing subsidiaries; enhance powers for insolvency practitioners in relation to value extraction schemes; and further raise standards by ensuring that directors of a company publish regular explanations to their shareholders as to what extent the company can afford to pay dividends alongside its financial commitments such as capital investments, workers’ rewards and pension schemes which they were previously committed to in 2018. 

The Government should grasp this opportunity to bring forward this full suite of long-awaited reforms. 

This Bill must provide a safety net, not use insolvency as a tool to disadvantage creditors, and restructure businesses at the expense of workers, pensions funds and other unsecured creditors. The trade unions and others have some serious concerns about this with good reason. 

Unsecured creditors are often left to bear most of the risk of insolvency. This inequitable sharing of the risk is unfair and damaging particularly to small businesses who are in a weak position to absorb losses.

The government must strengthen the Bill to ensure that restructuring plans do not enable companies to neglect responsibilities to their employees by cutting pay, pension rights or other benefits. A better balance must be struck between allowing businesses to survive through the crisis, and not removing essential protections. 

The emergency measures in the Bill should be extended from the end of June until September at least. Many sectors such as hospitality, travel and tourism, won’t even be partially open for business again by that deadline. Businesses that are struggling to keep their heads above water, need to know that the lifeline measures in this Bill won’t be pulled away too soon. 

The reforms in this Bill are only a small part of the rescue and recovery package that businesses need to come through the pandemic. 

These measures might delay insolvencies today, but government needs to provide a second wave of support to companies, and add safeguards to the Bill so that so they do not just push problems into tomorrow. 

 

Lucy Powell is Labour and Co-operative MP for Manchester Central and shadow minister for business and consumers

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