April 10, 2002
One of the great joys of representing the City of London is the ready availability of a vast array of historic material about that part of our nation. As I recently ploughed my way through David Kynaston’s excellent history of the City – I wonder how often any of us have the uninterrupted chance to read a book – I came across a passage that seemed as apposite today as it was when it was written in 1857 by a contemporary commentator on commercial life, who said:
"I gathered from them a strong idea of what commercial failure is, to English merchants, utter ruin, present and prospective, and obliterating all the successful past; how little chance they have of ever getting up again; how they feel they must plod heavily onward under a burden of disgrace and poor men, and hopeless men, and men forever ashamed . . . It is not so in America, nor ought it to be here."
Perhaps things have not changed much in the past century and a half.
I want to say a few words about cartels, then concentrate on insolvency. I realise that I may yet have a chance further to examine the Bill’s 269 clauses and 26 schedules if I win the fierce competition to serve on the Standing Committee.
On cartels, the principle of open competition has been supported across the political spectrum – if not by the hon. Member for Orkney and Shetland (Mr. Carmichael) – but in recent years there has been increasingly wide divergence on the means by which that can be achieved. There is also universal acceptance of the commercial need, in certain instances, for regulation. However, all too often the Government have used regulation as a rough and ready tool to promote competition while effectively displacing consumer choice. That has been especially true in the newly privatised industries, where under the pretext of enhancing competition the Government have shifted nominally to allow private utilities the responsibility to ensure that their disadvantaged customers benefit from improved efficiency and greater fairness. Under the disguise of competition, regulators have been given significant new powers of social engineering and, with that, an added burden on business that should properly be borne by the Government.
The importance of regulation dates back to the United States in the early part of the 20th century, when anti-trust legislation under Theodore Roosevelt clamped down on the protectionist power of big business. The undesirability of monopolistic power was deeply entrenched in the US’s corporate psyche, and that played its part in the years ahead.
The domestic system was introduced about two years ago when the Competition Act 1998 came into force. The Bill goes a step further by proposing a maximum custodial sentence of five years for offenders. That creates a problem in relation to the complementary jurisdiction of European Union law. Where a cartel has an inter-state trade aspect, EU law will apply to the exclusion of national legislation. In view of the reluctance of many European countries to extradite their own nationals, it is difficult to see how the proposed new "get tough" cartel rules will work in practice.
On insolvency, I welcome the Government’s clear commitment to grasp the nettle after so long. I suspect that many of the concerns pre-date even the comments from 1857 that I quoted. For as long as I can remember there have been plans to relax our insolvency laws. The Bill allows at least for a dispassionate analysis of some of the key issues, although I shall have time to do no more than set out a few ground rules.
During my experience as a junior corporate lawyer in the recession of the early 1990s, when I dealt with restructurings, administrations and liquidations, many UK lawyers cast an envious eye across the Atlantic at what appeared to be the infinitely more flexible regime under chapter 11. US insolvency legislation enables directors to continue in business well beyond the point at which a director in the UK would have incurred some personal liability for trading insolvently. Moreover, the mechanism allowing for the restructuring of older debts operates alongside a welcome breathing space for a company to reorganise without the ever-present prospect of creditors breathing down its neck. I accept the wisdom of trying in this country to emulate America’s bankruptcy laws. However, we need to recognise that the stigma of insolvency is probably as strong as ever. It has been argued that, culturally, Britain is not sufficiently attuned to using insolvency to return a restructured company to the hands of its management. As a practical issue, that is as strong as ever. The commercial reality is that, without strong management and a distinct restructuring plan, no amount of tinkering with the insolvency law is likely to make a great difference.
The experience of Railtrack in the past six months seems to be adequate evidence that creditors should do anything that they can to prevent a business going into administration or any form of receivership, since the costs of that process are absolutely prohibitive. Railtrack is by no means an exception in that regard. All too often, the management of such companies is paralysed by having to concentrate on day-to-day rather than strategic concerns. That applies particularly to businesses in the service sector, in which the main assets of companies are often the middle-ranking and junior staff. A protracted cycle of
administration is likely, as much as anything, to result in the rapid departure of that key staff asset in such businesses.
Before administrative receivership is consigned to the archives, it is worth pointing out that it is a quick, cheap and often effective mechanism, which allows businesses to be sold without interference from companies or their creditors. The unfettered power of secured creditors to appoint receivers makes them insufficiently accountable to other creditors, but that appointment puts paid to other potential rescue plans. Although the Bill seeks to water down the power of secured creditors to control an insolvency situation, a greater degree of certainty is needed as to its true replacement.
For all the Bill’s much-heralded radicalism, these proposals are still founded – as I mentioned in my earlier intervention- on the traditional British insolvency distinction between innocent bankrupts who are victims of economic circumstance and more culpable cases, without recognising that there is often a very grey area in cases of negligence and recklessness. In its own terms, the Bill aims to improve enterprise and enhance responsible risk taking. However, I am concerned about the difficulties in relation to these measures, and I question whether they will make as much practical difference as the Government would have us believe.