Those who put their own money on the line to set up a business are the lifeblood of a free market economy and when they give a bank security over their assets, they have a special right to be treated honourably. But most entrepreneurs need to discover how to lose money before they learn how to make money.
Sometimes, the failure of a business will be terminal and liquidation can be the right option. But, very often, a business that hits hard times can emerge from the other side of its troubles stronger than ever. But the value of experiencing failure can only be realised if the business is given the chance to survive. So this week, I published a policy paper that set out proposals to rebalance the law in favour of small businesses.
America has always had a better attitude towards failure than Britain. There, companies can file with a federal bankruptcy court for protection under what is termed “Chapter 11” where the focus is on trying to save the business. The UK law on bankruptcy was reformed in 2002 to borrow some aspects from the US system. Under the new form of “administration”, there is some protection from the court and the emphasis is on trying to hold a company together until it can be restructured or sold as a going concern.
But there remains one giant hole in the UK system: it doesn’t cover smaller businesses. Receivers appointed to small businesses under the Law of Property Act (LPA Receivers) are totally unregulated and, in many ways, behave like the discredited, old style receivers that the government thought it had abolished ten years ago. The banks hold all the cards and frequently exploit their bargaining position to bully their small business customers into accepting higher interest charges or less favourable terms.
The original Law of Property Act 1925 envisaged that receivers would simply receive income from the assets over which they were appointed. It also said that their fees should be limited to 5 percent of the income they received. However, clever lawyers working for banks have constantly undermined the original intention of the law. They use their “standard terms and conditions” to give receivers general powers of sale and to rack up unacceptable charges. They have seized new rights for themselves through their standard terms and conditions and it is totally unacceptable.
To make matters worse, many of the high street banks pay “permanent retainers” to the most able law firms which prevent the best lawyers from acting against the banks. It’s all a bit of a stitch up and I think it’s time to place limits on the powers of the banks and their receivers and to stand up for smaller businesses.
George Eustice can be contacted at email@example.com or 1 Trevenson Street, Camborne, Cornwall TR14 8JD or by telephone on 020 72197032.