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Parry Mitchell on a small but important victory in the Lords on 'phoenix’ companies

Yesterday, at Lords Report on the Enterprise and Regulatory Reform Bill, we tried to convince the government to change its proposed legislation to quote companies should need to get shareholders’ approval on executive salaries – and do so on an annual basis. Unfortunately, we failed – a big error on their part. We also tried to make it compulsory for companies to publish annually the salaries of their ten highest paid and ten lowest paid employees. Shareholders should know this information, but in the end we had to withdraw the amendment.

It wasn’t all doom and gloom however, and we were successful in getting Ministers to agree to set up an independent review into the complex issue of pre-pack administration.

Not too many people know what pre-pack is so a brief definition is in order.

If a company is failing, one option open to the directors is to arrange a structure before the company is put into administration:  they form a replacement company (indeed a clone company) that will commence its activities very shortly after the first one is put into liquidation.

On the good side this mechanism can be said to preserve jobs, protect customers, and ensure key suppliers are not affected.  From our point of view preserving jobs is the most important. But there is also a dark side to all of this.

It is a key aspect of capitalism that when a company fails, the shareholders should be the first to suffer – much as they are the first to gain when the company does well. Quite a few pre-packs however, are set up in such a way that the original directors stay in place and the company resurfaces very soon afterwards.  

We call the new companies ‘phoenix’ companies – they rise from the ashes, often with the same or a similar name. Left in the lurch however are the creditors – often small businesses but also most of the smaller shareholders. Even worse, legitimate claims against the first company, perhaps due to employment or accident-related issues, fall by the wayside. Pre-pack gives the unscrupulous the opportunity to dump their company’s liabilities and set up shop again as if nothing had happened.

I’ve been told that the reason this abuse has been allowed to continue is that the subject is ‘too complex’.  That is ridiculous. Since when do we avoid dealing with this type of problem simply because it’s too difficult?

Despite my forebodings on the issue, Ministers have agreed to set up this independent review and they should be starting work in the late spring. They now recognise the problem and are taking action.  We shall of course be keeping a close watch on what happen, but I am pleased that we have got the ball rolling.

Lord Parry Mitchell is a member of Labour’s BIS team in the Lords

Published 12th March 2013


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