George Eustice MP: How we should rebalance the law in favour of enterprise
George Eustice MP won Camborne and Redruth at this year's general election and is sponsoring the Secured Lending Reform Bill after coming twentieth in the Private Member's Bill ballot.
There is only one way out of this recession and that is through enterprise. We need talented individuals to have a go, take risks and try to turn new ideas into industry. The sorts of people who, under the last government, had a safe job working for some government quango talking about “stakeholders” and passing trendy advice on to small businesses are the sorts of people who must now develop the confidence to fly the nest and do it themselves.
But an integral part of enterprise is risk and how the law regards risk is important. If we want to rebalance our economy, then first we must rebalance the law in favour of enterprise. My Secured Lending Reform Bill is designed to protect the economic recovery by encouraging a rescue culture and greater responsibility in the banking industry. At its heart is a simple premise: that if a borrower gives a lender security over their property, they have a special right to be treated honourably by the lender. This will protect not only the borrower but also the interests of employees and other unsecured creditors.
There are cases where conscientious business people have offered their home as security to a bank in order to garner the financial support to develop their ideas. But people who make this extraordinarily generous gesture have no real protection under the law. Since the 1980s, banks have exploited loop-holes in the law to contractually extend their powers through mortgage agreements. As a result, they can and do enforce their security recklessly and prematurely, without regard for either the entrepreneur, their employees or other unsecured creditors.
Sometimes banks force vulnerable businesses to sign away their rights by dangling the prospect of new lending and then go in for the kill once the ink is dry. I have also seen cases where banks have demanded direct communication with land agents who are supposedly being paid by and therefore should be working for the interests of the entrepreneur. And once they have forcibly appointed a receiver to look out for their own vested interests, they expect someone else to pay the professional fees that are incurred. One of the most shameful things about the insolvency business is the way that receivers “cook up” bills that effectively absorb any remaining equity left in a business for themselves. So there is rarely much left for the unsecured creditors. Too often, it is just a cosy stitch up between the bank and the receiver and because the whole process is so demoralising for the victims in such scenarios, such conduct often goes unchallenged.
The lesson from past recessions is that the period of greatest conflict between borrower and lender is as the economy emerges from recession and banks move aggressively to eliminate customers who have issues with serviceability but have comfortable margins of equity. This is because the banks, as preferential creditors, can appoint a receiver and enforce their security at the cost of the borrower.
The provisions of the Secured Lending Reform Bill have been developed with the help of Peter Williams, a senior partner in the law firm Burges Salmon and one of the country’s leading authorities on the Law of Property Act 1925. The Bill would curtail the role of receivers by limiting their powers to those envisaged in the original 1925 Law of Property Act.
Under this legislation, receivers would expressly not have the power of sale, they would only have the power to receive income from assets. This would force banks to deal with problems they have rather than contracting out the dirty work to receivers. The Bill would also bar banks from gaining a Possession Order over a property until all other counter-claims and disputes lodged by a borrower have been resolved by the courts. This would prevent the situation which is common now where a bank can, for instance, commit breach of contract but then continue to enforce its security unhindered.
By rebalancing the law in favour of the secured borrower and by significantly reducing the role of LPA Receivers, this Bill would lead to a reduction in litigation, encourage much needed responsibility in the banking industry and encourage an environment where the banks work with their customers to find solutions. It is an essential ingredient to the creation of an enterprise economy.