Lords motion to approve the Insolvency (Amendment) (EU Exit) Regulations 2018 - Jan 15

That the draft Regulations laid before the House on 19 November 2018 be approved.

Special attention drawn to the instrument by the Joint Committee on Statutory Instruments, 42nd Report

My Lords, while we believe that a deal with the EU is in our mutual interest, it would not be appropriate to assume the outcome. It is therefore important that we also plan and provide, as the instrument before us does, for a no-deal outcome.

It may be helpful if I speak briefly about the current EU framework for cross-border insolvencies. The existing EU insolvency regulation ensures that member states automatically recognise an insolvency order made in an EU country, assisting the insolvency practitioner in recovering assets and returning money to creditors, avoiding unnecessary court proceedings, time and costs, and helping return more money to creditors, or rescuing a business, or saving employees’ jobs. The EU legislation contains safeguards to ensure that individual member states’ own laws are respected, and cannot be overridden by an insolvency order made in another state. I give way to the noble Lord.

I want to ask about a point of procedure as I am surprised that the Minister is moving this, given that the 42nd report of the Joint Committee on Statutory Instruments says, at paragraph 1.12:

“The Committee accordingly reports regulation 5(1) for defective drafting”.

Further on, it says:

“The Committee accordingly reports regulation 5(2) on the grounds that it appears to make an unexpected use of the enabling power”.

Given that very strong criticism from the committee, is it really the Government’s intention to move ahead with this?

My Lords, it is my intention so to do, and I was coming to address the points made by the JCSI. This is a perfectly regular procedure. The noble Lord is very experienced in dealing with statutory instruments and with reports from the JCSI. It often happens that a report will come with criticism from the JCSI. The department then issues its response, and that should deal with the matter. I was going to come to this in my opening remarks and it is right that I should do so. The noble Lord will be able to listen to my explanation and I hope will accept that I, and the Government, have dealt satisfactorily with the concerns that the JCSI put to us. We greatly respect the JCSI. It does a very good job and we are very grateful for that. Back in the long-distant past, the noble Lord—like most of us—probably served on the JCSI and, if he had that honour, I am sure that he did a very good job in so doing.

This instrument recognises that, as we leave the EU, our European Union (Withdrawal) Act will automatically retain a version of EU regulation in UK law. However, the safeguards that the regulation provides can no longer be relied upon as the remaining member states will no longer be bound by them in respect of the UK. Many in the professional insolvency sector have argued that reciprocity is an essential part of continuing with this legislation. In the absence of a deal, it is vital that we do not indefinitely continue to apply EU rules that could override our own law and prevent us from dealing effectively with insolvencies in the UK.

The instrument therefore repeals the majority of the EU insolvency regulation, retaining only the small part necessary to keep the right to open proceedings in the UK. It provides for an orderly wind-down of the arrangements by continuing to apply the current EU rules to existing cases where main insolvency proceedings are already open on exit day. But, as a safeguard, the courts may disapply the EU rules where they will lead to a different outcome from that which would have been the case before we left.

I come now to the JCSI report, which the noble Lord, Lord Foulkes, has kindly brought to the attention of the House. I assure the noble Lord that I had every intention of raising this subject. The report refers to a lack of clarity—the noble Lord no doubt has it before him—and an unexpected use of the withdrawal Act power. I am confident that the provisions are an appropriate use of the power in the withdrawal Act. The provisions will give the court the necessary discretion to respond to unexpected outcomes from the interaction between our law and that of EU member states. There are precedents in existing insolvency legislation providing the court with the broad discretion to make orders in insolvency proceedings.

If, following EU exit, UK creditors or others with an interest in the insolvency are being treated unfavourably, it is only right that the court is allowed to apply the powers in our own cross-border insolvency regulations—which are used for non-EU insolvency proceedings—or make some other appropriate order to resolve the situation. The detailed examples that we provided to the JCSI demonstrated just some of the situations in which this might arise, and these examples were included within the JCSI’s report.

The instrument also amends certain employment legislation which ensures that protection for employees is retained following the insolvency of their employer. This ensures that the current financial support given to UK-based employees when their employer in the EU becomes insolvent will continue after exit day. In the absence of a Northern Ireland Executive, the instrument updates and makes similar changes to the law on insolvency and employment rights in Northern Ireland, on behalf of the Northern Ireland Government. I commend the regulations to the House.

My Lords, in addition to the concerns which were very importantly raised on the nature of the drafting involved here and the use of powers, I have a couple of major technical quibbles. At the risk of treading into what may be the patented territory of asymmetry, which was just discussed, we seem to be back in an asymmetrical relationship here. We are changing our rules in the hope that Europe will reciprocate. That is my interpretation; if it is wrong, perhaps the Minister can update me. How forlorn or optimistic is this hope? What hope do those employees have of their rights and benefits being preserved—the Minister rightly highlighted that we need to have these processes in order to preserve them—for businesses which cross not just into the United Kingdom but into the rest of Europe?

The Minister’s point about courts was very interesting, because that of course was what the European Court of Justice was for: dealing with cross-border disputes over a similar group of rules. What the Minister describes is complicated, expensive and fraught with the possibility of failure. Perhaps the Minister can explain what benefits we will reap from substituting what we have today with what his department has set in front of us. So I have serious concerns that there are major problems with this SI.

My Lords, I thank the Minister for introducing this issue. The SI seems to be welcomed by many in the industry and deals with a particularly difficult issue in a very constructive way, according to reports from those who have written to us. I agree with the points made by the noble Lord, Lord Fox. When the Minister responds, it would be interesting if he could be quite clear about whether the SI covers the minimum necessary to get the statute book in order if there is no deal, or whether, as he suggests, the Government will go a little further and lay out some sort of attractive regulatory pas de deux for the EU post Brexit which would make it easier to legislate for an asymmetrical solution. That is probably not quite what is happening here, but it would certainly be interesting to get the Minister’s response.

Given that the results are coming in of the vote in another place in which the Government’s proposals have been roundly defeated, we may be witnessing a transition to a slightly different arrangement, which we do not need to comment on just yet. In the circumstances it would perhaps be best to let the Minister respond to the points made. I hope to hear from him very shortly.

Before my noble friend replies, I will make just a couple of points as a current member of the Joint Committee on Statutory Instruments. I preface them by saying how greatly the committee will relish the praise that my noble friend heaped upon it at the outset.

The two points arise from the committee’s report. The first relates to Regulation 5(1), where the committee points out that it would have been far better if the department, despite the explanation that it provided, had avoided the ambiguity of language to which the committee drew attention by replacing vague concepts with clearer definitions instead of continuing with its own approach.

The second point relates to Regulation 5(2), to which the committee drew attention because it appears to give very wide powers to the courts that will be called upon to adjudicate issues. Despite the department’s explanation, the committee remained concerned,

“at the breadth of the discretion conferred on a court by regulation 5(2)”.

It went on to say that this regulation,

“leaves it entirely to the courts to determine—on a case-by-case basis—what law they should apply in any particular case”.

I would be very grateful if my noble friend could touch on those points when he replies.

My Lords, I indicated earlier that I was surprised that the Minister was pressing ahead with this, given the critical report from the Joint Committee on Statutory Instruments. I do not think that the Government have dealt with it fully—and we have just heard an explanation of the concerns. As I said yesterday and last week in Grand Committee, I am surprised that the Government are pressing ahead with these instruments in the event of no deal, with all the time and expense of the excellent civil servants—not to mention Ministers—involved. Given what has just happened down the Corridor, where the Government have been defeated by a majority of 230, the largest government defeat in history, I cannot believe the noble Lord, Lord Henley, has the enthusiasm, let alone the responsibility and legitimacy, to press ahead with this. I urge him to do himself and the House a favour and withdraw this statutory instrument.

I will not comment on my legitimacy in front of the noble Lord, but I can assure him that I still have enthusiasm. I await guidance on what is going on in another place. Meanwhile, it is probably right and proper that we deal with this. Irrespective of that result, there is still the possibility that we might leave the EU without a deal. The noble Lord will be aware of all the legislation that has gone through with support from all parties, setting out what we will do and that if there is no deal we will leave on 29 March. That remains the situation at this stage. So it would be useful to continue with these regulations, which are designed purely to deal with a no-deal situation.

I will deal with some of the points made, starting with those from the noble Lord, Lord Fox, who referred again to asymmetry—I was worried that he was stealing it from the noble Lord, Lord Stevenson. I will make it clear that we are making changes here, because we can, but obviously we cannot control how other member states deal with their legislation. We think it is right to do so and so give certainty to the UK in the event of no deal. That is what we will do and we will continue to negotiate to deal with other matters.

Turning to the noble Lord, Lord Stevenson, I am glad he reminded us that this regulation has generally been welcomed by industry; I think that is the case and it is very important. He also asked what assessment we had made of the total cost to business for all the no-deal SIs—I think that was the noble Lord, Lord Stevenson. On 28 November we published a robust, objective assessment of potential impacts on sectors, nations and regions of the UK, and it shows that our deal—which obviously had not been rejected by another place—would be the best available for jobs and economies. We will continue to publish individual impact assessments to accompany legislation, as we have done on many occasions, including SIs where appropriate.

I turn finally to the questions relating to the JCSI asked by my noble friend Lord Lexden. Again, I am grateful for his words. I repeat the praise for the JCSI, which I first served on some 35 years ago. We are fully aware of its concerns. As my noble friend may have seen, the department issued the very detailed memorandum to the committee that is attached to the report, setting out the reasons why the transitional provisions are important to protect the United Kingdom’s position on exit day in a no-deal scenario. I do not intend to go through all the points that were raised in that memorandum, other than to say that the safeguard provided is necessary to enable the court to act where there is an adverse impact of exit on insolvency cases that are already open on exit day. That power provided to the courts to deal with cases that are ongoing on exit day is both necessary and proportionate, and is similar to provisions found in other UK insolvency law. It would not be possible to limit its scope without potentially tying the hands of the courts in dealing with these matters.

I believe that I have dealt with the points that were raised, and I beg to move.