Lords consideration of the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Change of Expiry Date) Regulations 2021 - Mar 18

Friday, 19 March 2021 08:46

Corporate Insolvency and Governance Act 2020 (Coronavirus) (Change of Expiry Date) Regulations 2021

Moved by

Lord Callanan
That the Grand Committee do consider the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Change of Expiry Date) Regulations 2021

Relevant document: 46th Report from the Secondary Legislation Scrutiny Committee

The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Callanan) (Con)
My Lords, these regulations were laid before the House on 11 February. We have shared a long and difficult journey since restrictions were first needed in March 2020. As individuals, we have had to endure the very necessary but nonetheless difficult requirement to socially distance, with limits on where we can go, what we can do and who we can see. That, of course, has had an impact on businesses, with many having to close temporarily, and many more being able to trade only under very tight restrictions.

I am sure noble Lords all shared my sense of optimism when, on 22 February, the Prime Minister was able to set out the road map for the staged lifting of restrictions in England, with plans for Scotland and Wales being published by the devolved Administrations soon after. We can at last look forward to a return to normality in the months ahead. This would not have been possible without our wonderful NHS workers, both in their caring for sufferers from the virus and in their astonishing efficiency in the successful rollout of our unprecedented vaccination programme. Over the next few weeks, businesses that have been closed for many months will be able to reopen and trade, initially subject to certain limitations but, if all goes well, free of restrictions in parts of Great Britain from late June.

Noble Lords will recall that the Corporate Insolvency and Governance Act 2020 provided urgent support for businesses severely impacted by the effects of the pandemic. Temporary measures such as suspension of the use of statutory demands and restrictions on winding-up petitions, and the suspension of personal liability for wrongful trading, were put in place to allow viable businesses the best possible opportunity to survive.

New insolvency and business rescue procedures were also introduced, which will allow companies breathing space to decide on the best course of action in the face of financial distress, or to use a new formal restructuring process. As a contingency, and to enable the Government to rise to meet unexpected challenges and strains on the corporate insolvency regime as a result of the pandemic, the Act provided the Secretary of State with a general power to make temporary amendments or modifications to the effect of specified insolvency and governance legislation through regulations.

This power was needed because at that time we just did not know what the future would bring. We had hoped, of course, that the pandemic would have run its course by autumn last year, but, sadly, as we all know, that turned out not to be the case. The general power meant that the Government could act quickly to make the urgent changes needed to prevent unnecessary insolvencies, to allow the regulatory and administrative frameworks to deal with any impact of the pandemic on case numbers, and to mitigate the impact of the legislation on the duties of those with corporate responsibility.

As this was such a wide power, its use was restricted. It can be used only for the purposes I have just mentioned, and only where the temporary change was in response to the impact of the pandemic. The general power can be used only where the need is urgent, the provision being made is a proportionate response to the challenge being met, and exercising that power is the only way to achieve the desired outcome. In addition, the Secretary of State has a duty not only to assess the impact of using the power on those affected by any changes but to keep any regulations made using the power under review and to revoke them if they are no longer needed.

The legislation creating this general power also specified that it would sunset on 30 April 2021, although that date could be extended by further regulation. The original expiry date for the general power was set when we all hoped that the pandemic would be over and life would return to normal by the autumn. It would allow the power to be used while businesses were recovering and adapting to life after the virus.

While we were of course hoping to be free of restrictions in June, businesses have suffered the impacts of the virus for a year now, and we may need to be able to use the general power while the economy recovers. The unprecedented package of Government support which has been put in place has so far allowed as many otherwise viable businesses as possible to survive, saving jobs and livelihoods in the process. But there is of course no question of it being business as usual as soon as lockdown restrictions are fully lifted. Indeed, the Office for Budget Responsibility is not expecting the economy to have fully recovered until the middle of next year.

These regulations use a power in Section 24(3) of the Corporate Insolvency and Governance Act 2020 to extend the sunset date of the general power, and will mean that the Secretary of State will be able to use it for a further year. Extending the period during which we can use the general power will mean that we can continue to be able to act quickly should the need arise, to give the best opportunities to allow viable businesses to survive the pandemic, and, in the process, save jobs and livelihoods.

The general power could, in addition, be essential to any strategy that we need to deal with any extraordinary pressures on the administrative and regulatory regimes. I can reassure noble Lords that the Government’s ability to extend the life of the general power is not open-ended. In particular, any further extension of the power is limited by Section 24(4), which prohibits the power being exercised after 24 June 2022—that is to say, for two years, starting with the day after the Act conferring the general power was passed.

It is important to note that these regulations do not introduce a new power but rather extend an existing one which we think is still needed. The general power has been used once since its creation to revive the suspension of personal liability for wrongful trading when national restrictions were reintroduced late last year. That suspension has not been extended, due to the apparent improvement in trading conditions at the time of its expiry at the end of September.

There are no specific plans to use the power again at present, but this could of course quickly change, and it remains an essential part of our toolkit in dealing with the impact of the pandemic on business. I commend these draft regulations to the House.

16:38:00

Baroness Neville-Rolfe (Con) [V]
My Lords, I thank my noble friend for his explanation of these regulations, which extend the powers to regulate that we agreed last year during our lengthy debates on the Corporate Insolvency and Governance Act for a further year, until April 2022.

We know from the report by our hard-working Secondary Legislation Scrutiny Committee that the power has been used only to suspend temporarily the personal liability incurred by company directors through wrongful trading. As my noble friend said, that has not been renewed, so I cannot see why a wide-ranging power of this kind needs to be extended—and extended for a whole year. If necessary, I would have favoured a more focused provision and a six-month extension.

It is dangerous to take too much power in regulations. I do not favour the method apparently adopted by the ancient Greek state of Locris, where proposers of law change stood with a noose round their neck, ready to be hung should the proposal be rejected. However, every burden placed on business and society makes someone poorer, and we need to outgrow the juvenile temptation to meddle, using strong, grown-up powers. Perhaps my noble friend can reassure me by outlining the circumstances in which he thinks he might need to use these powers.

From the Back Benches it has seemed that BEIS, the Minister’s department, has dealt with Covid relatively well. Instructed to bring in extensive controls on business, it tried its best to consult and find ways around problems like insolvency and access to business, retail, hospitality and other premises. Several sectors of the economy have kept working better than in the first lockdown. BEIS has also been a critical player in the success of vaccines, which, like all victories, has many fathers, to pick up an observation of President John F Kennedy.

However, the voice of business and economics has not been heard loudly enough. This is part of the reason that the programme of lockdown is far too lengthy. Each day of lockdown takes the country closer to a potential financial crisis, especially as bond yields start to move up. In what amounts to a reverse takeover, the objective of BEIS has become:

“Building a stronger, greener future by fighting coronavirus, tackling climate change, unleashing innovation and making Britain a great place to work and do business.”

There seems to be very little emphasis on the success of British businesses, large or small, which create the wealth and pay the taxes that finance hospitals, schools, transport and social care, let alone unfashionable causes like the police and defence.

In the wider health sphere, our approach to Covid has failed. Our handling of the epidemic, which is not the Minister’s fault, has undone years of progress in the NHS and threatens a decade of excess deaths. According to a left-wing think tank, IPPR, disruption to healthcare will be felt for 10 years. There will be 4,500 needless cancer deaths this year alone and doctors’ appointments are down by 31 million.

In terms of mass suffering, we need to add the impact of the pandemic on mental illness and social care. That does not allow for the agony of people, especially the elderly, being unable to see family and friends. Nor does it count the cost to the young unemployed or to those who have built up businesses only to see them go bankrupt—just visit the centre of a relatively prosperous town like Salisbury, my local town. This contrasts with the United States, which has been more confident, less fearful, kept its economy going well and is on course to match our record in vaccination in a few weeks’ time. Sadly, one has to conclude that it is a better friend to business, innovation and enterprise than we sometimes are.

In closing, I thank my noble friend for his letter of today and ask when we will be able to debate the changes to company law announced by the Business Secretary. As a non-executive company director who takes my responsibilities seriously and as an ex-company secretary, I am alarmed by these proposals. They seem bound to have the perverse effect of discouraging skilled people from taking positions on the boards of companies that need their help. Blaming business, as some seem to be, is not the way to rebuild confidence.

Indeed, unlike parts of government, business has done superbly during the pandemic—think of the food supply chain and the supermarkets, AstraZeneca, construction; think of the adaptability of and investment by pubs and restaurants still unable to open.

I am sure that the Minister will not wish to reply now, but I urge him to prepare a full impact assessment, not only of the benefits of these proposals but of all the risks and the costs including, perversely, the extra accountancy charges that businesses will have to pay. We need to think very carefully about these changes and consider what could be achieved by better enforcement of existing rules.

More broadly, we need an end to the fantasy that we can make things work perfectly by passing new laws. I know that my noble friend was a Brexiteer, and that a driver of Brexit thinking was getting rid of EU rules and ending Brussels bureaucracy—a cause I support. It would be unwise now that Brexit is finally secured to abandon this path.

16:44:00

Lord Sikka (Lab) [V]
My Lords, I am very grateful to the Minister for the explanation of the regulations. It is also a great pleasure to follow the noble Baroness, Lady Neville-Rolfe, and to add to some of the comments that she has made. I am sure that many businesses welcome the extension of what were supposed to be temporary measures, especially as they struggle to re-establish themselves. At the same time, some may well resent it, because they may argue that it constrains their ability to recover money from some businesses.

Overall, I am inclined to support what the Minister has announced. Nevertheless some industries, such as aviation, hospitality and event management, will need support beyond the period from 2022, and it would be helpful for the Government to consider the specific circumstances of various industries and businesses in considering what happens over the next three to four years. The Government need a transitional plan, as it would give businesses some certainty about what is coming their way in the next two to three years. Many businesses will still face a cliff edge in that, when these measures come to an end, floodgates to insolvency will open. Those unable to pay landlords or suppliers will definitely face an uncertain future so transitional help, focusing on their particular problems, would be helpful.

The Government could and should have done more; they could have increased the survival chances of businesses by reforming insolvency practices and ensuring that unsecured creditors receive a fair share of the debts owed to them, but they have refused to act on that front. The high street is already reeling from bankruptcies. Bonmarché, Cath Kidston, Comet, Flybe, Maplin, Monarch Airlines, HMV, House of Fraser, Payless shoes and Toys“R”Us are just some of the victims of asset-stripping by private equity. Their ranks are now swelled by Debenhams. Private equity invests little in equity and usually installs itself as a secured creditor, which means that it needs to be paid before unsecured creditors can recover anything from the proceeds of the sale of a bankrupt business’s assets. These insolvency arrangements have no economic or moral logic from a national perspective and are based on medieval practices that prioritise the interests of lenders over all other creditors. The Government could and should have investigated the predatory practices of private equity to create breathing space for supply-chain creditors, but they have not done so.

The survival of suppliers is also affected by the collapse of the Arcadia empire, and darker shadows loom on Liberty Steel and others. Most supply-chain creditors will be lucky to get a few pennies in the pound of the debts owed to them, and this will hit their survival chances, just when they need all the resources that they can muster. There is no logic in such insolvency arrangements, whereby the risks of insolvency are not fairly shared. The current arrangements throw a few crumbs to unsecured creditors and strangle many SMEs, which often rely on relatively few customers and stand to recover next to nothing.

The Government should have used the last year to reconstruct insolvency practices, but they did not. Last year, as the Minister knows, Labour put forward proposals for equitable sharing of insolvency risks, which would have ensured that unsecured creditors recovered substantial sums from their bankrupt customers and thus improved their chances of survival. I hope that the Government can still revisit those proposals, because they are worthy of consideration. The suppliers’ chances of survival are further hampered by the Government’s failure to effectively regulate the insolvency industry. Higher insolvency fees and longer time taken by insolvency practitioners to finalise the bankruptcy inevitably harms unsecured creditors.

By January 2021, PricewaterhouseCoopers, acting as special managers assisting the official receiver in the Carillion liquidation, had already collected nearly £60 million in fees. The London Capital & Finance administrators have collected nearly £8 million in fees. I have personally seen invoices from big accounting firms where their partners act as insolvency practitioners; they are charging themselves out at a rate of some £1,500 an hour. There is absolutely no justification whatever for this. Such huge fees directly deplete the amount available to unsecured creditors, but the Government have done nothing to curb such predatory practices. I am not aware of a single insolvency regulator who has even asked any questions about such high fees.

I am sure that the Minister will put up a spirited defence of the Government’s action on the insolvency front. However, they are not even curious about the welfare of unsecured creditors. On 14 January 2021, I asked the Government:

“how much unsecured creditors have been unable to recover from the bankruptcy of their corporate customers”.

On 28 January, the reply was:

“This information is not collated and held centrally.”

The Government have no idea of the size of losses faced by supply chain creditors, far less have they been helping them.

There is no control on insolvency processes, and practitioners can continue to milk distressed businesses for years. On 27 October 2020, the Minister informed me that 7,962 corporate liquidations were still open within five to nine years of commencement; that 3,642 incomplete liquidations dated between 10 and 14 years; and that 14,328 were incomplete even after 15 years. Do the Government know that these prolonged insolvencies destroy supply chains, since the cost of these huge fees is directly borne by unsecured creditors? Secured creditors do not bear a single penny of the cost of the insolvency practitioner. I urge the Government to help unsecured creditors by reforming insolvency practices and clamping down on rapacious practices, thus giving hard-pressed businesses, especially small businesses, a good chance of survival.

The Deputy Chairman of Committees (Baroness Garden of Frognal) (LD)
The noble Baroness, Lady McIntosh of Pickering has withdrawn, so I now call the noble Lord, Lord Lennie.

16:52:00

Lord Lennie (Lab) [V]
My Lords, I thank my noble friend Lord Sikka and the noble Baroness, Lady Neville-Rolfe, for their contributions to this debate, and I thank the Minister for introducing the new regulations. I do not imagine he thought they would be quite as controversial as they appear to be.

However, the regulations extend the Secretary of State’s powers to modify, temporarily, corporate insolvency or governance legislation in response to coronavirus until 29 April 2022. We repeatedly said during the passage of the Corporate Insolvency and Governance Act 2020 that we supported the changes the Government were making. We called many times for the end date of provisions to be delayed in order to support business through this difficult period. Businesses are still in distress, and the lockdown and business disruption will continue beyond the original date in the provisions—the end of April this year.

The system of business support that was set up for three months has not proven adequate for the length of time that the crisis is continuing. In truth, we do not yet know whether all the restrictions will be lifted after 21 June, when social restrictions are due to be ended. BEIS has said that the one-year extension reflects that, while there is a vaccination programme, with national lockdowns and other restrictions on normal trading continuing, the future impact of the pandemic on business and the insolvency regime remains at least uncertain. The Minister mentioned this in his introduction, but can he clarify whether the other measures in the Act will be extended, such as on wrongful trading?

It is only sensible to maintain the option of further extending the measures in the Act in this way: we have the worst economic recession of any country in the G7. Although the Covid support measures that the Government put in place have given business a stay of execution, we are concerned that we may still see a wave of insolvencies as support is withdrawn and the safety net dissolves.

16:55:00

Lord Callanan (Con)
I thank all noble Lords for their interesting and valuable contributions to this debate. The Government’s road map for the staged lifting of restrictions is cause for great optimism, and we can look forward to many businesses, including shops, pubs, and restaurants, being able to reopen successfully in April. But we have to recognise that these businesses and many others have suffered from the impact of the pandemic for a year now, and in many cases could take time to return to full pre-Covid financial health. The Government are determined to do whatever they can to continue to support businesses throughout this period of economic recovery. For example, many business owners and employees will have welcomed the Chancellor’s statement in the Budget that the furlough scheme will be extended to September this year.

All the same, traders and company directors will be having to assess whether full recovery of their businesses in a post-Covid economy is possible, and government financial support, along with the temporary easements in the Corporate Insolvency and Governance Act, must at some point be brought to an end. Having a power to use regulations to make temporary amendments to corporate insolvency and governance legislation, or modifications to its effect, will mean that we can continue to act quickly to meet the challenges which arise as a result of these uncertain times.

This was illustrated when the power was used to revive the suspension of personal liability for wrongful trading. This was a Corporate Insolvency and Governance Act 2020 provision which had expired at the end of September last year when trading conditions for many businesses had improved. Other temporary easements in the Act had been extended, but given the importance of wrongful trading as a protection for creditors and a deterrent to trading when insolvency proceedings are inevitable, the suspension was allowed to expire.

Sadly, as noble Lords will recall, there was a surge in infection levels in late October leading to national restrictions being reintroduced across Great Britain and businesses once again being required to close their doors. As a result, many company directors were once more faced with great uncertainty about their companies’ futures. Using the power to revive the suspension of wrongful trading meant that directors of companies which would have been viable but for the impact of the pandemic were able to make decisions as to whether they should continue to trade based solely on their knowledge and experience, rather than under the threat of becoming liable to contribute to the company’s debts themselves should insolvency proceedings then follow. This meant that unnecessary insolvencies could be avoided and is an example of how the power could be used going forward to save jobs and livelihoods.

My noble friend Lady Neville-Rolfe asked why we need the power for a further year. Although we now have a road map for the lifting of restrictions, the impact on businesses will continue after return to what we would call normality. The OBR predicts that the economy is unlikely to return to pre-Covid levels before the middle of next year, so we need to keep the power on the statute book until then. My noble friend also asked how we might intend to use the power. I am afraid I must say to her that, at the moment, we just do not know. There are no plans to use the power at present, but it is a contingency and we need to be in a position where we can meet urgent challenges quickly. If the worst happens, as the noble Lord, Lord Sikka, indicated, we may need the power as part of our strategy to deal with any increases in insolvency case numbers.

We also need to keep the power because, although the Prime Minister has now announced a road map for a gradual reopening, the impact of restrictions on businesses is likely to be felt beyond the point that we would consider to be full normality. As I have said, the OBR is expecting the economy to return to pre-Covid levels by the middle of next year, but we do not know for certain what will happen in the meantime. However, we do know that many businesses are struggling and may need protection. If we were to extend for less than a year and, as likely, a further extension was needed, we would be back here debating the same question in just a few months because of the requirement for debate before the extension can occur.

My noble friend Lady Neville-Rolfe referred to the audit reform proposals. The White Paper published this morning is not, of course, the subject of today’s debate, but I can certainly tell her that we have carefully thought through the director accountability proposals that she referred to. They would cover only the biggest companies, with turnovers into the hundreds of millions, and employing hundreds, or even thousands, of people. I think most people would think it appropriate that we ask directors of such companies to take a little more responsibility for the accounts and financial information produced by their companies. As I said, this will not apply to small business, to SMEs or to entrepreneurs, so I think I can put my noble friend’s mind at rest.

The noble Lord, Lord Sikka, asked what was being done to prepare for the approaching cliff edge of potential insolvency cases when government support measures and temporary easements end. Official statistics published by the Insolvency Service show that case numbers are still low in comparison with the same period last year, and it seems inevitable that there will be an impact on insolvency case numbers. This is being closely considered, and extending the power for a further year will allow any temporary changes needed to be made quickly. I thank the noble Lord for reminding the Government of the importance of closely monitoring the operation of the insolvency practitioner regulation regime.

The noble Lord, Lord Lennie, asked whether the other measures introduced by the Corporate Insolvency and Governance Act would be extended. We are considering that question at the moment, and I hope that we will be in a position to make an announcement shortly. I thank the noble Lord for asking about the other temporary measures in the Act, and I can assure him that they too are under close consideration; any announcement will be made shortly.

I think I have addressed all the points raised in the debate, and I thank all noble Lords who have contributed. I commend these draft regulations to the Committee.

Motion agreed.