Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) (No. 2) Regulations 2021

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) (No. 2) Regulations 2021

Relevant document: 8th Report from the Secondary Legislation Scrutiny Committee.

My Lords, I beg to move that this Committee approve the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) (No. 2) Regulations 2021, which were laid before the House on 21 June 2021.

The emergence of the Covid-19 virus has posed the greatest threat to our way of life in a generation, and the past 18 months have been a challenge for us all, both as a nation and as individuals. The essential restrictions placed on our day-to-day activity have saved lives and limited the spread of the virus, but they have of course placed unprecedented pressures on many businesses. I am sure all noble Lords will share my optimism that the early signs of a strong recovery signal a return to normality. However, many businesses are not out of the woods just yet.

The four-step road map offered a road back to normal life while our world-class vaccination programme was successfully rolled out. Each step of the road map was implemented to safely reintroduce social contact for businesses, schools, activities and events based on the contemporaneous data. Step 4 was successfully launched on 19 July and led to the removal of all legal limits on social contact and the reopening of many premises. I am delighted to report that as of today, 6 September, more than 60% of the UK population are now fully vaccinated, and 71% have received their first dose.

Since the start of the pandemic, the Government have put in place an economic support package totalling £352 billion through the furlough scheme and the Self-employment Income Support Scheme, support for businesses through grants and loans, and business rates and VAT relief. In March, during the Budget speech, the Chancellor announced a generous extension of economic support for businesses and individuals, with many schemes continuing well beyond the end of the road map to help businesses to bounce back. The Government continue to support businesses by once again extending this key protection to prevent companies being forced into liquidation where their debts are due to the effects of the virus.

My Lords, I declare an interest. Since we last debated this subject, I have become a non-executive director and chairman-designate of Manolete Partners plc, an AIM-listed company involved in insolvency litigation. Therefore, I have a vested interest in addition to my other business interests.

I again congratulate the Government on the swift and decisive action taken with the introduction of this legislation in responding to the economic crisis. We did not agree on every aspect of the legislation, particularly some details of the moratorium, but we did agree on the direction of travel and the effect that all this has had. This debate is of course in respect of regulations which, as I understand it, expire at the end of this month, so although necessary, because of the way the regulations are drafted, it is probably the shortest-term effect of any regulation that has gone through this House.

More important is to know and understand what will happen after the end of this month. A number of us would argue that the time has come to relax these regulations and to rely on the market in which this Government have such faith. The market will determine which companies should have more capital allocated to them, which companies are zombie companies and which companies do not have a future. That will be decided partly by creditors and partly by people choosing whether to invest in companies that need such cash to face creditors.

It is interesting to look at the situation regarding creditors’ voluntary liquidation. Creditors’ voluntary liquidation is essentially when directors decide to throw in the towel because the business cannot carry on of its own volition. The figures published by the excellent Insolvency Service just the other day show that the level has returned to pre-pandemic levels, about 2,800 companies in the last quarter, which is roughly where it was pre-pandemic and is constant. So the market is returning to normal where it can. I very much hope that the Minister can give us an indication soon of the Government’s thinking on this extremely important issue.

My Lords, there are many industries that are still not fully on a path to recovery, good examples being hospitality and events management. If we are thinking about terminating this legislation at some stage, surely before we do that the Government will have to present us with some evidence of what the impact of the cliff edge will be on those and other industries.

Clearly a cliff edge is looming, although the can continues to be kicked down the road. What will happen when suddenly, as has been said, you let the market forces rip? What will be the effect of this legislation upon creditors who would perhaps have expected to have some recovery but who now must wait to recover? Clearly there is a knock-on effect, but the Government have not really presented any estimate of that. When the cliff edge comes, what restraints will be exercised by banks, private equity, hedge funds and other secured creditors, or will they all simply be rushing to collect their resources, collect their money, and put businesses into liquidation? That will clearly have a huge negative effect.

The Government need to present us with a plan. What exactly is the value of the debts that are affected? How many businesses? How many creditors? We have heard absolutely no information from the Government. When market forces are allowed to rip, what exactly would be the constraints on the insolvency practitioners who charge mega sums for insolvency fees that actually worsen the crisis? The BHS liquidation began in 2016 and is still not finished. Carillion began in 2018 and is still going. Thomas Cook is still going. Maplin is still going. Monarch Airlines and many others have been going for decades and decades. There seems to be absolutely no check. If the Government are really planning ahead, they need to present a plan about how they are going to constrain the insolvency industry. We have not really heard anything about that. I have asked in PQs for information about the values that unsecured creditors may lose. I am told that the Government have no figures. Again, I ask: what is the Government’s plan to deal with the cliff edge ahead?

My Lords, I declare an interest. I am chairman of the Secondary Legislation Scrutiny Committee, which has reviewed these regulations, but I speak this afternoon not as its chairman, nor indeed for the committee at all; I speak entirely in a personal capacity.

My noble friend the Minister will be aware of my interest in these matters, and it would be right for me to begin by thanking him and his officials, led by Paul Bannister, for the time they have given me and other interested Members of your Lordships’ House over the past few months to look at aspects of the particular problem we are dealing with this afternoon. Indeed, they have given us not just time but action in the sense that we have had some really sensible regulations about pre-packs, which have become a feature of choice and often with connected persons. The regulations which the Government have produced have done much to block that loophole and, judging by my postbag, they seem to be working well so far, although, as the noble Lord, Lord Sikka, has pointed out, the point of maximum strain will of course come when we reach the end of the subsidies, whenever that may be.

I have a couple of points to make this afternoon. The first is about how we judge when “can’t pay, won’t pay” moves to “can pay, won’t pay”. My noble friend the Minister will say that paragraph 7.3 of the Explanatory Memorandum says that that is when the court is satisfied that the company’s inability to pay is not due to coronavirus. That may a possibility for a large and well-resourced company, but it is certainly beyond the resources of a small or medium-sized enterprise to go to court to try to prove this issue, which is pretty hard to prove anyway. I do not think that the Government should think that this offers anything other than the largest companies a proper balance in the argument about “can’t pay” and “can pay, but not bothering to pay”.

It would be helpful if the Minister could broaden out, in a slightly philosophical way, how his department is considering the matter and how it will make judgments in the future. Please, it must not fall back on saying, “It’s up to the court”, because the court is a court and not always as well able to judge commercial matters as the Government and advisers to them. That is my first point.

My second point concerns the position of landlords. They are always unpopular; nobody likes paying rent, and people always try to avoid it. However, we need to remember that big and small landlords provide the foundations for a huge swathe of our industrial, commercial and residential activity. As before, this is not just an academic exercise. The pensions that many of us enjoy, or hope to enjoy, are underpinned in large measure by real estate values. If we allow this sector to be savaged, the impact will be felt by pensioners up and down the country. Our environment, our neighbourhoods and in particular our high streets will depend for their vitality on a continuing flow of real estate investment. If we allow landlords to become too much the target, we run the risk of damaging those important factors.

My noble friend needs to be aware—I am sure he is already—that the position of landlords under the present regulatory regime, the landlord restructuring plan, is giving cause for concern. At this point, I need to declare a second interest, in that I have a shareholding in a family investment company that rents out commercial property—happily, to date, without any of the problems to which I will refer, but the Committee needs to be aware that I have that conflict.

I will have just a word on the specific challenges, for which I would be grateful for my noble friend’s reaction this afternoon or, if he feels that I have gone too far off-piste and his brief is not ready for this, I am happy to receive a letter, and I am sure other Members of the Committee will be happy to do so too.

Noble Lords interested in the area will be familiar with what are called, in current legislation, cross-class cram-down provisions. These prevent a small group of creditors greenmailing—holding a restructuring plan to ransom. In that sense, they seem reasonable enough and sensible, but they also enable one group of creditors to bully another into accepting unfair terms. There are many constraints on individual classes of creditors, and landlords can have difficulty obtaining appropriate compensation or protection. First, it is very costly. The Virgin Active restructuring cost about £3 million. It has to happen very quickly. A real estate company or landlord has three weeks to get its case together, brief its Silks—its legal advisers—and get to court. Once again, these are sufficiently high hurdles that small and medium-sized companies just cannot go there. Big ones can, but smaller ones are left behind. Secondly, life being what it is, unscrupulous firms facing difficulties can make their financial affairs even more difficult in advance of such an issue, so it is even more problematic, costly and complicated for a landlord seeking to obtain protection to go to court and get it.

There is also the concern that landlord restructuring plans can go much further than what is needed just to save the business, if that business is in danger of going into administration. It is what is known in the legislation as the relevant alternative. A firm in trouble has an incentive to plan its financial performance as part of a restructuring likely to lead to administration and so set landlords in particular, but also other creditors, at a disadvantage.

My last point on this matter, and the Government understand this, is that there are not now the protections against connected parties. In company voluntary arrangements, less than 50% must be connected parties. There is no such provision in this measure. With a landlord restructuring plan, 70% of the connected parties —shareholders, creditors, whatever—could vote in favour, with the landlord unable to obtain redress for it.

Those are just some of the issues bubbling up as part of the situation that we face and which the Government now need to think about. What could be the solution? Without diving too deeply into the detail, I point out that the Government have powers under the Corporate Insolvency and Governance Act to introduce further secondary legislation to address these challenges specifically. First, they can amend the rules governing cross-class cram-down provisions. Secondly, they could introduce the 50% unconnected creditor test for LRPs, which, as I have mentioned, presently applies to CVAs.

When my noble friend responds, he may claim that there has been only a limited number of cases of this abuse so far, but, as the noble Lord, Lord Sikka, and I said earlier, the point of maximum danger will be when the pandemic measures are withdrawn, if we extend beyond 30 September. Acting then will be too late: the horse will have bolted. However, if the Government decide to act now, there is a reasonable prospect that the new regulations could be in place in time to keep the horse in the stable. I look forward to hearing my noble friend’s reaction.

My Lords, we are back again debating measures to extend the restrictions on the use of statutory demands and winding-up petitions. I think this is the third time we have debated them, and every time we welcome, as we would from our Benches, the Government extending the safety net for businesses in distress because of the pandemic.

Just as we supported the emergency legislation last year, we welcome any measures to support the businesses that closed to keep us safe. As the Minister knows well by now, we argued then that the protections in the Act should be extended over a long period. As the Government extend them again, we reiterate the point, as we have before, that these short extensions cause real uncertainty and worry for businesses in the run-up to each expiry date, concerned as those businesses are with the cliff edge.

As the economy opens and restrictions end, it is right that these measures are kept under review, but we must also remember how many people are still affected by insolvency. The Government’s recent statistics, from July 2021, showed that there were 1,094 registered insolvencies. This was 13% higher than the number registered in the same month in 2020. Does the Minister expect this yearly increase to continue for the rest of 2021? Before he gets into the stream of consciousness response which the noble Lord, Lord Hodgson, so eagerly anticipated, perhaps he could answer a few other questions as well.

Will this be the last extension of these measures, or will we be back in a couple of weeks, or a month or so, since the current extension is only to the end of September? What has changed since the last SI is that some support was not extended beyond the end of June. This includes the small supplier exemptions from the termination clause provisions and the suspension of viability for wrongful trading provisions. The Government have said that these measures were allowed to lapse to enable a gradual return of the insolvency framework to its normal operation. Can the Minister explain how this decision was made? What evidence was it based on? What impact has it had on businesses since June?