HANSARD
Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) (No. 2) Regulations 2020
- Considered in Grand Committee
- 2:31 pm
- Moved by
- That the Grand Committee do consider the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) (No. 2) Regulations 2020.Relevant document: 40th Report from the Secondary Legislation Scrutiny Committee
- My Lords, since the emergence of Covid-19, the Government have been swift to act and provide businesses with help and support to give them every chance to survive and get through this difficult period of uncertainty. Since March last year, businesses have benefited from an unprecedented package of government support targeted at saving jobs and livelihoods, such as the furlough and job retention schemes, as well as billions of pounds in loans, rates relief, tax deferrals and grants.Today, all areas of Great Britain are again subject to restrictions put in place to limit the spread of the virus and to help save lives. These restrictions are crucial to prevent our NHS from being overwhelmed and we wait for everyone to be vaccinated. But until life returns to normal, we have to recognise that the impact on business is severe and continuing. The adverse effects that these essential restrictions continue to have on many businesses, particularly those in the retail and hospitality sectors, have been well documented and well debated in our House. Once again, the Government have acted quickly following the introduction of the latest national restrictions, with a new £4.6 billion package of lockdown grants to support businesses and to help protect jobs.These regulations, which were laid before the House on 9 December 2020, will continue to help companies by extending the temporary suspension on using statutory demands to wind up companies and other restrictions on company winding-up petitions to 31 March 2021. First introduced by the Corporate Insolvency and Governance Act 2020, these measures were extended from the end of September 2020 by order to 31 December and this instrument seeks to extend them further. The measures, like others in that Act, are aimed at supporting directors in guiding their companies through the period in which business is being affected by the current pandemic. Since their introduction in March last year, these temporary measures have helped to protect many viable companies from aggressive creditor enforcement during unprecedented trading conditions.The temporary restrictions on company winding-up petitions that the regulations seek to extend mean that a petitioner must satisfy a court that any debts are not Covid-19 related. In this way, companies that would be viable but for the effects of the virus will not face action from creditors seeking to wind them up because they have been unable to pay their debts due to the trading restrictions that have been necessary to protect our citizens and the National Health Service. This extension will further help to support companies while national restrictions continue to affect the trading capability of many of our businesses.While these measures are intended to help companies that may be subject to aggressive creditor enforcement, the Government have been clear that they are not to be seen as a payment holiday. Where companies can pay their debts, they should, of course, do so. It is important to note that these measures aim to encourage forbearance and do not extinguish any existing creditor rights or interests.
- I inform the Committee that the clock is not working currently and remind them that speeches are limited to six minutes. I call the next speaker, the noble Lord, Lord Sikka.
- 2:36 pm
- My Lords, I thank the noble Lord, Lord Callanan, for his speech. I am certain that there is widespread support for extending the duration of temporary measures to protect businesses from insolvency proceedings during this Covid emergency. However, these measures cannot be extended indefinitely and businesses face the prospect of a cliff edge, leading to a flood of insolvencies, job losses and damage to the supply chain. When the temporary prohibition on issuing statutory demands and winding-up petitions ends, many businesses will face pressure to pay creditors. Failure to pay will lead inevitably to further insolvencies.The Government need to bring forward plans for long-term financial support to help businesses to navigate the post-Covid era. Many small businesses are particularly affected; the Federation of Small Businesses estimates that 250,000 SMEs are at risk. They cannot easily get trade credit insurance and will also be hard hit by the bankruptcy of their major corporate customers.As part of the support for businesses, the Government also need to reform insolvency laws. These enable secured creditors, usually financial institutions, to walk away with most of the proceeds from the sale of a bankrupt business’s assets and leave very little for unsecured creditors. Such arrangements ensure that the risks of insolvency are not equitably shared between secured and unsecured creditors. There is no economic or moral justification for this. Banks and financial institutions hold diversified portfolios and therefore have a greater capacity to manage risks. In contrast, SMEs rely on comparatively fewer customers and have a much lower capacity to absorb risks arising from the bankruptcy of their major customers. A risk management perspective would recommend changes in insolvency laws.Before Covid, unsecured creditors were taking a hit of around £4 billion a year and that is now bound to increase. This can be mitigated by reforming the risk-sharing arrangements. I would suggest that 30% to 40% of the proceeds from the sale of a bankrupt business’s assets should be ring-fenced for distribution to unsecured creditors, thus ensuring that they make a substantial recovery which would enable them to survive.
- 2:42 pm
- My Lords, it is a pleasure to follow the noble Lord, Lord Sikka, who raised some very interesting points about insolvency law in general which I think are worthy of examination. I thank my noble friend the Minister for introducing these regulations, which are of course relatively familiar to us by now. I also thank my noble friend for what the Government have been doing in many areas to help alleviate the economic pressures that have been caused by the pandemic—I think particularly of the business rates holiday for retail, and I urge the Minister to consider with colleagues its continuation after the end of this financial year.These regulations form part of a series that we have looked at under the Corporate Insolvency and Governance Act 2020, which was, of course, passed in June of last year—so some time ago now. I note in passing that we are renewing various aspects of the Act but on different timescales. I ask my noble friend why that is. As it seems extremely likely that we will be asked to renew these again, could we not do so on the same timescale and not have to see these things separately, given that they hang together? The provisions here on wrongful trading, which are due to end in April, will, I presume, then be subject to renewal. Can we look at these things in the round together?Like many others, I welcome these regulations. The Explanatory Memorandum talks of a “breathing space” for business—it actually talks, I think erroneously, of a “briefing” space for business; unless that refers to communications policy, I think it means breathing space. The regulations are widely welcomed for that reason, and they do indeed provide that breathing space.However, I am concerned about how temporary these provisions are, a point made by the noble Lord, Lord Sikka. We are coming up now to nine months of these provisions. If, as I suspect, we are asked to renew them again, that will be a year. This is not just a concern about us being asked repeatedly to renew them, because I can see the sense of that, but there is a balance of convenience here. These regulations help some businesses by preventing aggressive creditor action, but there are creditors with quite legitimate debts who are feeling the pressures of the pandemic too, and they are not able to use the normal tools of enforcing those debts while these regulations are in place.
- 2:47 pm
- My Lords, I am well aware that the Government have helped a lot of small and medium-sized businesses, which I care very much about, and this is a good idea; these regulations need extending. However, it seems obvious, as the noble Lord, Lord Sikka, said, that there is going to be a cliff edge at some point. I am curious about how the Government think they are going to deal with that when it happens. Are these regulations going to be tweaked again, or is there really a long-term plan? I realise that it is difficult and that many businesses will continue to struggle and fail.I want to ask about a point that the noble Lord, Lord Bourne, made about HMRC and its new status as a preferential creditor. If it is going to play an active and supportive role in insolvency proceedings, does that mean that there are going to be more staff? Will it be able to support viable restructuring proposals so that businesses and jobs could be saved? It would be good to explore the opportunities that HMRC might have.Unfortunately, I have more questions than I have answers or recommendations on this issue. I would appreciate answers, if at all possible—in a letter would be absolutely fine. On HMRC, how will bottlenecks be addressed? Of course, when insolvency measures are not having a break any more, there will be a bunch of businesses that will go out of business. How will the Government address those bottlenecks?Are the Government aware that they should be adding climate and ecological considerations to their long- term insolvency planning? Environmentally sustainable businesses should be supported wherever possible: if the Government are to achieve their net-zero carbon target by 2050, they will need companies which understand how to achieve this and how to cut their carbon emissions. On the contrary, environmentally damaging businesses should not be helped in the same way but should be dissolved or restructured with advice to remove the damaging elements of the business. I wonder whether this is taken into consideration by the Government. Obviously, I really would like to help, and that is an area where I could probably make some positive suggestions.
- 2:50 pm
- My Lords, I am delighted to follow the noble Baroness, Lady Jones, and contribute to this short debate on the regulations. I thank my noble friend the Minister for bringing forward the extension, as set out in the regulations, and for presenting it in such a clear and concise way. There is much in the regulations to commend.I pay tribute to the Government for their generous support, as set out by my noble friend. He referred in particular to the retail and hospitality sectors. I became more familiar with the contribution of the night-time economy to both the London economy and that of the wider UK, in other major cities across the four nations, through the ad hoc committee report in your Lordships’ House on the Licensing Act 2003. At its height in 2019, the night-time economy contributed billions to the UK economy. As my noble friend set out, together with retail and hospitality, the wider night-time economy includes those who advise, PR people and all sorts of managers and so on—it is a much wider industry than it might appear at first, and they are very much in sight when we come to consider the regulations.Like others, I will focus my questions on the Government’s exit strategy. I entirely support the regulations and the extension to 31 March, which will protect companies and ensure their longer-term viability, and that the focus will be on the petitioner to establish in court that any debt incurred is not Covid related. I accept that this is a payment holiday and, as my noble friend said, that the debt must be repaid at once, in so far as it can be.I want to highlight the new role played by HMRC, as other noble Lords have referred to. To what extent will BEIS and my noble friend work with the Treasury and HMRC to ensure that they adopt a more supportive approach to businesses? That will help to ease the restructuring of those businesses facing potential insolvency and also, as HMRC is a key creditor, it is in its interests to keep such companies solvent. An even more beneficial effect could come from reducing the fees currently earned, as set out by the noble Lord, Lord Sikka.
- 2:54 pm
- My Lords, it is always a pleasure to follow the noble Baroness, Lady McIntosh of Pickering. I thank the Minister for his explanation of these regulations, which simply prolong the period in which the temporary provisions that restrict the issuing of winding-up petitions under the Corporate Insolvency and Governance Act are to have effect to 31 March 2021.While the regulations are welcome, like the noble Baroness, Lady McIntosh of Pickering, I wonder about the Government’s exit strategy and the need to support companies that have had to endure—along with their management and employees—severe restrictions as a result of the Covid pandemic. This was raised during the passage of the Bill, and the debate on subsequent regulations, because of the nature of the pandemic, the need to bear down on infection rates, and the problems faced by many businesses in such a difficult trading environment. Therefore, why not extend for a longer period, as lockdown could last for a significant time, given the concerns around the level of transmission of the new variant of Covid.? I fully appreciate that there is a balance to be struck between having an exit strategy and protecting companies from insolvency.Unfortunately, we are discussing this statutory instrument in retrospect, because of the nature of the pandemic—it came into force on the 31 December. However, is there not a better, more effective system, whereby we can debate and affirm such statutory instruments before they come into effect, to ensure greater accountability?The noble Lord, Lord Bourne of Aberystwyth, referred to the briefing we received from R3. It suggests that a key way for the Government to help manage the process is the invocation of HMRC to take an engaged and supportive approach in its role as a creditor in most insolvencies. With its new preferential status, HMRC’s support as a creditor will be required to ensure that viable restructuring proposals can be agreed—proposals that could potentially save thousands of jobs and businesses as the UK adjusts to a post-Covid environment next year.
- 2:58 pm
- My Lords, like other speakers, I support these regulations, but I will touch on three points, two of which have been touched on by earlier speakers.I note that no impact or economic assessment has been made of the effect of the regulations since they were brought in in the summer. Do the Government have any idea of how many liquidations have been postponed under these regulations and their predecessors? Presumably someone could look at how many liquidations took place in an equivalent period before Covid and at how many have not occurred since. I have no idea of the magnitude of the issue we will face once these regulations come to an end—which actually brings me to my second point.A number of noble Lords indicated their concern that we must not get to the position, when these regulations end, where companies simply fall off a cliff into liquidation. Clearly, the Government must have given some thought to what is likely to happen, and it will be very helpful if the Minister, although not wanting to be pinned down on that, can give us some indication of the Government’s thinking. As other noble Lords have said, the lobbying organisation has suggested that HMRC should be invoked to help a soft landing, but I should welcome the Minister’s comments on whether further thought has been given to how we have a soft landing.My third point is technical. As the noble Lord, Lord Bourne, said, it is not just the threat of being wound up that keeps company directors awake at night; it is also the question of protection from charges of wrongful trading. This was recognised by the Government in providing protection against both liquidation and unlawful trading until 30 September, but, unfortunately, although the winding-up suspension was extended to 31 December—and now further by these regulations—the wrongful trading protection was not extended at the same time, and made effective only from 26 November last year. I cannot believe this was deliberate, but was presumably an oversight, but it means that, theoretically, directors could be liable for wrongful trading from 30 September to 26 November last year. Can the Minister please confirm that directors will have protection for their actions during that period?
- 3:01 pm
- My Lords, I start by thanking the Minister for introducing the SI this afternoon in his usual calm and unflustered way and for getting across the main points, for which we are always very grateful.This has been a good debate and has raised much wider issues than perhaps might have been expected, because these are continuations of a continuation, and because of the concern expressed by a number of speakers that, as time moves on, we are moving into a situation where the temporary becomes permanent, and the implications of that.We all recognise the points made by my noble friend Lord Sikka on the need to look more widely at insolvency issues as a result of some of our experiences in the Covid pandemic, but these issues were there beforehand. I should be grateful if, when he comes to respond, the Minister could give us more of a timetable for when and if we will look again at insolvency issues, because there are some substantial ones to be addressed—not least the question of the priority of secured creditors, but also of HMRC as a preferential creditor, which I shall come back to.The noble Lord, Lord Bourne, made some interesting points about whether we should be expecting an impact statement at some point, but what we are looking for is a little broader. It is whether these proposals, which have been coming through in dribs and drabs, arising from the founding legislation, are having the effect we want: if they are, how much, and, if not, what are the implications? There is no criticism here of the Government’s approach to what we are dealing with; they have done all they can in the time available to do it, and we should always acknowledge that. However, as the noble Lord said, as time goes on, we begin to wonder whether we are heading in the right direction and, if so, how and in what form we could review that without in any sense jeopardising where we are.