My Lords, a limited number of Members are here in the Chamber, respecting social distancing, and if the capacity of the Chamber is exceeded, I will immediately adjourn the House. Other Members will participate remotely, but all Members will be treated equally, wherever they are. For Members participating remotely, microphones will unmute shortly before they are to speak—please accept any on-screen prompt to unmute. Microphones will be muted again after each speech. I ask noble Lords to be patient if there are any short delays as we switch between physical and remote participants. I remind the House that our normal courtesies in debate still very much apply in this new hybrid way of working.
I shall begin by setting out how these proceedings will work. A participants’ list for today’s proceedings has been published and is in my brief, which Members should have received. I will call Members to speak in the order listed. Members’ microphones will be muted by the broadcasters except when I call a Member to speak. Interventions during speeches or before the noble Lord sits down are not permitted, and uncalled speakers will not be heard.
During the debate, I will invite Members, including Members in the Chamber, to email the clerk if they wish to speak after the Minister. I will call Members to speak in order of request and will call the Minister to reply each time. Debate will take place on the lead amendment only. The groupings are binding and it will not be possible to de-group an amendment for separate debate. A Member intending to press an amendment already debated to a Division should give notice in the debate. Leave should be given to withdraw amendments. When putting the Question, I will collect voices in the Chamber only. If a Member taking part remotely intends to trigger a Division, they should make this clear when speaking on the group.
57: After Clause 17, insert the following new Clause—
“Review of pre-pack transactions
In Schedule B1 to the Insolvency Act 1986, after paragraph 74 insert—“Review of pre-pack transactions“74A (1) The assets of a company may not be transferred under the terms of a pre-pack transaction unless the proposed purchaser has obtained an opinion in writing from a member of the Pre-Pack Pool that the transaction is not unreasonable.(2) In this paragraph, a “pre-pack transaction” means a transaction which is negotiated before a company enters administration, and under which all or a substantial part of the company’s assets are sold to an associate on or shortly after the appointment of an administrator.(3) For the purposes of sub-paragraph (2), “associate” has the meaning given in section 435 of the Insolvency Act 1986.””Member’s explanatory statement
This amendment requires a positive opinion to be obtained from a member of the Pre-Pack Pool before a company enters into a pre-pack transaction. The Pre-Pack Pool is an independent body of experienced business people set up in response to the recommendations of Teresa Graham’s report.
My Lords, I thank the Minister for rearranging his diary to enable us to complete Committee stage so quickly, the Whips Office for similarly reorganising things so that we can get on with it and, last but not least, the staff of the House for the work they have undertaken, particularly since we kept them here rather later than should have been the case yesterday evening. I am very grateful to them all, particularly my noble friend the Minister, who sat patiently and courteously through a very long and quite testing time yesterday.
I ask my noble friend the Minister’s help in just one thing, which concerns my blood pressure: could he possibly ask his Bill team, when they prepare his speaking notes, not to say, “The Bill is needed because of the pandemic”? The Bill is not needed because of the pandemic. Half the Bill is needed because of the pandemic, and if we were dealing only with that half, we would have been done and dusted and home in time for tea yesterday. As we unpicked and unpacked the Bill yesterday afternoon, we saw how much consideration still needed to be given to the bit of the Bill that has nothing to do with the pandemic. If he could just make that change to his speaking notes, it would do wonders for my blood pressure and, I suspect, for that of many other Members of your Lordships’ House.
Amendment 57 is designed to remedy a gap in the oversight and regulation of pre-packs. I am extremely grateful to the noble Baroness, Lady Bowles, for her support on this amendment. I know that my noble friend Lady Neville-Rolfe, whom we will hear from later, probed in a similar way with Amendment 60, which we touched on yesterday afternoon.
During that debate, my noble friend the Minister said that pre-packs were a valuable tool in the insolvency toolkit. He is right that they are valuable but they are open to abuse, which is why I pressed for the House to have a chance to debate pre-packs in a separate group of amendments. First, the treatment and regulation of pre-packs is a loose end in insolvency law and practice. It has been so for 20 years; indeed, it has been a very loose end for the past six years. Secondly, at the margin, if pre-packs continue to grow unregulated, it will undermine the use of moratoriums, which are a much more carefully controlled and regulated way of dealing with company insolvency. Why go through all that if you can go to a pre-pack and therefore, in that sense, undermine the purposes of this Bill?
My Lords, we are aware of a technical problem meaning that those Members who are joining us remotely can hear us but not see us. We are working vigorously to bring about a resolution.
My Lords, I metaphorically rise to support Amendment 57 in the name of the noble Lord, Lord Hodgson of Astley Abbotts, and to speak to my very similar Amendment 61. Both relate to pre-packs.
The Minister said yesterday that pre-packs are
“a useful tool that allows businesses and jobs to be saved.”—[Official Report, 16/6/20; col. 2092.]
I do not think that anyone disagrees with that. Equally, few disagree that pre-pack deals with related parties involve clear conflicts of interest and raise serious transparency concerns—speaking of which, I can now see noble Lords, which is a great benefit. Indeed, at Second Reading the Minister directly recognised these concerns.
The 2014 Graham report, as mentioned by the noble Lord, Lord Hodgson, very clearly set out its findings that related party pre-packs often involve limited, if any, marketing and on average achieve worse outcomes for creditors. There is truth in the perception of creditors being dumped while directors sail on unharmed with their phoenix company.
The Pre Pack Pool was created in 2015 to introduce an element of independent review into connected party pre-packs. The hope was that this could be a voluntary process, but, sadly, this has not worked; only around 10% of pre-packs have been referred. I am afraid this confirms my slightly cynical view of how the insolvency industry works in practice. The Government had the power to fix this, as we have heard, under the Small Business, Enterprise and Employment Act 2015, but, as the noble Baroness, Lady Neville-Rolfe, pointed out, this expired two or three weeks ago.
I was initially tempted by her approach, as set out in Amendment 60—which, incidentally, should have been in this group—simply to reinstate the power to regulate. However, the Government did not use that power for five years, so I have limited confidence that they would do so in another year. Anyway, as we debated yesterday, this Bill already has more than enough powers to regulate.
My Lords, I echo the words of previous speakers. I have added my name to Amendment 61 in the name of the noble Lord, Lord Vaux, but I also support the amendment of my noble friend Lord Hodgson of Astley Abbotts. As the noble Lord, Lord Vaux, has said, either approach would at least give a fighting chance of avoiding the sort of gaming of creditors that we have seen so often in the past. Indeed, when I was first involved in the pensions system in the early 2000s, the insolvency restructuring that pre-packs have sometimes engaged in was widespread as a means of dumping the defined benefit pension liabilities.
I fear that this Bill will pave the way for the same type of activity, to the detriment of the Pension Protection Fund and all employers sponsoring defined benefit pension schemes. Therefore, I urge my noble friend to take these amendments seriously; I plead that he look at the activities of the Pre Pack Pool and move to a mandatory approach, which, as has been so well described, would clearly better protect against the sorts of corporate activity that have so often brought capitalism into disrepute.
My Lords, I have two specific questions for the Minister. Is it the case, as reported in the Times on 26 May, that the Pre Pack Pool’s oversight committee has written to the Minister specifically, notifying him that it will be “unsustainable” unless referrals of pre-pack sales are made mandatory? Secondly, could he confirm that Teresa Graham, the accountant who led the review referred to by the noble Lord, Lord Hodgson, is now in favour of mandatory referrals? She is quoted in the Times as saying:
“To see the demise of the Pre Pack Pool would be utter folly.”
If that is the case, I cannot see how the Government can resist the amendment in the name of the noble Lord, Lord Hodgson, unless they believe that the pool and its whole policy is wrong. If the Minister is not as forthcoming as he expects, I hope the noble Lord, Lord Hodgson, will have the courage of his convictions and bring this back to the House on Report, because this looks otherwise like a classic case of willing the means but not the ends.
My Lords, I declare my interests as an investor in turnaround and distressed businesses and as a corporate finance professional working in a regulated business.
It is unfortunate to have to return to this issue. I recall that my first duty as a Front-Bencher was to deal with the then Small Business, Enterprise and Employment Bill, where these issues came up. I recall at Second Reading a very powerful consensus over the problems that needed to be addressed, the Graham report recommendations and the feeling that a reserved power was still insufficient to deal with it. It is rather terrifying that we are back in a position of trying to recover a power we never thought good enough in the first place, due to the Government not only never exercising the power to make it mandatory but not really reviewing its performance.
I pay tribute to the noble Lord, Lord Hodgson, who was a strong advocate then and has been a doughty campaigner since. I associate myself with his comments; he summarised the position extremely well. I support Amendment 57 completely. I do so in preference to Amendment 61, but I also praise the noble Lord, Lord Vaux of Harrowden, for his excellent speech and his intention.
There is such a weakness in the system. Pre-packs are everywhere at the moment, and I can see their footprint increasing at some pace. That is not to say that pre-packs are inherently a bad thing. They are a device to try to maintain businesses and jobs. Indeed, this week Oak Furnitureland and its team of administrators were able to use the mechanism in a way that saved the business and brought in an external investor. But far too often they punish staff and small suppliers for management mistakes, and allow poor and improper management conduct to be legalised at the expense of employees and powerless suppliers. There is no fairness or public interest in this.
Nothing better proves the shortcomings of the drafting of the legislation that we are debating, and the Government’s unwillingness to provide better assurances that would give some sense of how the new system would work, than the presence—or rather the absence—of anything about pre-packs in the current framing. As the noble Lord, Lord Hodgson, so correctly said, that is likely to undermine the capacity of monitors and other proposals in the Bill to work effectively.
This was beautifully described by Alistair Osborne, the excellent business commentator, in the Times, when he talked about the design of the pre-pack. The shops were owned by a subsidiary of Quiz, so it did not sell an asset but bought it back for £1.3 million, at a discount from the £39.6 million of gross assets. The result was that £6 million in liabilities owed to the likes of suppliers and landlords were lost. That is what was thrown away. Of course, they claimed that the rest of the business—the 1,600 employees and other areas—were at risk, and that this was the only way to save it. But the owners are still going to keep 90% of the shops open. This was a cheap device. As Alistair Osborne said:
“Even so, ask him if, instead of stiffing other people, he should be putting some of the money that he took out at the float back in.”
The owner
“ducks the question. ‘We can’t go into that at the moment.’”
Yes—but “Heads I win, tails you lose” is not an approach that we should ever make acceptable through an unregulated flaw. That case may be extreme, but it is not alone; such improper practices are widespread. In my own experience in the past few weeks, a prominent case of two companies seeking to offload liabilities by merging, thus dumping their duties to TUPE staff, was undermined only by accident, when someone came along and forced the administrators to allow them to rescue one of the businesses with a major cash injection—even though the two businesses tried hard to rig the process to stop that deal. Unsurprisingly, the other business, which was claiming that the process was necessary because it was on the verge of closing, still continues today, owned by the same shareholder, who miraculously avoided liquidation or collapse.
In the last two weeks, one of my research team looked into tracking companies that went into pre-pack to search for trends or other things that we could be informed about. He found one business that, essentially, has been through 11 pre-packs in six years, marginally changing the name on each occasion, but with no change of directors. Anything that allows such a practice to continue is clearly wrong.
In my experience, the abuses have got worse, not better. What has been the response? The Government have let the powers in the Small Business, Enterprise and Employment Act not just cease to be exercised but lapse, and have left the Pre Pack Pool to wither to the extent that, as others have pointed out, it has written to the Minister about its huge underuse, which means that it is likely to collapse because of its anaemic funding. No doubt its effectiveness is affected by its weak finances. Pre-packs as currently regulated cause too many adverse outcomes, legalise shareholder misconduct and encourage very poor business practices such as extracting too much cash from a business and not planning for sensible levels of working capital.
The Government were dragged, kicking and screaming, to do something about this, and we got a voluntary option. That is a low bar. It is no doubt insufficient, but it is something. Maybe this proposal lacks the support of a prominent footballer, but I hope that the strength of the comments of noble Lords will not be lost on the Minister. I support Amendment 57 and the sentiments of other noble Lords who have spoken in the debate. Citing the Government’s broader review is an inadequate response. Just keeping the provision would have been something, but with a measure that involves emergency legislation and temporary measures, to introduce the amendment tabled by the noble Lord, Lord Hodgson, even on a temporary basis, with a review, would also be something.
I strongly urge the Minister to give as full and as expansive an explanation as possible—and in particular, to be clear about whether the Government are truly committed to the Pre Pack Pool’s continued existence, and whether they feel it is their responsibility or role to keep it functioning. I certainly urge him to give some indication of what they will do, not just to plug this obvious gap in the long term, but—in the short term, at this critical moment—to ensure that the measure, which should have been exercised previously, is at least available when it is most needed.
My Lords, there is little to add to what has been said. I signed both the amendments, and I agree with what the noble Lords, Lord Hodgson and Lord Vaux, have said, and with what they have proposed both in these and in their other amendments. I also associate myself with the remarks made by the noble Baroness, Lady Altmann, and the noble Lord, Lord Mendelsohn, about pre-packs. Profitable as they may be for some, and right in some instances, they are too frequently a blot on our corporate landscape. They are despised by the public, who recognise them as being too often against the public interest.
It is important to take forward a fulsome operation of the Pre Pack Pool, by mandating its use. As has been explained, there was a provision that could have enabled that, but it expired recently, possibly through unavoidable circumstances. As the noble Lord, Lord Hodgson, also explained, there is a greater need for that provision now, because otherwise even the moratorium, and the good intentions that lie behind it, could be undermined.
Who refers something to the pool could be left open, but it is probably better to specify, as the noble Lord’s amendment does. It does not have to be the purchaser; it could be a monitor duty, making the process look more independent.
As the noble Lord, Lord Hodgson, says in his amendment, there should also be some kind of positive response from the panel. He put “not unreasonable”. I tend to favour something a bit more positive, possibly that it is “fair and reasonable”, which carries an overtone both of an open market or arm’s-length value and of being viewed in the round—again, as the noble Lord, Lord Hodgson, explained in his speech. Indeed, he even used the word “fair” in explaining what should happen.
If we compare the two amendments, which I did when I signed up to both, it comes down to where they are placed in the relevant schedule and whether to link them to connected persons rather than to associates, as the noble Lord, Lord Vaux, has done. As “connected persons” was the language used in earlier debates on the Bill, that is the placing that caught my eye, but I would not bet against the noble Lord, Lord Hodgson, having found possibly the better spot. However, now that we are alert to it, an optimal draft could be produced, and I urge the Government to do that.
My Lords, we have had a very good debate on this issue today. It is an accident of the way things went yesterday that we have been given this time, and I am grateful to the House authorities for allowing us to spend some time on this important topic.
The noble Lords, Lord Hodgson and Lord Vaux, gave brilliant exposés of why pre-packs are causing more harm than good, as they put it, although both were valiant in suggesting that it remained on the agenda or was a “valuable tool in the toolbox”, which was another phrase used, although the noble Lord, Lord Hodgson, said that it has been a very loose end recently. Increasingly, perhaps we need to think hard about how this should go forward.
Like my noble friend Lord Mendelsohn, I have had an interest in pre-packs since we were involved in the quite intensive discussions on the small business Act in 2015. Like him and many people, I regret that the power that was inserted into that Act has lapsed, because that seems a missed opportunity and we should be thinking hard about how that might go. Perhaps when the Minister responds he could explain again why he thinks that the amendment in the name of the noble Baroness, Lady Neville-Rolfe, should not be brought forward again. It seems that it would give him the powers that he might need in the future to take action.
The key issue here is not whether the pre-packs will continue to cause trouble but the damage that they might do to the Bill. I hope that the Minister will recall that, when we had our first meeting on the Bill and we were going through some of the main issues, I raised the question of whether the Bill would have an impact on pre-packs and vice versa. The answer I got was that, in the view of the drafters of the Bill, it would not materially have an effect one way or another. However, the evidence we have heard today suggests that that is not the case. Although the Teresa Graham report of a few years ago and its suggestion of a pre-pack pool has been working reasonably well in practice, it is still a voluntary scheme, as was picked up, and if it is indeed rewarding the good guys but not catching the bad ones, the Government are on notice to do something about that. Additionally, if the Pre Pack Pool itself falls into desuetude, obviously a major issue is looming.
I thank and pay tribute to my noble friend Lord Hodgson for ably introducing this grouping and speaking so powerfully on this subject. In fact, such is the power with which he speaks that when he spoke, claps of thunder echoed around the Chamber. We do not have any of our right reverend Prelates here to advise us, but perhaps my noble friend’s amendments have support from authorities even higher than those in this House. I am also grateful to the noble Lord, Lord Vaux, for speaking so eloquently on this topic, and grateful to him, my noble friend and the noble Lord, Lord Mendelsohn, for the time that they made available for us to discuss these issues in the last couple of weeks.
At the risk of further increasing my noble friend’s blood pressure, I say to him that the measures in the Bill are indeed intended to help companies to maximise their chances of survival during the Covid-19 emergency, to protect jobs and support the recovery of the economy. That is why other measures, which would not necessarily alleviate the impact of the current emergency, have not been included in the Bill.
I will reply also to the points from the noble Lords, Lord Adonis and Lord Mendelsohn. The Pre Pack Pool wrote to me on this subject a few weeks ago, and I responded on 29 May. I understand its concerns; officials will be meeting the pool and the Insolvency Service to take forward the discussions and the concerns that it has rightly raised.
I also see that the Small Business, Enterprise and Employment Act 2015 has provided some inspiration for these amendments, which would require mandatory reference to the aforementioned Pre Pack Pool. Aside from specific considerations as to whether a requirement for a positive opinion from the pool might conflict with the strategy duties of the administrator, I would be concerned that the amendment might impose an additional burden on businesses at this difficult time. Furthermore, as my noble friend Lord Hodgson reminded us, the Pre Pack Pool operates as a limited company, and I ask whether it is right to restrict the required opinions to one source of supply.
In his response, the Minister did not answer the question of whether he believes that the Pre Pack Pool is useful, sustainable on a voluntary basis, and whether it matters if it ceases to exist. Could he answer that now?
I do not want to go any further than what I said in my reply. I have been in correspondence with the Pre Pack Pool and we have arranged for officials from my department and from the Insolvency Service to meet with it further to discuss its concerns.
In principle I have no objection to releasing that; obviously, I would need to speak to officials and to the recipients to check whether they are all happy with that. I do not know whether it was sent on a confidential basis or whether it is available for publication, but I will certainly look at that.
My Lords, I thank all noble Lords who have spoken in support of this amendment and the amendment in the name of the noble Lord, Lord Vaux, and thank him for his support for the approach that we are taking. I particularly thank the noble Lord, Lord Mendelsohn, who has a lot of experience in this field; his evidence and his views were very persuasive indeed. To the noble Baroness, Lady Bowles, who was a co-signatory, I say that the reason that I chose “not unreasonable” as opposed to “fair and reasonable” was to put the bar as low as possible, so we had the least problem getting the government horse over the jump. But even this, apparently, is not good enough.
I found my noble friend’s answer thin—and this describes only half of what I feel. To describe this as imposing an additional requirement at this time seems an extraordinary justification; and to say that it is not right to depend on the Pre pack pool alone—the Pre pack pool was set up as a result of a government review—seems equally dubious logic. He says that we are going to discuss options of a right way forward—but we are about to come out of lockdown. The result of the pandemic will be hundreds of firms in very grave difficulties. Some of them need saving. But they need saving in a way that is fair to the creditors, to the pension fund regulator and all the other people involved. I do not think that discussing options as we go into that storm—which is coming; it is bound to come—is right. I heard what he said, I regret that he cannot take this forward and make at least some compromise suggestions, and I reserve the right to bring this back on Report. In the meantime, I beg leave to withdraw the amendment.
Amendment 57 withdrawn.
Amendments 58 to 64 not moved.
Clauses 18 and 19 agreed.
Clause 20: Restrictions
Amendment 65 not moved.
Clause 20 agreed.
Clause 21: Time-limited effect
Amendments 66 and 67 not moved.
Clause 21 agreed.
Clause 22: Expiry
Amendments 68 to 70 not moved.
Clause 22 agreed.
Clause 23: Consequential provision etc
Amendment 71 not moved.
Clause 23 agreed.
Clause 24: Procedure for regulations
Amendment 72 not moved.
Clause 24 agreed.
Clauses 25 to 28 agreed.
Clause 29: Time-limited effect
Amendment 73 not moved.
Clause 29 agreed.
Clause 30: Expiry
Amendment 74 not moved.
Clause 30 agreed.
Clauses 31 to 34 agreed.
Amendment 75 not moved.
Clauses 35 and 36 agreed.
Clause 37: Temporary power to extend periods for providing information to registrar
Amendments 76 and 77 not moved.
Clause 37 agreed.
Clause 38 agreed.
Amendments 78 to 80 not moved.
Clause 39: Power to change duration of temporary provisions: Great Britain
Amendment 81 not moved.
Clause 39 agreed.
Clauses 40 to 47 agreed.
Schedule 1: Moratoriums in Great Britain: eligible companies
Amendments 82 to 88 not moved.
Schedule 1 agreed.
Schedule 2: Moratoriums in Great Britain: contracts involving financial services
89: Schedule 2, page 104, line 15, at end insert “, and
(b) a master agreement for securities financing transactions.”Member’s explanatory statement
This amendment provides for a master agreement for securities financing transactions to be a “contract or other instrument involving financial services” for the purposes of new section A18 of the Insolvency Act 1986.
90: Schedule 2, page 104, line 24, leave out from “derivative” to end of line 25 and insert “, and
(b) a master agreement for derivatives.(2) “Derivative” has the meaning given by Article 2(5) of Regulation (EU) No. 648/2012.”Member’s explanatory statement
This amendment provides for a master agreement for derivatives to be a “contract or other instrument involving financial services” for the purposes of new section A18 of the Insolvency Act 1986.
91: Schedule 2, page 104, line 27, at end insert “, and
(b) a master agreement for spot contracts.”Member’s explanatory statement
This amendment provides for a master agreement for spot contracts to be a “contract or other instrument involving financial services” for the purposes of new section A18 of the Insolvency Act 1986.
92: Schedule 2, page 104, line 35, leave out from “to” to end of line 36 and insert “an agreement which is, or forms part of, an arrangement involving the issue of a capital market investment.
(2) “Capital market investment” has the meaning given by paragraph 14 of Schedule ZA1.”Member’s explanatory statement
This amendment provides for an agreement relating to the issue of capital market investments to be a “contract or other instrument involving financial services” for the purposes of new section A18 of the Insolvency Act 1986.
Amendments 89 to 92 agreed.
Amendment 93 not moved.
Schedule 2, as amended, agreed.
Schedule 3: Moratoriums in Great Britain: further amendments
Amendments 94 and 95 not moved.
Schedule 3 agreed.
Schedule 4: Moratoriums in Great Britain: temporary provision
97: Schedule 4, page 122, line 39, leave out “Act” and insert “Schedule”
Member’s explanatory statement
This amendment changes the definition of the “relevant period” so that the term is defined by reference to the coming into force of the Schedule rather than by reference to the coming into force of the Act as a whole.
Amendment 97 agreed.
Amendments 98 and 99 not moved.
Schedule 4, as amended, agreed.
Schedule 5: Moratoriums in Northern Ireland: eligible companies
Amendment 100 not moved.
Schedule 5 agreed.
Schedule 6: Moratoriums in Northern Ireland: contracts involving financial services
101: Schedule 6, page 154, line 10, at end insert “, and
(b) a master agreement for securities financing transactions.”Member’s explanatory statement
This amendment provides for a master agreement for securities financing transactions to be a “contract or other instrument involving financial services” for the purposes of new Article 13D of the Insolvency (Northern Ireland) Order 1989.
102: Schedule 6, page 154, line 19, leave out from “derivative” to end of line 20 and insert “, and
(b) a master agreement for derivatives.(2) “Derivative” has the meaning given by Article 2(5) of Regulation (EU) No. 648/2012.”Member’s explanatory statement
This amendment provides for a master agreement for derivatives to be a “contract or other instrument involving financial services” for the purposes of new Article 13D of the Insolvency (Northern Ireland) Order 1989.
103: Schedule 6, page 154, line 22, at end insert “, and
(b) a master agreement for spot contracts.”Member’s explanatory statement
This amendment provides for a master agreement for spot contracts to be a “contract or other instrument involving financial services” for the purposes of new Article 13D of the Insolvency (Northern Ireland) Order 1989.
104: Schedule 6, page 154, line 30, leave out from “to” to end of line 31 and insert “an agreement which is, or forms part of, an arrangement involving the issue of a capital market investment.
(2) “Capital market investment” has the meaning given by paragraph 14 of Schedule ZA1.”Member’s explanatory statement
This amendment provides for an agreement relating to the issue of capital market investments to be a “contract or other instrument involving financial services” for the purposes of new Article 13D of the Insolvency (Northern Ireland) Order 1989.
Amendments 101 to 104 agreed.
Schedule 6, as amended, agreed.
Schedule 7 agreed.
Schedule 8: Moratoriums in Northern Ireland: temporary provision
106: Schedule 8, page 166, line 12, leave out “Act” and insert “Schedule”
Member’s explanatory statement
This amendment changes the definition of the “relevant period” so that the term is defined by reference to the coming into force of the Schedule rather than by reference to the coming into force of the Act as a whole.
Amendment 106 agreed.
Schedule 8, as amended, agreed.
Schedule 9: Arrangements and reconstructions for companies in financial difficulty
123: Schedule 9, page 189, line 17, leave out “24(1) (insolvency)” and insert “24 (insolvency)—
(a) in sub-paragraph (1)”Member’s explanatory statement
This amendment makes a consequential drafting change as a result of the insertion of a second amendment to paragraph 24 of Schedule 17A to the Financial Services and Markets Act 2000.
124: Schedule 9, page 189, line 19, leave out “section 355A” and insert “sections 355A and 355B”
Member’s explanatory statement
This amendment provides that the powers conferred by new section 355B of the Financial Services and Markets Act 2000 will be available to the Bank of England in relation to certain types of institution regulated by the Bank.
125: Schedule 9, page 189, line 20, at end insert—
“(b) in sub-paragraph (2), after “recognised investment exchange” insert “(other than the reference to “an authorised person” in section 355B(2)(a))”.”Member’s explanatory statement
This amendment ensures that the application of new section 355B of the Financial Services and Markets Act 2000 in relation to the Bank of England works as intended.
126: Schedule 9, page 190, line 36, at end insert—
“355B Enforcement of requirements imposed by section 355A(1) For the purpose of enforcing a requirement imposed on a company by section 355A(2) or (3), the appropriate regulator may exercise any of the following powers (so far as it would not otherwise be exercisable)—(a) the power to publish a statement under section 205 (public censure);(b) the power to impose a financial penalty under section 206.(2) Accordingly, sections 205 and 206, and so much of this Act as relates to either of those sections, have effect in relation to a requirement imposed by section 355A(2) or (3) as if— (a) any reference to an authorised person included (so far as would not otherwise be the case) a reference to a company falling within any of paragraphs (a) to (d) of section 355A(1),(b) any reference to a relevant requirement included (so far as would not otherwise be the case) a reference to a requirement imposed by section 355A(2) or (3), and(c) “the appropriate regulator” had the same meaning as in section 355A.(3) In this section “the appropriate regulator” has the same meaning as in section 355A.”Member’s explanatory statement
This amendment provides that the powers of the FCA and PRA to publish a statement about a regulatory breach or to impose a financial penalty are exercisable in relation to a contravention by a company of the requirements imposed by new section 355A(2) and (3) of the Financial Services and Markets Act 2000.
127: Schedule 9, page 202, line 25, at end insert—
“( ) Sections 197, 198 and 202A of the Banking Act 2009, and sections 201 and 202 of that Act, so far as relating to those sections, apply in relation to a failure by an infrastructure company to comply with subsection (2) or (3) above as they apply in relation to a compliance failure within the meaning of Part 5 of that Act.”Member’s explanatory statement
This amendment provides that the powers of the Bank of England to publish a statement about a regulatory breach, to impose a financial penalty or to seek an injunction are exercisable in relation to a contravention by an infrastructure company of the requirements imposed by new section 124A(2) and (3) of the Financial Services (Banking Reform) Act 2013.
133: Schedule 12, page 221, line 25, at end insert “and
(b) a master agreement for securities financing transactions”Member’s explanatory statement
This amendment provides for master agreements for securities financing transactions to be excluded from the operation of new section 233B of the Insolvency Act 1986.
134: Schedule 12, page 221, line 34, leave out from “derivative” to end of line 35 and insert “and
(b) a master agreement for derivatives.(2) “Derivative” has the meaning given by Article 2(5) of Regulation (EU) No. 648/2012.” Member’s explanatory statement
This amendment provides for master agreements for derivatives to be excluded from the operation of new section 233B of the Insolvency Act 1986.
135: Schedule 12, page 221, line 37, at end insert “and
(b) a master agreement for spot contracts.”Member’s explanatory statement
This amendment provides for master agreements for spot contracts to be excluded from the operation of new section 233B of the Insolvency Act 1986.
136: Schedule 12, page 222, line 2, leave out from “to” to end of line 3 and insert “an agreement which is, or forms part of, an arrangement involving the issue of a capital market investment.
(2) “Capital market investment” has the meaning given by paragraph 14 of Schedule ZA1.”Member’s explanatory statement
This amendment provides for agreements relating to the issue of capital market investments to be excluded from the operation of new section 233B of the Insolvency Act 1986.
137: Schedule 12, page 222, line 23, at end insert—
“Aircraft equipment21_ Nothing in section 233B affects the International Interests in Aircraft Equipment (Cape Town Convention) Regulations 2015 (S.I. 2015/912).”Member’s explanatory statement
This amendment clarifies the relationship between the proposed new section 233B of the Insolvency Act 1986 and the International Interests in Aircraft Equipment (Cape Town Convention) Regulations 2015.
Amendments 133 to 137 agreed.
Schedule 12, as amended, agreed.
Schedule 13: Protection of supplies of goods and services: Northern Ireland
138: Schedule 13, page 227, line 35, at end insert “and
(b) a master agreement for securities financing transactions.”Member’s explanatory statement
This amendment provides for master agreements for securities financing transactions to be excluded from the operation of new Article 197B of the Insolvency (Northern Ireland) Order 1989.
139: Schedule 13, page 227, line 44, leave out from “derivative” to end of line 45 and insert “and
(b) a master agreement for derivatives.(2) “Derivative” has the meaning given by Article 2(5) of Regulation (EU) No. 648/2012.”Member’s explanatory statement
This amendment provides for master agreements for derivatives to be excluded from the operation of new Article 197B of the Insolvency (Northern Ireland) Order 1989.
140: Schedule 13, page 228, line 2, at end insert “and
(b) a master agreement for spot contracts.”Member’s explanatory statement
This amendment provides for master agreements for spot contracts to be excluded from the operation of new Article 197B of the Insolvency (Northern Ireland) Order 1989.
141: Schedule 13, page 228, line 10, leave out from “to” to end of line 11 and insert “an agreement which is, or forms part of, an arrangement involving the issue of a capital market investment.
(2) “Capital market investment” has the meaning given by paragraph 14 of Schedule ZA1.”Member’s explanatory statement
This amendment provides for agreements relating to the issue of capital market investments to be excluded from the operation of new Article 197B of the Insolvency (Northern Ireland) Order 1989.
142: Schedule 13, page 228, line 31, at end insert—
“Aircraft equipment21_ Nothing in Article 197B affects the International Interests in Aircraft Equipment (Cape Town Convention) Regulations 2015 (S.I. 2015/912).”Member’s explanatory statement
This amendment clarifies the relationship between the proposed new Article 197B of the Insolvency (Northern Ireland) Order 1989 and the International Interests in Aircraft Equipment (Cape Town Convention) Regulations 2015.
Amendments 138 to 142 agreed.
Schedule 13, as amended, agreed.
Schedule 14: Meetings of companies and other bodies
Amendments 143 to 146 not moved.
Schedule 14 agreed.
House resumed.
Bill reported with amendments.
Sitting suspended.
For those who have come late to the party, I have a few sentences on how pre-packs work, using an example of how the position can be abused. Directors decide that a company is no longer able to trade solvently and will shortly become insolvent. The probable reason is because the company has taken on a lot of debt from previous bad decisions. There are too many creditors and the bank is owed a great deal of money. However, within the company, there is an operational piece that the directors think can be salvaged, so they decide that they will make an offer for that operational piece, without the debts. They approach an administrator and say, “This is what we’d like to do.” They make a nominal offer—maybe only £1 or a similarly trivial sum.
The administrator then takes it on. He or she must decide that this is a fair offer, so it is usually advertised in the paper—usually on a Monday in the Financial Times. If noble Lords look at the Financial Times on a Monday, they will see businesses for sale; those are mostly pre-pack transactions. If no competing offer has been made by the Thursday, the administrator has tested the market and this is therefore the best available offer. The pre-pack can then be completed and the business rises like a phoenix from the ashes of the old, often being run by the same people who got it into trouble in the first place—but, of course, without all the creditors, who have been sloughed off along the way.
As a concept, pre-packs have considerable political appeal. Governments, local Members of Parliament and councillors can trumpet the fact that their actions have saved, say, 200 jobs. However, no one counts the jobs lost or the financial damage done to suppliers, to other firms locally or, indeed, to the Pension Protection Fund, whose position and role was carefully debated yesterday afternoon in relation to moratoriums. Indeed, the Minister kindly sent us an email this morning indicating that the Pension Protection Fund will have a particular place in moratoriums. So what we have is a superficially attractive mechanism but one that, in many cases, because of counterfactual information that you cannot gather, causes more harm than good.
For a number of years, other Members of your Lordships’ House and I pressed Governments of all political persuasions not to be seduced by the attractions of unregulated pre-packs. To their credit, the coalition Government under Vince Cable recognised the problems and set up a review, which was carried out by Teresa Graham and backed by research from the University of Wolverhampton. Six years ago, her 2014 report was accepted by the Government.
Among the report’s recommendations was the establishment of what is known as Pre Pack Pool Ltd, a company with access to a pool of experienced businessmen who could give a view on whether a proposed pre-pack was fair. They could reach one of only three conclusions: that a proposed transaction was reasonable; that it would be reasonable if changes were made; or that it was unreasonable. The pre-pack pool was established and remains self-funded through charging £800 for each opinion it gives. However—this is the critical weakness in the edifice—reference to it was optional. The results have therefore been entirely predictable. Who wants to pay £800 if they do not have to? The more ruthless and one-sided your proposed pre-pack is, the less likely it is that you will want to refer it to the pool. This device therefore rewards the good guys and does not catch the bad ones.
Now the Pre pack pool is on the edge of collapse. It had only 10 referrals this year, according to an article in the Times. If it collapses, the last vestiges of independent third-party regulation of pre-packs will disappear. Amendment 57 seeks to remedy this problem by making it compulsory to obtain an opinion from the pre-pack pool that a proposed pre-pack is not unreasonable. As my noble friend Lady Neville-Rolfe pointed out in her remarks yesterday, the Government had the power to make referrals mandatory under the Small Business, Enterprise and Employment Act 2015 but that power has now lapsed. I imagine that she will wish to use her Amendment 60 to review that decision and see what else can be done to reinstate that power.
Finally, I referred in my opening remarks to the possible damage to the flagship change in this Bill: the moratorium. No one—but no one—will prefer to undertake a highly regulated mortarium if they can get away with a virtually unregulated pre-pack.
The potential abuses of pre-packs have long been identified. They were reported on by an inquiry set up by the Government and solutions from that inquiry were accepted by the Government six years ago, yet still nothing has been done. By contrast, we are now rushing through a series of entirely new, untested and potentially controversial changes to our insolvency laws while leaving this loophole unblocked. My amendment closes the loophole and provides for proper regulation in this area.
My noble friend the Minister has an open goal. I hope that he will put the ball in the back of the net. If not—somehow I suspect that he will not—will he tell the House whether the Government are prepared to see the Pre pack pool collapse? No ifs, no buts; if the Government are to bring forward legislation at some point in the future, as is the hallowed phrase, what will we do about the pool in the meantime? I urge him to give a yes or no answer so that we can have some confidence in the way this matter is being tackled through the department’s policies. I beg to move.
The Minister said at Second Reading that:
“If strengthening of professional standards and the existing regulation do not deliver increased creditor confidence in connected pre-pack sales, the Government will look to bring forward further legislation.”—[Official Report, 9/6/20; col. 1728.]
That was very welcome, but fixing this issue is more urgent than that, given the current situation, and, frankly, it is already clear that professional standards and existing regulations are not working. Yesterday, the Minister praised the ethical and professional standards of the insolvency industry, saying that we should rely on those for independence and so on. That is touchingly naive—that might be the first time anyone has described the Minister in those terms.
Just last week, there were three high-profile pre-packs to related parties, which attracted a high degree of negative publicity. Only one was referred to the pool. Sadly, there are likely to be many more in coming months. Surely the Minister agrees that we should make sure these happen more transparently? As the noble Lord, Lord Hodgson, has pointed out, we may lose the Pre Pack Pool altogether if we do not take action. It wrote to the Minister to say that it is not sustainable under the current voluntary approach. The industry is also in favour; R3 has said that it would like to see action.
Making referral of connected pre-pack sales to the Pre Pack Pool mandatory in this Bill seems the obvious solution. It is very simple and could start working immediately; no new bodies need to be created and there are no material costs involved. Everything needed already exists. The Pre Pack Pool takes a very light-touch approach and can act quickly, so I strongly urge the Minister to include a clause to this effect in the Bill. It may not be enough in the longer term and we should continue to monitor pre-packs, but making referral mandatory would at least improve transparency with no material cost or complication. It would be very helpful if the Minister could give us his views on the usefulness of the Pre Pack Pool—whether he agrees it is unsustainable on a voluntary basis and whether he thinks it matters if it ceases to exist.
There is one subtle difference between my Amendment 61 and Amendment 57 in the name of the noble Lord, Lord Hodgson; mine says simply that a connected pre-pack deal cannot go ahead until it has been referred and the Pre Pack Pool has reported. The noble Lord’s amendment is more robust, saying that the report must also be positive. I would be happy with either approach. We need to improve transparency to prevent creditors being unfairly dumped, however we do it.
In general, the pre-packs that involve current owners carrying on by being able to write off their debts, rather than a third-party buyer bringing in fresh thinking and funding, have never sat well with me. My experience is that they provide an unchecked process that allows people to make clean that which should never be considered to be so. Far too often, as the noble Lord, Lord Hodgson, said, people hide behind the claim that they are saving jobs. There is more than one way to do that, and very often there are better ways than by using the same people.
We should recognise that it is not always the wrong outcome for existing owners to keep businesses—an example is the recent pre-pack of Everest, which sold the business back to the owner and secured a good long-term future for it. In that case we should give credit to Jon Moulton’s Better Capital, which referred the matter to the Pre Pack Pool and undertook a proper process to find an alternative. That is the true value of the Pre Pack Pool.
However, there are ways to game the system that are so clearly unacceptable that we must deal with them. In recent weeks we have witnessed, with both Monsoon and Quiz, two uses of the pre-pack system permitting current owners to cherry-pick parts of their businesses to dispose of, allowing them to avoid their debts and responsibilities and to carry out real abuse of the rules. I directly ask the Minister to comment on the Quiz situation—not to justify that particular action, but to tell us how it is possible to allow the system to remain untouched in current circumstances.
May I remind the noble Lord of the facts, so that he can give a policy interpretation? Quiz raised £103 million when floating in July 2017, and the business was valued at £200 million: £93 million of the proceeds went to the owners and £10.6 million went to the business for its growth. Unsurprisingly, the group unravelled well before the pandemic, with frequent profits alerts, as it was a listed business, and at the start of the year the share price went down to less than 10% of the float. The family still control 49% of the company, and, essentially, all activities of the business.
The amendments here are very much autonomous, and it has been a useful debate. Of course, if they were accepted, they would effectively be saving a bad system and not introducing good regulation. As the noble Baroness, Lady Altmann, said, we need to think about a mandatory approach here. When the Minister responds, we will be looking for guidance from him about whether this is the opportunity to do so. Would he be prepared to reconsider his initial view on the amendment proposed by the noble Baroness, Lady Neville-Rolfe, to give powers back to the Government to act if they are required, or will we have to seek another opportunity?
There are already legislative and professional regulatory requirements in respect of pre-pack sales. When deciding whether to go ahead with any sale in administration, the administrator is required to take into consideration the statutory objectives of administration, which include rescuing the company as a going concern and achieving a better result for creditors as a whole. The administrator must also send a detailed narrative explanation to creditors, justifying why a pre-pack sale was undertaken. That is sent to the administrators’ regulatory body, which monitors it to ensure that administrators comply with the spirit as well as the letter of this requirement. At Second Reading, I explained that we continue to work with regulators and industry stakeholders to discuss the options for strengthening the professional regulatory requirements. I can tell noble Lords that if that fails to give greater assurance to creditors, we will consider bringing forward further legislation.
For the reasons that I have set out, I am therefore unable to accept these amendments and I hope that my noble friend and the noble Lord, Lord Vaux, will therefore be able to withdraw and not press their amendments.