Insolvency (Amendment) (EU Exit) (No 2) Regulations 2019

Motion to Approve

Moved by

That the draft Regulations laid before the House on 22 July be approved.

My Lords, these regulations address the consequences of the change in the UK’s departure date from the EU to the insolvency regulations previously approved by Parliament. The purpose of the new regulations, as with the previous regulations, is to ensure that the UK’s insolvency law operates effectively after Brexit, in all circumstances. The regulations laid before your Lordships make two changes that are necessary to address the introduction of the modernised Scottish insolvency rules, which came into force after 31 March, and the coming into force of Article 25 of the original EU regulation, which creates an integrated insolvency register across the EU.

These latest regulations update the Scottish rules by removing references related to the EU regulation to ensure a consistent approach to the UK courts’ jurisdiction to commence insolvency proceedings. The changes are made at the behest of the Scottish Government and with the support of the Scottish Parliament, following consultation.

The changes to UK insolvency necessitated by Article 25, which seeks to integrate member states’ insolvency registers, would carry an immediate cost that would be incurred without certainty of reciprocity after exit day. The current regulations would revoke Article 25 of the EU regulation if we leave the EU without agreement.

I stress that it is not the Government’s preferred outcome for the UK and the EU to cease co-operating on cross-border insolvency issues. We have listened carefully to industry professionals, who have outlined the risks that such an outcome would pose to the efficient management of insolvency cases. None the less, we must ensure that the UK’s approach to insolvency is legally correct irrespective of the nature of our exit.

Our assessment of the impact of losing automatic recognition for UK insolvencies in the EU was carefully made; the cost to business would be in the region of £2.7 million per year. We note also that a similar cost will befall EU insolvency practitioners applying to UK courts. However, both sides can retain the benefit of reciprocity only if there is a deal. In the absence of such an arrangement it is important to provide businesses and individuals with certainty regarding the rules governing insolvency in the UK.

These two changes ensure that the impact of leaving the EU will not be exacerbated by retaining inoperable law, which would lead only to confusion and cost. On that basis, I commend the regulations to the House.

My Lords, I thank the Minister for taking time before the discussion on the Floor of the House to go through some of the more technical detail of the SI. As he said, the regulations make amendments to the Insolvency (Amendment) (EU Exit) Regulations 2019, which were agreed by this House in January. Those regulations were mostly welcomed by the industry and, although concerns were raised by the Joint Committee on Statutory Instruments at the time, the House ultimately passed them. They dealt with the core policy, which I will not seek to reopen, while the No. 2 instrument debated here today appears to make only minor technical amendments.

I shall move on to the substance of today’s regulations. Despite Parliament making it clear that it does not wish the UK to crash out without a deal, it appears that much of this instrument is necessary only to facilitate such a scenario. As the Minister will be aware, both Houses have repeatedly rejected the UK leaving the EU without a deal. Why spend the time and money, therefore, moving forward with SIs that should play no part in the future of our decision-making? Are there any further SIs yet to be laid that deal specifically with a no-deal scenario?

As noted, another element and purpose of this instrument is to amend the Scotland-only regulations, as insolvency is partly devolved. I note from the EM at the back of the SI paperwork that consultation was carried out with the Administration in Scotland. It would be helpful to get a little more detail about what consultation was carried out between the department here and the Scottish Administration. I am curious too about timing. Why have the regulations been brought forward only now, when the new Scottish insolvency laws came into force in April this year?

With regard to the drafting of these regulations, I mentioned earlier that the previous insolvency regulations were mostly welcomed by industry. As the Minister has pointed out, there is a financial cost. I am curious about whether any further discussion or consultation has taken place with the industry.

My Lords, I thank the Minister for introducing this SI and for his explanation. I associate myself with the comments of the noble Lord, Lord McNicol, about the necessity for no-deal statutory instruments if the Government are, in good faith, going to follow the law. I notice that the noble Lord, Lord Callanan, is also sitting on the Front Bench opposite, and he has repeatedly said—when I have been in this Chamber and often when I have not—that the Government will observe the law, so I hope that means the spirit as well as the letter. However, the SI has been tabled and it is incumbent on me to make some comments.

It is, perhaps, appropriate that we should be talking about insolvency because, in the event that there is a no-deal Brexit, insolvency will be an issue for many businesses in this country, small, medium and large. Perhaps this gives us a chance to soberly reflect on the stupidity of a no-deal exit. These rules are welcome and it is very hard for us to stand in their way. The Explanatory Memorandum talks about avoiding an “inefficient insolvency process”. What is an efficient insolvency process other than a disaster? In not opposing these rules, I suggest that these Benches do not wholeheartedly endorse the current system on insolvency. There is, many people feel, an overdominance of HMRC’s call on insolvency in the current rules. This is not for debate today, but I put that down as an issue.

The Minister talked about reciprocity, a word that should be used carefully. However, it seems to me that this is a unilateral assertion of reciprocity, which, by its nature, is not reciprocity. What guarantee does the Minister have that the EU 27 will turn this into a reciprocal process and not merely watch us put our cards on the table while they decide not to? Without the EU 27 participating in this, we do not have the systems in place that we need for the Government’s definition of efficient insolvency to apply. Can the Minister tell us what assurances are in place?

Paragraph 2.11 of the Explanatory Memorandum says that we will,

My Lords, the UK has a great advantage over most European economies and the US when it comes to effecting a sorting out and recovery of a business that is failing. Can the Minister confirm that whatever EU rules we may be moving in tandem with will not damage our advantage in sorting out businesses?

My Lords, this has been a short and relatively sweet debate in some respects. There seems to be a recognition that these modest adjustments are necessary, primarily as a consequence of the earlier date not being met. I suspect there is a question about reciprocity. Let me tackle that head on. One of the challenges we have here, even allowing for the legislation made in the other place, is that the situation regarding the EU depends upon the EU. We cannot provide for what it will do in these circumstances. That is why we must be absolutely certain that in any circumstances in this area of insolvency we are legally sound and entirely correct. It would be wrong to do otherwise. However, it is important to stress that if we secure a deal, these regulations will become moot. We will not be pursuing them in that regard, so we will end up in a transition period and then, I do not doubt, the future relationship will examine a number of these aspects and we will see a very different outcome. However, these regulations are necessary. We have spoken with a number of bodies representing those responsible for insolvency to ensure that they are content with the way we are taking this forward.

In relation to some of the points raised by the noble Lord, Lord McNicol, we have looked at this very carefully to establish exactly where the costs rest. Had they been above the £5 million threshold, of course we would have done a full impact assessment. The current assessment is that the figure is £2.7 million and therefore it does not fall into that category. We have done a thorough consultation to ensure that there is no risk whatever that this will suddenly conflagrate beyond that.

As to timing, the noble Lord rightly pointed out that the Scottish Government moved forward its legislation in April, just after the previous proposed exit date. It is not a question of dawdling on our part, but of trying to put these two things together and move them forward, and we would have done so before that exit date in October because it would be necessary to do that. As to the level of consultation with the Scottish Government, it will not surprise noble Lords that we did a thorough consultation with them. One of the Scottish Parliament’s committees did an investigation and affirmed that this was the right approach. We spoke to several bodies in Scotland about this. The changes we are making at this point are relatively modest. They correct the legislation which emerged after 31 March to make sure that it is legally sound. It could not have been done before then because at that point we were not sure what was going to happen by that date, so the legislation could not anticipate the situation in which we ultimately found ourselves. I think the Scottish Government are relatively content, but I am quite happy to provide more information, should that be required, on the official level of engagement that has taken place.

I just want to follow up on that and seek some clarification from the Minister. If, for some unknown reason, we do not exit the EU on 31 October, will we need to be back here changing the dates in the SIs all over again to whatever the next date is?

That is very easy and straightforward to answer. It is the Government’s policy to leave on 31 October, but the laws have been drafted to ensure that, going forward, we will not have to revisit these regulations. I reiterate that, come Halloween, we will be on the other side.

Can the Minister clarify the point about the modified version of the jurisdictional tests?

I had written that down but then forgot to mention it. The noble Lord will be aware that one element of the original regulations was the jurisdictional tests. The modification that we are talking about here is to ensure that those tests are broadly compliant with the changes that have been brought in. The jurisdictional tests themselves remain broadly intact. Their purpose is to ensure that the legal jurisdictions of the various courts function after Brexit.

To be clear, the modification is with us rather than with Europe.

Absolutely—the modification is with us. However, the point is that broadly the tests are part of retained EU law and we have made the adjustments to make sure that they are compliant with our own statute book.

My Lords, will these changes in any way damage the superior insolvency legislation that this country has at present?

My noble friend is right to remind me of a point that I had almost overlooked by gazing at the Benches opposite. No, it should not damage that legislation. In fact, the UK is a good jurisdiction in which to address insolvency issues. I think that that is widely recognised in the EU and around the globe. We have an advantage there, and if we can maintain that advantage, this will be a place where such law can be made and we can maintain our leadership credentials. On that basis, I would be content to move forward with the regulations.

Motion agreed.