The Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy (Richard Harrington)
Thank you, Mr Speaker, for such a lengthy and erudite introduction. I expected nothing less, and I was not disappointed.
The hon. Member for Brighton, Pavilion (Caroline Lucas) has brought a serious matter to the House, and I thank her for raising this important issue. I am also grateful for the interventions and contributions from the hon. Members for Hove (Peter Kyle) and for Strangford (Jim Shannon). We have heard terrible stories about their constituents. I have to say that I was not surprised, however. I had heard such stories before, being an occasional reader of the Brighton Argus, and I know that the hon. Lady is not just describing a one-off here. It is the job of the Insolvency Service, the Department for Business, Energy and Industrial Strategy and the entire trading standards system to do what they can to provide recompense for her constituents.
Peter Kyle
I am pleased to hear that the Minister reads the Brighton and Hove Argus. He has mentioned several of the agencies that people can turn to in these situations, but is it not the case that the landscape of regulation is very complicated? The constituents that we have been describing today simply do not think that any one agency has a grip on such situations.
Richard Harrington
I thank the hon. Gentleman for his intervention. I hope that I will be able to partly satisfy him with the comments that I am going to make. If not, I will be happy to meet him and the hon. Lady, representing the Greater Brighton constituencies, to take up any further points.
The insolvency regime is an important part of the framework of business, even though it has to deal with the unintended consequences of it. To put this into perspective, levels of insolvency are low, but when it does happen—particularly in consumer-facing companies such as this building company—it can have a significant impact on customers, employees and suppliers. It is an unfortunate fact of life that companies sometimes have to cease trading without paying their debts, and that when they do, creditors can often suffer, with little or no chance of receiving their money back. This is exacerbated in circumstances such as these when customers have paid for work in advance, because those people have often saved for some considerable time to have improvements made to their house, for example.
In many cases, insolvency proceedings such as liquidation will follow. These allow an expert in insolvency, who is authorised and bonded, to be appointed to oversee an orderly winding-up of the company’s affairs, to sell its assets and to make dividend payments to creditors from the funds available. It is an important principle of the insolvency regime that unsecured creditors rank equally when it comes to receiving such payments. Only certain creditors, such as employees, are paid in priority.
Hon. Members will appreciate that I cannot comment specifically on the liquidation of DMB at this early stage of the proceedings. The liquidators have an important task to carry out in winding up the company and making such reports to the creditors as are appropriate. I am aware that complaints have been made to trading standards—
Richard Harrington
I hope that the hon. Gentleman will bear with me. I do not want to run out of time without having tried properly to answer all the questions. If there is time left at the end, I will be delighted to give way to him.
I am aware that complaints have been made to trading standards, and we will have to wait for that authority to reach its conclusions. In the meantime, however, we are not sitting idly by. All traders are subject to consumer protection regulations which, for example, require them to provide clear and full information and allow consumers to unwind a contract if they have been the victim of a misleading commercial practice. It is right that any alleged breaches of those regulations should in the first instance be reported to trading standards.
I will set out how the regime impacts on creditors. The first thing to say is that directors who do not play by the rules can expect to be held accountable. It is a long-established principle of company law that directors must act in the best interests of their company, but once the company approaches insolvency, their first duty must be to the creditors. I note from the hon. Members’ comments that, in this case, some of the money was paid a few days before insolvency. Without speaking specifically about this firm, I can say that that is highly relevant to the possible actions open to the authorities. I will say more about that in a moment.
In the majority of company insolvencies, the law is obeyed. Once it has been established that the company cannot pay its debts, a responsible director should take steps to protect creditors, and if a solution to the problem cannot be found, the company may enter into formal insolvency proceedings.
However, not all directors are that diligent. Sometimes, they bury their heads in the sand and continue to run the company as if nothing has happened, or they try to use money owed to creditors as working capital, so that the company may continue to operate, and pay their own salaries. In those few cases, the position of creditors, such as customers who have paid for work in advance, may deteriorate, which would seem to be the case here, given what we have been told. Such directors may be subject to disqualification proceedings, which if successful will prevent them from acting as a director of a company, whether formally appointed or not, for a period of between two and 15 years.
The Government are responsible for disqualification of unfit directors via the Insolvency Service, which assesses insolvent company cases to decide whether to investigate the conduct of the directors and, where appropriate, seek disqualification orders. A person who acts as a director while disqualified is committing a criminal offence and, further, they are personally liable for any debts of a company incurred while they were breaching the disqualification.
Caroline Lucas
The people who have been affected have already contacted the Insolvency Service, which has said that it will not investigate, so where do they go now?
Richard Harrington
At this juncture, the hon. Lady and her constituents have to accept that this is the beginning of the proceedings.
An investigation may lead to evidence of criminal offences committed by directors, such as fraud. In those cases, directors may face prosecution as well as disqualification proceedings. All that will usually start—this is the relevant point—with the receipt of a report on the conduct of the directors of an insolvent company, which must be submitted by the liquidator within three months of their appointment. Having said that, in deciding whether there should be an investigation, all sources of information will be considered, including information from creditors of the company, its customers, its records and other agencies. If the hon. Lady’s constituents have information about the conduct of the directors of DMB—it appears that they certainly do—that they feel would help to decide whether there should be further investigation, they may, and should, submit it to the Insolvency Service, which has a link on its website for precisely that purpose.
Rogue directors will also discover that they may be personally liable for a company’s debts if it traded while they knew, or ought to have known, that it was insolvent and creditors suffered as a result. While I cannot comment on this particular case, if the circumstances that the hon. Lady described are correct—I have every reason to believe that they are because they are based on what her constituents have told her—the firm was trading when the directors knew or ought to have known that the company was insolvent, and creditors have suffered. A court can order that they repay money to the company out of their own pockets if it can be shown that their actions, or inaction, have harmed creditors. In this situation, the directors would have breached their duty to the creditors of the company, which has the serious effect of preventing the directors from hiding behind the normal veil of incorporation that is a limited company.
Richard Harrington
I am going to run out of time, so I will continue. I ought to emphasise again at this point that I cannot comment specifically on the case of DMB or indeed the conduct of its directors.
I mentioned earlier that the Government continue to look for ways to strengthen regulatory and enforcement systems, and disqualification is one area where there have been recent improvements. From 2015, the powers of the Insolvency Service to investigate have been expanded, and the system for liquidators reporting on the conduct of the directors has been modernised, allowing for quicker and more efficient investigations. In addition, there is a new process whereby if a director is disqualified, and it can be shown that their actions caused direct losses to creditors, the court can order that they make a payment from their own pocket to compensate creditors or the estate. These compensation orders were introduced in the Small Business, Enterprise and Employment Act 2015.
The insolvency of a construction company such as DMB may often result in some customers having paid for work that it was not possible to complete. It is not unusual to ask the customer for a proportion of the payment up front, such as in the circumstances described by hon. Members tonight. Those circumstances may be different from insolvencies that may happen when directors behave perfectly properly and get into financial difficulties, but I will not describe that as the “normal” way, because few companies do become insolvent. There are things that become a serious matter of misconduct on the part of directors and that lead to periods of disqualification, personal liability and possibly prosecution proceedings being sought.
Caroline Lucas
Apparently, we have a couple more minutes. The Minister says there is provision to get a court to order a pay-out from people’s own pockets. Does that still apply if it was a limited company?
Richard Harrington
I believe that is the case, but I do not want inadvertently to mislead the House, so I will write to the hon. Lady on that subject to answer specifically and properly.
I am genuinely sorry, as anybody would be, for the hon. Lady’s constituents following this business with DMB. It is a horrible situation, but I reassure her and other Members that there will be full consideration of whether there should be further investigation of the circumstances of this insolvency. [Interruption.] I have been given a piece of paper saying that the answer to her question is, “Yes, it does.” I will write to her anyway, because I promised that I would.
I have craved your indulgence enough, Mr Speaker—I think I have one minute left—and I hope I have been able to reassure the hon. Lady that the insolvency legislation is robust in dealing with directors who abuse the principle of limited liability. If she and her Brigtonian, Hovian and Portsladian colleague, the hon. Member for Hove, would like to meet me or the relevant officials, I am happy for them to do so.
Paul Girvan
Is it possible for protected creditors, such as Her Majesty’s Revenue and Customs in respect of VAT, to allow flexibility for those who are in most need? We are sometimes talking about the widow’s mite here.
Richard Harrington
That is not currently the situation. As the hon. Gentleman will know, some creditors are protected above others, such as banks with mortgages, and we have to be careful that companies can legitimately borrow money and pay their taxes.
Caroline Lucas
The hon. Member for Hove (Peter Kyle) and I would be grateful for the meeting the Minister describes. We will follow up with his office.
Richard Harrington
I apologise for the fact that in some cases I may not have been able to answer as fully as I had hoped.
Question put and agreed to.