Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) Regulations 2020
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Lord Callanan
That the Grand Committee do consider the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) Regulations 2020.
Relevant document: 29th Report from the Secondary Legislation Scrutiny Committee
The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Callanan) (Con)
My Lords, this statutory instrument was laid before the House on 24 September 2020.
Since the emergence of Covid-19, businesses have received billions of pounds in loans, tax deferrals, business rate reliefs and grants to support them and help save jobs. The Government’s recently launched winter economy plan has a further package of targeted measures to provide ongoing essential support as social restrictions are reintroduced in many regions of our country. However, the Government recognise that while most businesses have been able to reopen and many have received significant financial support, some continue to face uncertainty and financial difficulties.
This statutory instrument will help companies by extending most of the temporary measures introduced by the Corporate Insolvency and Governance Act 2020 which were due to expire on 30 September. The extensions to various parts of insolvency and company law will protect companies from aggressive creditor action, promote company rescue and give greater flexibility to businesses by allowing them to hold their annual general meetings in a way which is consistent with social distancing measures.
The Government recognise that these measures have a significant impact on the normal working of insolvency legislation and the rights of creditors. Therefore, it is right that they are not extended for longer than they are needed. We think it is right, therefore, that any consideration of an extension, and for how long, should be done on an individual basis, rather than in the round, taking into account all the circumstances and potential impacts. We will continue to monitor the situation closely and will act swiftly if evidence demonstrates the need to act further.
The temporary insolvency measures being extended are: first, the suspension of serving statutory demands and the restrictions on filing petitions to wind up companies until 31 December 2020; secondly, certain modifications to the moratorium provisions and the temporary moratorium rules, which are extended until 30 March 2021; and, thirdly, the small supplier exemption from termination clause provisions, which is also extended until 30 March 2021.
During these difficult trading times the temporary suspensions on serving statutory demands and restrictions on winding-up petitions have helped many essentially viable companies by removing the threat of aggressive creditor action at a time when many businesses are unable to operate at full capacity due to continuing social distancing restrictions.
Since the introduction of these measures there has been a decrease in the number of compulsory liquidations by 67%, compared with the same period last year. Not extending these measures may lead to essentially viable companies that would be able to pay their debts but for the virus being put into a value-destructive compulsory liquidation. Such an outcome would put jobs and investment at risk and would not be a satisfactory outcome for creditors or the economy. Extending these measures further will instead give confidence and support to companies that are doing their best to stay open in these unprecedented times.
Noble Lords will know that the Government have already extended the temporary suspension on the right of commercial landlords to forfeit the tenancies of businesses until 31 December 2020. This will give further protection to tenants who have only recently been able to restart trading after the restrictions introduced because of the pandemic.
Most landlords and tenants have been working together to reach agreements on debt obligations. However, there remains a risk that some landlords might use aggressive debt recovery tactics against companies struggling to meet rent commitments in these difficult trading conditions. These measures taken together will support such businesses.
While we believe that the extension of the statutory demand and winding-up provisions will be particularly welcomed by commercial tenants, it applies to all business sectors of the economy. A range of other legal options is available to creditors seeking to recover debts that are unaffected by the changes being made here—for example, it is possible to bring a civil claim to recover a debt—but it is important to note that these measures aim to encourage forbearance and do not extinguish any existing creditor rights or interests.
I turn to the other measures related to the moratorium. While support from government measures has meant that there has been suppressed demand to date for the new moratorium procedure, I am pleased that companies, particularly smaller ones, are beginning to make use of them. During normal economic conditions, moratoriums are intended to include important criteria that must be met before a company can enter into one. These criteria protect the integrity of the moratorium, which should be used only for companies with a realistic prospect of rescue.
Noble Lords will know that it was recognised during the debates on the Corporate Insolvency and Governance Bill that a temporary relaxation of these criteria would help fundamentally viable companies impacted by the pandemic to make use of the moratorium. These regulations extend some of those temporary relaxations to 30 March 2021. They, first, allow a company subject to a winding-up petition to access a moratorium by simply filing the relevant documents at court, rather than having to make an application to the court; and secondly, disapply the rule that prevents a company from entering a moratorium if it has been subject to certain insolvency measures within the last 12 months—for example, a company voluntary arrangement, an administration, or a previous moratorium.
The temporary modifications to moratoriums that are being extended relax the eligibility criteria for obtaining one, enabling a greater number of companies in financial distress access to rescue or restructure options free from creditor pressure. This extension recognises the extraordinary and temporary difficulties being caused by coronavirus and will make the moratorium as widely available as possible. The regulations also extend the temporary administrative rules for the moratorium that enable it to operate, as contained in Schedule 4 to the Corporate Insolvency and Governance Act.
The final measure to be extended in the insolvency framework is the small company supplier exemption from the prohibition of termination clauses, which this instrument extends to 30 March 2021. Termination clauses are often found in supply contracts between businesses. They are triggered when a company commences a formal insolvency or a rescue procedure, allowing the supplier to terminate supply immediately. They can also be used by suppliers to demand ransom-type payments to maintain the supply of essential goods or services that may be vital to continue trading and the withdrawal of which could jeopardise any potential rescue. Their prohibition means that contracted suppliers cannot terminate contracts or take other steps, such as demanding additional payments, simply on the basis that the company has entered an insolvency procedure or a moratorium. The measures give an important protection to distressed companies while they attempt a rescue.
However, in the current circumstances such a provision could hit small suppliers hard, potentially endangering their own solvency. While small businesses represent 99% of the business community, 64% of turnover is through businesses that do not fall within the definition of a small business. It therefore continues to be right to temporarily exempt small suppliers from the prohibition, thus allowing them to terminate supplies should they need to protect their own business.
Turning to annual general meetings, the Corporate Insolvency and Governance Act 2020 introduced temporary flexibilities around the way companies and other qualifying bodies could hold general meetings. This allows companies to balance the requirements of legislation and their constitutional arrangements with the prevailing coronavirus restrictions. In doing so, companies can safeguard the well-being of their employees, shareholders and members. This is crucial in the operation of the UK’s strong corporate governance regime, which makes sure that company boards are fully held to account by their members. Without an extension, this scrutiny would be made increasingly difficult.
Despite the fact that, in large part, the season for annual general meetings is behind us, we know that there remain over 100 large companies still to hold an AGM between now and the end of the year. To that we must add the multitude of smaller companies, charitable incorporated organisations and mutual societies that have similar obligations. The extension in these regulations will give companies comfort that they can continue to convene these and other general meetings safely and consistent with their legal obligations.
Overall, the package of temporary measures introduced by the Corporate Insolvency and Governance Act in June this year has been widely welcomed by businesses at this crucial time. We have been told by business that these measures have been essential in supporting them, with many companies now able to trade without the threat of aggressive creditor action being taken against them, and with the availability of new tools to help them to restructure and rescue themselves. I commend these regulations to the House.
Lord Callanan (Con)
I thank all noble Lords who contributed to this short debate. I know that many also contributed to the legislation when we originally introduced it. There is a great deal of expertise in the House on this subject, and I am grateful to those who have thought to opine further on the extensions that we have introduced.
I thought that the debate started off well with an excellent contribution from the noble Lord, Lord Blunkett, who, rightly, highlighted the difficulties of businesses in areas such as his own dear Sheffield which are subject to tier 3 restrictions. The Government very much recognise the ever-changing context in which we operate, but I hope he is assured that the Government are keeping all these measures under review in light of the ongoing development with the pandemic, in order to act in a proportionate way should it prove necessary to do so. I can further offer assurances to the noble Lords, Lord Blunkett and Lord Vaux, and to my noble friend Lady McIntosh that the measures included in the order are being kept under review as part of this. We would not hesitate to move swiftly to extend them further if that is necessary to support business in a proportionate and viable manner.
My noble friend Lord Bourne raised questions on the differing dates of the extensions within the regulations. The reason for that is that they were assumed to be the best and most viable dates at the time, following consultations with various organisations and other government departments. However, as I said earlier, we will keep those measures under review. The temporary measures all have significant impacts on the normal working of various parts of insolvency legislation and the business community. The term of extension for one measure may not be desirable or needed for another. We think it right, therefore, that any consideration of an extension and for how long should be done on an individual basis, rather than in the round, taking into account all the circumstances and potential impacts.
My noble friend Lord Bourne and the noble Lord, Lord Stevenson, asked further about why restrictions on wrongful trading were not being extended. Careful consideration was given to whether to prolong each of the separate temporary measures introduced by the Corporate Insolvency and Governance Act; a package of targeted measures remains in place to assist companies in financial difficulties. We reached the view that a further extension of the prohibition restrictions on wrongful trading was not required at this time.
The end of the suspension represents the return of an important protection for creditors. As always, it is a question of getting the right balance. At the beginning of the pandemic, company directors faced a very uncertain future with regard to trading conditions. Now that the suspension has been in place for seven months, they will have had time to make a better assessment of the impact of the pandemic on their companies’ viability. We therefore considered it right to restore that provision.
The points made in the debate have highlighted the importance of the measures being extended by these regulations and the necessity of extending them so that businesses continue to benefit from them. The Government have considered the ongoing impact of Covid-19 and the potential impact of each measure to determine how for long each measure should be extended, if at all. Government officials have been in close dialogue with business and professional groups about these measures and the impact that they are having. Given that the Covid-19 crisis is still with us and businesses are still dealing with its impact, the consensus is that the measures being extended are still necessary.
The number of corporate bodies benefiting from the company law measures—my noble friend Lord Bourne referred to 100 companies—are public companies with obligations to hold AGMs with a variety that is testament to our varied business sectors. Countless other companies will benefit from having flexible general meetings in the coming months. The flexibilities are intended to be temporary and only for the purposes of assisting bodies in coping with Covid-19 restrictions. Once the measures and powers expire, meetings will continue to be held as normal and in line with the body’s normal constitution.
The Companies Act 2006 already gives companies the ability to hold general meetings in a virtual form but, generally, they would need to secure shareholder consent to appropriate changes in their articles of association. Ultimately, it is for companies and shareholders to agree what flexibilities they want over the longer term. We do not think it appropriate to mandate that meetings be held in a particular way. These measures give bodies the flexibility to hold meetings in a safe way, including through the use of electronic means. This will allow companies to respond appropriately to changing circumstances where required. I am happy to confirm for the noble Lord, Lord Stevenson, and my noble friend Lord Bourne that the Financial Reporting Council has published guidance on AGMs on its website.
The noble Lord, Lord Vaux, asked how to protect businesses in recovery after the end of the measures for which it is clear that the restrictions have changed. Government support has evolved; its goal remains to protect people’s jobs and livelihoods. As the path of the virus and the threat to the economy become clearer, government action needs to support jobs and businesses while at the same time allowing the economy to adapt to the new normal.
The noble Baroness, Lady McIntosh, asked me about the uptake of the measures, and I can confirm to her that two companies have obtained a moratorium under the Insolvency Act 1986, as amended by the Corporate Insolvency and Governance Act 2020. One company had a restructuring plan under the Companies Act 2006 amended by this Corporate Insolvency and Governance Act 2020 sanctioned by the court. The restructuring plan, which was backed by creditors and sanctioned by the court in September, has allowed the airline Virgin Atlantic to restructure its debts, and to attract in excess of £1 billion of investment and international press attention. I think we can see that the legislation has worked in this respect: it has saved a company that was in difficulties because of the pandemic. We all know what has happened to airlines and the aerospace industry so, in this particular regard, the legislation that we slaved over has proved to be valuable.
Other noble Lords raised questions on the regional uptake of the measures and the impact of different-sized businesses; we are constantly keeping all these measures under review, and they will be reviewed on an individual basis. The low number of cases of each of these new legislative tools since the Act came into force is very likely to be as a result of the range of Government support which is still available and still being provided to companies—as noble Lords will be aware, and as I mentioned above—including the range of temporary measures that have recently been extended for a further period.
These temporary rules on the moratorium need to remain in place to allow time for the permanent moratorium rules, which require further secondary legislation, to be drafted. The law requires that the England and Wales rules require consultation with the Insolvency Rules Committee, which of course will take some time. It would also be undesirable to require businesses to adjust to new procedural rules at a time of great economic uncertainty, such as having to adapt to changes in government fiscal support and other regulatory support as a result of coronavirus.
The noble Lord, Lord Stevenson, asked on the point of viability for insolvency. I accept his point that this is not a term normally used by accountants of his persuasion, but it is being generally used as a term to indicate which companies would be profitable otherwise than for the impact of Covid-19. Over the past few months, businesses have continued to face an exceptionally challenging time, with many unable to trade or their ability to trade at full capacity restricted due to social distancing measures.
These regulations will provide the much-needed continued support for businesses to concentrate their best efforts on continuing to trade and to build upon the foundations for economic recovery in the United Kingdom. Careful consideration, as I said earlier, has been given to extending these temporary measures, and the Government will monitor the situation very closely before making any decisions about any further extensions, including, of course, consulting further with businesses, their representatives and shareholder bodies. With that, I commend these regulations to the House.