Corporate Insolvency and Governance Act 2020 (Coronavirus) (Suspension of Liability for Wrongful Trading and Extension of the Relevant Period) Regulations 2020
(Limited Text - Ministerial Extracts only)
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Lord Callanan
That the draft Regulations laid before the House on 25 November be approved.
Relevant documents: 37th Report from the Secondary Legislation Scrutiny Committee and 35th Report from the Joint Committee on Statutory Instruments (special attention drawn to the instrument).
The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Callanan) (Con)
My Lords, I think we all shared a sense of optimism last week when Margaret Keenan became the first person in the world to receive the Pfizer/BioNTech vaccine, administered at Coventry’s University Hospital. It gave us hope that, sooner or later, daily life for the majority may begin to return to some kind of normality. Until then, though, we continue to live with restrictions that are difficult for everyone but necessary to keep our citizens safe and make sure that the NHS is not overwhelmed. Today, all but a few areas of Great Britain are subject to restrictions put in place to limit the spread of the virus; the effect that this is having on many businesses, such as those in the retail and hospitality sectors, has been well documented.
The Government were swift to act and provide businesses with clarity and support when the impact of the pandemic was at its peak. Those companies that were worst hit were given every chance to survive and get through that period of uncertainty; I am grateful to everyone who contributed to the Corporate Insolvency and Governance Act. Businesses have benefited from a package of government support targeted at saving jobs and livelihoods, such as the furlough and job retention schemes, as well as billions of pounds in loans, rates relief and tax deferrals. However, until life returns to normal, we must recognise that the impact on businesses continues.
This instrument revives one of the measures introduced by the Corporate Insolvency and Governance Act 2020 and extends another measure. It revives the suspension of wrongful trading liability until 30 April and extends the flexibilities around the manner in which companies and other qualifying bodies can hold general meetings until 30 March. These measures, like others in that Act, are aimed at supporting directors in guiding their companies through the period in which business is being affected by the pandemic.
First, I shall deal with the temporary suspension of the wrongful trading provisions in the Insolvency Act, which expired on 30 September but which we propose to revive by this instrument. Noble Lords will be aware that wrongful trading is an action which may be taken by an insolvency officeholder, and can lead to a director being held personally liable for losses to a company’s creditors where it continues trading at a time when it is inevitable that it will enter formal insolvency proceedings. A successful action may lead to losses being recovered for the benefit of creditors but, more importantly, wrongful trading provisions have a vital role in preventing reckless insolvent trading in the first place. The threat of personal liability for directors is a strong deterrent to them causing companies to trade at their creditors’ risk. At the peak of the pandemic earlier this year, there were concerns that many would cause their companies to cease trading rather than risk personal liability in very uncertain trading conditions. They simply did not know what would happen or whether their companies could or would survive.
The temporary suspension of the wrongful trading provisions between 1 March and 30 September in the Corporate Insolvency and Governance Act allowed directors to discount the threat of personal liability for any worsening of their companies’ position during that period. It allowed them to take steps to save companies which would otherwise be viable but for the impact of the pandemic, without the concern that they would be penalised if things did not improve and the company had to enter insolvency proceedings. This then allowed them to access government support to continue trading, and therefore to save jobs and livelihoods.
I should say at this point that suspending wrongful trading does not give a free pass to directors and allow them to act irresponsibly. Other vital protections for creditors remain in place to protect them where a company is in an insolvent position, such as the director duties set out in the Companies Act, fraudulent trading or misfeasance actions under the Insolvency Act, or, ultimately, disqualification from acting as a company director.
At the end of September, many companies had returned to more normal levels of trading, so it was right that at that stage the protection given to creditors by the wrongful trading provisions should return. The suspension in the Corporate Insolvency and Governance Act was therefore allowed to expire on 30 September. Noble Lords will be well aware that since then, sadly, circumstances have worsened. A new wave of the virus has unfortunately meant further necessary restrictions being imposed across most of Great Britain. Directors again face uncertainty about future trading conditions; they need our support and reassurance that they can continue to trade and save companies that would be profitable but for the restrictions, without the fear of personal liability.
The Corporate Insolvency and Governance Act gave a power to make temporary changes to the effect of corporate insolvency legislation; this instrument uses that power to temporarily suspend the wrongful trading provisions again from 26 November until 30 April next year. This will give that reassurance to directors that they need not close viable companies solely because of uncertainty about their own position. It will help to save jobs, as well as contribute to the economic recovery. The suspension works by telling any court considering a wrongful trading action that it is to assume that a director is not to be held responsible for any worsening of the financial position of the company in the relevant period: 26 November 2020 to 30 April 2021. This was the approach that we used in the Act itself.
I am grateful for the report of the Joint Committee on Statutory Instruments, which addresses this specific point. It is important for directors to be absolutely certain that they will not face a wrongful trading action if they continue trading in uncertain circumstances, so if the assumption was in any way rebuttable this would not give them the reassurance they need when so much is at risk.
None of us can say for certain what will happen over the next few months, and the expiry date of 30 April 2021 will of course be kept under review. If, at some time before then, it becomes clear that the suspension has done its job in preventing companies entering insolvency proceedings unnecessarily, it will be removed. The protection for creditors will therefore return.
I move on to the measure on annual general meetings. The Corporate Insolvency and Governance Act also introduced temporary flexibilities around the manner in which companies and other qualifying bodies could hold general meetings. This is crucial to the operation of the UK’s strong corporate governance regime, which ensures that the boards of companies and other bodies are fully held to account by their members. This flexibility allows bodies to balance their constitutional arrangements with the prevailing coronavirus restrictions and, in doing so, safeguard the well-being of their shareholders and members.
Despite the fact that, in large part, the season for AGMs is now behind us, we know that around 80 large companies are still to hold annual general meetings between now and the end of March. That is excluding the multitude of smaller companies, charitable incorporated organisations and mutual societies which have similar obligations. The extension in these regulations until 30 March 2021 will give these bodies comfort that they can continue to convene these and other general meetings safely, while being consistent with their legal obligations.
I hope noble Lords will agree with many stakeholders that the two measures included in this instrument will provide much-needed reassurances to businesses in the critical trading period leading up to Christmas and beyond. I therefore commend these regulations to the House. I beg to move.
Lord Callanan (Con)
I thank the noble Lord, Lord Stevenson, and the noble Baronesses, Lady Bowles and Lady Altmann, for their valuable contributions. They are all veterans of the previous Act’s debates, and the points they raised very much reflect some of the concerns raised during those debates. They have also highlighted the importance of the measures and the necessity of doing all we can to extend them so that support for businesses can continue. Businesses have continued to face an exceptionally challenging time, with many of them unable to trade at full capacity due to the need to protect the population. These regulations provide the much-needed support for businesses to build on the foundations for economic recovery.
Picking up on the points raised by all three noble Lords, who rightly reflected the concerns of creditors, it is worth pointing out that the suspension of wrongful trading does not give a free pass to directors allowing them to act irresponsibly. This was a point made by the noble Baroness, Lady Bowles. Other vital protections for creditors remain in place to protect them when a company is in an insolvent position. These are the director duties set out in the Companies Act; the provisions of fraudulent trading; the provisions on misfeasance actions under the Insolvency Act; and, ultimately, disqualifications from acting as a company director.
The noble Baronesses, Lady Altmann and Lady Bowles, both raised the matter raised by the JCSI, and we are of course grateful for their input and for bringing it to the attention of the House. The suspension works by telling any court considering a wrongful trading action that it is to assume that a director is not to be held responsible for any worsening of the financial position of the company in the relevant period—and this is crucial—from 26 November to 30 April. This was the position we used in the Act itself. The purpose of the suspension is to prevent directors from otherwise putting viable companies into insolvency proceedings just because of the risk to them of personal liability. As I said in the introduction, I reassure all three noble Lords that this suspension will be kept under review while the restrictions remain in place, and we will consider using the power to end the suspension early if trading conditions change such that the suspension is no longer needed or no longer proportionate.
The noble Baroness, Lady Bowles, also raised the subject of further extensions, but I can reassure her the Government will extend only for as long as is necessary. The covering Act only allows for that, but we will of course keep this matter under close consideration. The suspension is related solely to the relevant period that I referred to.
The noble Baroness, Lady Bowles, and the noble Lord, Lord Stevenson, rightly raised the issue of what the noble Lord, Lord Stevenson, called the “lacuna” period and asked why the suspension of wrongful trading was not extended in the previous regulations laid on 24 September. At the time, even though social distancing and restrictions on social gatherings remained, directors had had seven months to access the package of help put forward by the Government, and some trading had returned to more normal levels. It was important at that time that protection for directors was reinstated. The suspension did not, in and of itself, remove any director’s responsibility continually to assess the company’s situation. We believe that things have changed since then; the uncertainty facing businesses has worsened again, and it is now right that the suspension should return, allowing directors every opportunity to help their companies survive the pandemic. This is matter of fine judgment, but we believe that we have the balance right.
The noble Lord, Lord Stevenson, also raised the issue of AGMs. We will be mandating that all AGMs can be held virtually in future, but we do recognise the value of holding physical AGMs. It is not appropriate to mandate that all meetings be held electronically. It is for companies to work with their members to establish their preferred way of working and holding meetings in future, to secure their consent and to make the requisite changes to their articles of association.
After all of those answers, I think I have addressed all the concerns raised, but let me reiterate: careful consideration has been given to extending these temporary measures, and the Government will, as I said, monitor the situation very closely before making any further decisions on how best to support businesses and representatives as the UK returns to normal. With that, I commend these regulations to the House.