Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) Regulations 2021
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Lord Callanan
The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Callanan) (Con)
My Lords, these regulations were laid before the House on 24 March this year. It is now over a year since the emergence of Covid-19, and the Government have consistently taken the swift action needed to save lives, limit the spread of the disease, protect the NHS and mitigate damage to the economy. The Government’s successful rollout of the vaccine programme and the implementation of their four-step road map out of lockdown are both reasons for cautious optimism that we will soon enjoy a return to normality. To date, in excess of 35 million people have had their first vaccination and more than 18 million have had their second dose—including me, yesterday. The British public have also risen to the challenge of suppressing the spread of the virus by sticking to the rules: staying at home; getting tested when appropriate; isolating when required; and following the “hands, face, space” and “letting fresh air in” guidance.
However, we are not out of the woods just yet, and the emergence of new strains of the virus mean that now is not the time to become complacent. The continuation of social distancing measures, introduced to limit the spread of the virus and help save lives, is crucial while we wait for everyone to be vaccinated, but this of course continues to have an effect on business. The Government recognise that, while most businesses have been able to reopen and many have received significant financial support, social distancing measures remain and some businesses continue to face uncertainty and financial difficulties, as they are still unable to open or are not yet able to trade at full capacity.
It is therefore crucial that the Government continue to support businesses by giving them every chance to survive, fully reopen and get through this period of uncertainty. This statutory instrument will do that by extending the temporary measures first introduced by the Corporate Insolvency and Governance Act 2020—which were due to expire variously at the end of March or April—by a further three-month period until the end of June 2021. The temporary measures being extended until 30 June 2021 are: first, the suspension on serving statutory demands and the restrictions on filing petitions to wind-up companies; secondly, the small supplier exemption from termination clause provisions; and, thirdly, the suspension of the wrongful trading provisions. In addition, modifications to the moratorium provisions and the temporary moratorium rules are extended until 30 September 2021.
The temporary suspension on serving statutory demands and restrictions on winding-up petitions continue to help many viable companies during these difficult trading conditions by removing the threat of aggressive creditor action at a time when many businesses remain closed or are unable to operate at full capacity, particularly in the retail, hospitality and events sectors. Extending these measures further will give businesses the confidence and support they need while they are doing their best to reopen safely and return to as normal trading as they can in these unprecedented times.
Noble Lords will know that the Government have already extended the temporary suspension on the ability of commercial landlords to forfeit business tenancies. This will give further protection to tenants who have only recently been able to restart trading after the restrictions introduced because of the most recent lockdown.
Although these measures are intended to help companies that may be subject to aggressive creditor enforcement, the Government have been clear that they are not to be seen as a payment holiday. Where companies can pay their debts, they should of course do so. It is important to note that these measures aim to encourage forbearance and do not extinguish any existing creditor rights or interests. In addition to the protection that these measures give, they are also intended to give those companies with unavoidable accrued arrears caused by the pandemic time to take advice from restructuring professionals and to negotiate and reach agreements with their creditors wherever possible.
I know that many businesses and their business representatives will welcome the continued support that these regulations will give them during this extremely uncertain time. However, I also recognise that these measures will mean a further period of uncertainty for creditors where some of their rights to enforce the recovery of their debts are temporarily restricted. Although 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.
Noble Lords will be aware that wrongful trading proceedings are an action that may be taken by an insolvency office-holder against directors, which can lead to a director being held personally liable for losses to a company’s creditors where they allowed the company to continue to trade beyond the point at which it became inevitable that the company would enter formal insolvency proceedings. A successful action may lead to losses being recovered for the benefit of creditors but, more importantly, wrongful trading has a vital role in preventing reckless insolvent trading. The threat of personal liability is a strong deterrent against directors causing companies to continue to trade at the risk of creditors.
The suspension of liability for wrongful trading until 30 June 2021 will allow directors to take steps to save companies that would otherwise be viable but for the impact of the pandemic without the threat that they may be personally penalised for losses incurred during a period of great economic uncertainty if things did not improve and the company later had to enter insolvency proceedings. I should stress that suspending wrongful trading does not give a free pass to directors or allow them to act irresponsibly. Other vital protections for creditors when a company is facing insolvency remain in place, such as the directors’ duties set out in the Companies Act, fraudulent trading or misfeasance actions under the Insolvency Act, and disqualification from acting as a company director.
Finally, the new company moratorium introduced by the Act gives financially distressed companies protection from creditor enforcement while they seek a rescue. In normal economic conditions, the moratorium is intended to work with certain entry 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 those companies with a realistic prospect of rescue. Noble Lords will recall that it was recognised during the debates on the Corporate Insolvency and Governance Act that it would help fundamentally viable companies impacted by the pandemic to make use of the moratorium if these criteria were temporarily relaxed.
These regulations will extend some of those temporary relaxations to 30 September 2021. They include: allowing a company subject to a winding-up petition to access a moratorium simply by filing the relevant documents at court, rather than having to make an application to the court; and, secondly, disapplying the rule that prevents a company entering a moratorium if it has been subject to a company voluntary arrangement, been in administration or been in a previous moratorium within the last 12 months. These regulations will also extend the temporary administrative rules for the moratorium contained in Schedule 4 to the Corporate Insolvency and Governance Act, which enable it to operate.
The important package of temporary measures, first introduced by the Corporate Insolvency and Governance Act last year and by subsequent extensions, continues to be widely welcomed by businesses. We are told by business that these measures, alongside the availability of new permanent tools, have been essential in supporting continued trading, seeking a rescue or restructuring, and allowing many companies to trade without the threat of creditor action being taken against them.
In conclusion, the Government recognise that these measures represent a significant incursion into the normal operation of insolvency legislation, in particular to the rights of creditors, and as such it is right that they are not extended for longer than is absolutely necessary. These temporary measures will, therefore, continue to be kept under constant review. I beg to move.
Lord Callanan (Con)
First, I thank all noble Lords who have contributed to what I thought was a very interesting and informative debate. The points raised have highlighted the importance of the measures being extended by these regulations and the necessity of extending them so that many businesses can continue to benefit from them. Over the past year, businesses have faced an exceptionally challenging time, with many unable to trade or having had their ability to trade at full capacity restricted due to social distancing measures.
My noble friend Lord Bourne asked how many moratoria there have been to date. The answer is four. This relatively low number is a direct result of the decisive government action to support the economy through the worst of Covid-19’s economic impact, which has helped many businesses and saved jobs. These measures have meant that there has been somewhat suppressed demand to date for the moratorium. It should be noted that there have also been far fewer corporate insolvencies in this period; for example, government statistics show that corporate company insolvencies in March 2021 were 86% down on the same month last year—as I say that, there is a clap of thunder; I hope that is not a sign of impending doom.
As the economy begins to emerge from the pandemic, it is of course sad to report that we expect the moratorium to be used more frequently. It will be subject to review to ensure that it works as intended no more than three years from Royal Assent of the Act.
On the different end dates my noble friend asked about, the Government recognise that these measures have a significant impact on the normal working of insolvency legislation and the rights of creditors; it is therefore right that they are not extended for longer than needed. The temporary provisions for moratoria in Schedule 4 are extended to 30 September because the consent of the Scottish Government may be required to implement replacement permanent rules for Scotland, as some aspects of corporate insolvency are devolved. Users have told us that when rules in both England and Wales and Scotland change, they prefer the rules to come into force in both jurisdictions at the same time. An extension of six months will therefore aid this process.
My noble friend also asked whom we consulted. We have engaged with major trade representatives including the Institute of Directors, R3, major restructuring firms and insolvency practitioners. There are too many to list now but I can write to my noble friend if he wishes to have a list.
My noble friend Lord Bourne also asked why we have singled out wrongful trading for these measures. Representatives have made it clear that wrongful trading is a strong deterrent to continued trading, and many responsible directors will cause companies to cease trading rather than risk the threat of future personal liability, with the impact that this could have on the lives of directors and their families and all it entails. As with all these measures, we will keep the need for them under constant review and act swiftly if evidence demonstrates a need to extend them further or turn them off.
My noble friend Lord Leigh asked about the Government’s approach to mounting levels of corporate debt in the economy. While many firms have been hit hard by the pandemic, government support has ensured that the corporate sector has remained resilient, with the increase in indebtedness matched by an increase in net deposits over and above the level of lending. Firms look likely to have used lending to increase cash buffers, both to cover deferred liabilities such as VAT and rent and to prepare for any further shocks. Firms in certain sectors such as hospitality, which has been hit hardest by the pandemic, have received additional government support in grants of up to £9,000 per premises. Support continues to be available to firms as restrictions are eased and economic activity rebounds.
Further temporary insolvency legislation and business support provided by the Government since the crisis began have resulted in fewer insolvencies than would normally be expected. Her Majesty’s Treasury is monitoring the impact that insolvencies will have on lenders’ balance sheets, which to date have remained largely resilient—backed of course by government action —and on their ability and willingness to lend to support economic recovery.
The noble Lord, Lord Sikka, raised some concerns about insolvency practitioner fees. In our view, it is right that insolvency practitioners are paid a fair rate for the work they do. The remuneration and expenses of insolvency office-holders are subject to the approval of creditors in each case and, of course, subject to the overall control of the court. Regulators have a statutory duty to encourage an independent and competitive insolvency profession that provides high-quality services at a fair and reasonable cost to the profession. Complaints about high levels of fees charged by an insolvency practitioner can be made through the Insolvency Service’s complaints gateway.
I was particularly grateful to my noble friend Lord Moylan for highlighting the many ways in which the Government have consistently supported business throughout the pandemic; he also made a number of very important points. He asked what the Government are doing to protect sole trader tenants and/or directors who have given personal guarantees against being made personally bankrupt by aggressive landlords; that is indeed a good point. As my noble friend will be aware, although the restrictions on insolvency proceedings were targeted at companies, the Government have put in place an unprecedented package of support to help the self-employed with their finances during the coronavirus pandemic; this includes the job retention scheme and the recovery loan scheme as well as a number of business support schemes operated by local authorities.
The Government recognise that many people are struggling financially due to the coronavirus. We have worked with mortgage lenders, credit providers and the Financial Conduct Authority to ensure that people can get and access the support that they need. We are also committed to helping people to access the necessary support to get their finances back on track. An extra £37.8 million has been made available to debt advice providers to support people in financial difficulty. I would always encourage businesses that have not been able to access support, or are not sure of the support available, to contact their nearest business growth hub. The Government have established a network of 38 of these hubs, with one in each local enterprise partnership area in England. Expert advisers can offer businesses of all sizes free, tailored, one-to-one guidance on areas such as business plans, building resilience and potential funding streams.
My noble friend asked why these temporary measures are not being extended for longer. The temporary measures can be extended by statutory instrument only for a maximum period, which was set down in the original primary legislation; for the insolvency measures, that is a maximum of six months. However, recognising that these measures involve a significant intervention into the normal working of the insolvency regime, including affecting the rights of creditors, it is right that these measures are put in place only for as long as is necessary and that we keep them regularly under review. The Government will keep this matter under review in the light of ongoing developments during the pandemic, and we will move swiftly to extend them further if that proves necessary.
Turning to my noble friend’s questions about the measures that expired at the end of March, this was solely due to a relaxation of the requirement to hold annual general meetings physically. The provision was effective for a limited period and it was not possible to extend it beyond 5 April 2021. Where there remain concerns in the business community that holding general and annual general meetings post March 2021 would be problematic given continued uncertainty around coronavirus restrictions, officials are working closely with stakeholders as a matter of urgency to explore non-statutory approaches to address the challenges that might arise upon the expiration of the temporary provisions.
Turning to the question of how we avoid a so-called cliff edge when these measures expire, the Government recognise the risks of such a scenario involving the accumulation of unpaid debts becoming due when restrictions and government fiscal support expire. Work is ongoing to develop possible solutions to enable a viable exit from these measures; that continues to support business during the recovery phase.
Finally, I turn to the question of the Government’s approach to the mounting level of corporate debt in the economy. While many firms have been hit hard by the pandemic, HMG support has ensured that the corporate sector remained resilient, with the increase in indebtedness matched by an increase in net deposits. As I said earlier, firms in certain sectors, such as hospitality, have also received additional support through grants of £9,000 per premises.
Further temporary insolvency legislation and business support, provided by the Government since the Covid-19 crisis began, has resulted in far fewer insolvencies than would normally be expected; I outlined the figures earlier to my noble friend Lord Bourne. We continue to monitor the impact of insolvencies on lenders’ balance sheets; backed by government action, these have been largely resilient to date, as have lenders’ ability and willingness to lend to support economic recovery.
The noble Lord, Lord Lennie, asked about the scope for wider insolvency reform. I can tell him that the Government always keep the insolvency regime under review and, if any change is needed, we will not hesitate to bring forward the necessary legislation. These regulations will provide much-needed continued support for businesses as we continue with the Government’s four-step road map out of lockdown, allowing them to concentrate their best efforts on reopening or continuing to trade, and building on the foundations for our economic recovery in the United Kingdom. Careful consideration has been given to extending these temporary measures, and the Government will continue to monitor the situation extremely closely.
Once again, I thank all noble Lords who have contributed to this debate.