Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill (First sitting)
(2 years, 9 months ago)
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The Committee consisted of the following Members:
Chairs: David Mundell, † Christina Rees
† Baker, Duncan (North Norfolk) (Con)
† Baynes, Simon (Clwyd South) (Con)
† Grant, Peter (Glenrothes) (SNP)
† Hall, Luke (Minister for Regional Growth and Local Government)
† Hunt, Jane (Loughborough) (Con)
† Jenkinson, Mark (Workington) (Con)
† Malhotra, Seema (Feltham and Heston) (Lab/Co-op)
† Mishra, Navendu (Stockport) (Lab)
† Richardson, Angela (Guildford) (Con)
† Rimmer, Ms Marie (St Helens South and Whiston) (Lab)
† Scully, Paul (Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy)
† Smith, Jeff (Manchester, Withington) (Lab)
Tomlinson, Michael (Lord Commissioner of Her Majesty's Treasury)
† Webb, Suzanne (Stourbridge) (Con)
† Whitley, Mick (Birkenhead) (Lab)
† Young, Jacob (Redcar) (Con)
Yohanna Sallberg, Committee Clerk
† attended the Committee
Witnesses
Stephen Pegge, Managing Director, Commercial Finance, UK Finance
David Kerr, Fellow, Chartered Institute of Credit Management
Dr John Tribe, Senior Lecturer in Law, University of Liverpool
Public Bill Committee
Tuesday 6 July 2021
(Morning)
[Christina Rees in the Chair]
Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill
The Chair
We are now sitting in public and the proceedings are being broadcast. Before we begin, I have a few preliminary announcements. Members will understand the need to respect social distancing guidance. In line with the Commission’s decision, face coverings should be worn in Committee unless Members are speaking or they are medically exempt. Hansard colleagues would be grateful if Members could email their speaking notes to hansardnotes@parliament.uk. Please switch electronic devices to silent. Tea and coffee are not allowed during sittings.
We will first consider the programme motion on the amendment paper. We will then consider a motion to enable the reporting of written evidence for publication and a motion to allow us to deliberate in private about our questions before the oral evidence session. In view of the time available, I really hope that we can take those matters forward without debate. I call the Minister to move the programme motion standing in his name, which was discussed yesterday by the programming sub-committee for the Bill.
Ordered,
That—
1. the Committee shall (in addition to its first meeting at 9.25 am on Tuesday 6 July)
meet—
(a) at 2.00 pm on Tuesday 6 July;
(b) at 11.30 am and 2.00 pm on Thursday 8 July.
2. the Committee shall hear oral evidence in accordance with the following Table:
DateTimeWitnessTuesday 6 JulyUntil no later than 10.30 amUK FinanceTuesday 6 JulyUntil no later than 11:00 amThe Chartered Institute of Credit ManagementTuesday 6 JulyUntil no later than 11:25 amDr John Tribe, University of LiverpoolTuesday 6 JulyUntil no later than 2:45 pmThe Chartered Institute of Public Financeand Accountancy; The Institute of RevenuesRating and ValuationTuesday 6 JulyUntil no later than 3:15 pmLocal Government AssociationTuesday 6 JulyUntil no later than 4:00 pmThe Transparency Task ForceTuesday 6 JulyUntil no later than 4:45 pmUKHospitalityTuesday 6 JulyUntil no later than 5:15 pmR3
Date
Time
Witness
Tuesday 6 July
Until no later than 10.30 am
UK Finance
Tuesday 6 July
Until no later than 11:00 am
The Chartered Institute of Credit Management
Tuesday 6 July
Until no later than 11:25 am
Dr John Tribe, University of Liverpool
Tuesday 6 July
Until no later than 2:45 pm
The Chartered Institute of Public Finance
and Accountancy; The Institute of Revenues
Rating and Valuation
Tuesday 6 July
Until no later than 3:15 pm
Local Government Association
Tuesday 6 July
Until no later than 4:00 pm
The Transparency Task Force
Tuesday 6 July
Until no later than 4:45 pm
UKHospitality
Tuesday 6 July
Until no later than 5:15 pm
R3
3. the proceedings shall (so far as not previously concluded) be brought to a conclusion at 5.00 pm on Thursday 8 July.—(Luke Hall.)
Resolved,
That, subject to the discretion of the Chair, any written evidence received by the Committee shall be reported to the House for publication.—(Luke Hall.)
Resolved,
That, at this and any subsequent meeting at which oral evidence is to be heard, the Committee shall sit in private until the witnesses are admitted.—(Luke Hall.)
The Committee deliberated in private.
Examination of Witness
Stephen Pegge gave evidence.
The Chair
We are now sitting in public again, and the proceedings are being broadcast. Before we start hearing from the witnesses, do any Members wish to make any declaration of interest in connection with the Bill?
Peter Grant (Glenrothes) (SNP)
One of the witnesses this afternoon is from the Chartered Institute of Public Finance and Accountancy. I am a member of that institute.
The Chair
Q So noted. We will now hear oral evidence from Stephen Pegge, managing director, commercial finance, at UK Finance. Before calling the first Member to ask a question, I should like to remind all Members that questions should be limited to matters within the scope of the Bill and that we must stick to the timings in the programme motion the Committee has agreed. For this session, we have until 10.30 am.
Stephen Pegge: Good morning, and thank you for the opportunity to come along today. My name is Stephen Pegge. I am managing director, commercial finance, at UK Finance. UK Finance is the trade association for finance and banking. We have around 300 members, many of whom provide services to companies, and we are involved more widely in supporting small and medium-sized enterprise policy.
The Chair
Q Do you have any general remarks about the Bill?
Stephen Pegge: Yes. This is an important Bill, and one that certainly has the support of many in the business community, including lenders. I know that the consultation had widespread support. It does appear that closing this loophole should be beneficial in terms of the enforcement of good practice, the prevention of abuse and a certain degree of deterrence of the misuse of an important and useful facility that allows companies to be dissolved quickly and cheaply, where that is appropriate and justified, as an alternative to liquidation.
There have been instances over the years where companies have been dissolved with outstanding liabilities, as a result of creditors or those who are owed money. I should stress that it is not just a question of banks, but others who may be owed money and indeed consumers who have perhaps paid deposits on work that has not been done or who are unable to recover those funds, because there has been a deliberate attempt to avoid debts by seeking dissolution.
It is possible in current circumstances for action to be taken, but it can be time consuming and costly, and would usually involve restoring a company to the register if it has already been dissolved. The particular arrangements here will make it possible for the Insolvency Service to investigate directors where there is evidence of abuse, even in circumstances where the business is not insolvent, but instead has been dissolved. That is the loophole that the Bill is looking to close and one, as I say, that we would very much support being open.
The Chair
Thank you, Mr Pegge. We will now take questions from members of the Committee, if you would be so kind as to answer. The Opposition traditionally go first, so I call Jeff Smith.
Jeff Smith (Manchester, Withington) (Lab)
Q Hi, and thanks for coming to give evidence. I am just trying to get a picture of the scale of the problem. To what extent do you think this is a problem? Are the measures in this legislation adequate to deal with the scale of the problem that you think is out there?
Stephen Pegge: To put it in context, the Insolvency Service estimates that there is currently evidence of misconduct or misuse of dissolution process in only 1% of cases. Given that there are something like 500,000 dissolutions a year, that might amount to only about 5,000 cases. There is some evidence that it is a rising problem and, given that the average company that is dissolved might have a loan of say £200,000, even 5,000 cases could amount to a risk to creditors of up to £1 billion. It is significant in scale because of the large number of companies, even if it is not currently a high level of risk in proportionate terms. I would emphasise that the vast majority of businesses are honest and straightforward and are not abusing this scheme.
The other factor that members of the Committee may be interested in is that quite clearly over the last year, during the covid crisis, there have been a significant number of companies that have taken finance. Given that the Government, through the British Business Bank, have provided guarantees, there would be an impact on the taxpayer if those loans were not repaid and a claim for repayment were made. Again, that is relevant to consideration.
Seema Malhotra (Feltham and Heston) (Lab/Co-op)
Q Thank you for your evidence today, Mr Pegge. I understand that you helped to establish the covid-19 lending schemes. The Government have suggested that some companies have been dissolved to avoid paying back Government loans given as coronavirus support. Have you seen any evidence of that? If these measures go through, do you believe, from your experience and what you have seen, that the Insolvency Service is adequately resourced to deal with the expansion of powers it would have through the Bill?
Stephen Pegge: Yes, we have seen instances of this practice being used to try and avoid liability under bounce back loans. Back in May 2020, UK Finance with the British Business Bank established the bounce bank loan fraud collaboration group. It involves attendees from the Cabinet Office; CIFAS, the UK fraud prevention service; the Treasury; BEIS; and the National Investigation Service—NATIS. The aim is for intelligence to be shared, good practice to be developed and a threat log to be maintained and fed into the National Crime Agency and the National Economic Crime Centre. In fact, this was one of the practices which had been identified through that and has led to some efforts more recently to try to intervene and intercept these cases of dissolved companies involving Companies House and BEIS.
In the meantime, it is always possible that these cases may well have got through and there is some evidence—again, reported by the Insolvency Service—that there could be around 2,000 such cases which are dissolved and where currently the powers to investigate do not exist, so it is a real problem. If it were to become a more popular route for fraud, while there are mechanisms to deal with it and creditors can object when they get notice through alerts when these situations are gazetted, unscrupulous individuals can still get through and it is important that it is closed as a loophole.
As regards the resources of the Insolvency Service, we have all been conscious that, while the number of insolvencies has been low during a period of suspension and the generous support that has been provided to businesses through public agencies and the finance industry, we would expect that to rise significantly in this next period. There is already some evidence that it will do so. It is important that the Insolvency Service is resourced sufficiently to be able to deal with this. The evidence at the moment is that they have been involved in disqualification of directors in something like 1,000 or so cases across the last year, so it is quite possible that there might be a rise in the amount of work that they will need to do. We would certainly support any investigation into what additional resources might be necessary.
Peter Grant
Q Good morning, Mr Pegge. You have described the loophole of company directors being able to dissolve the company in order to avoid their liabilities. Another way that directors can act is to set up two or three companies, transfer all the assets out of a company, dissolve the company with the debts and retain the companies with the assets. Is that a loophole that will still exist, even if the Bill goes through? If that loophole continues, is there a danger that that then becomes the route of choice for dodgy directors to avoid their liabilities?
Stephen Pegge: I think the practice you are describing is sometimes called phoenixing—setting up a company in the same location with the same assets purporting to be the same business with the same directors. It has certainly been a matter of concern for some time. Putting in place these measures should help to discourage and mitigate the risks of phoenixing: I do not think it entirely removes it. As you say, it is possible, even without these additional powers of investigation, for that to take place, but certainly where there is evidence of abuse, the fact that the Insolvency Service will have powers under the discretion delegated by the Secretary of State to investigate the directors, take action against them in terms of disqualification more generally, and seek compensation from them personally for losses suffered will discourage the practice of phoenixing, which I know is a concern. As I say, I do not think that it entirely removes it, but it certainly will discourage it, and to some extent remove some of the possibilities of it taking place.
Mick Whitley (Birkenhead) (Lab)
Q Welcome, Mr Pegge. Do the Government proposals address all the problems that have been identified with the dissolution process in relation to liabilities and directors’ conduct?
Stephen Pegge: This is certainly a very important contribution to addressing major issues, and it is the one that we have been most concerned about recently. We have seen, as I mentioned, real evidence of dissolution being used as an attempt to avoid liability, but I stress that in many cases dissolution is an efficient and appropriate way for companies to be removed from the register where there is no money owing and that business is ceasing, without going through the time and cost of liquidation, which obviously is available as an alternative—for solvent businesses through members’ voluntary liquidation, or in insolvent situations through creditors’ voluntary or compulsory liquidation. I am not aware of significant other means by which we need to deal with abuse of dissolution. This is the one that has been most to the fore in the evidence that we have seen of abuse, certainly through the fraud group.
Jeff Smith
Q I am trying to get a picture of the scale of the issue. You mentioned that the Insolvency Service was involved in about 1,0000 cases in the last year. I appreciate that you said that that is a low number for the year. Then you said that there may be around 2,000 cases where the powers to investigate currently do not exist. That sounds like a significant increase in work for the Insolvency Service, and I wonder whether you think that it will be able to cope.
Stephen Pegge: I am not close enough to its work and resource. One thing that I would say is that the Insolvency Service has very good experience in these sorts of investigations. I would also say that the other element of work, if it has found problems that meet the threshold of evidence and it takes action to disqualify a director, does not necessarily need to involve a court process. In most cases, the Insolvency Service will be successful in getting an undertaking from the director involved to be disqualified. It then has the powers to put that into effect, but certainly people may want to consider whether the resources are sufficient to deal with the case.
The other point is that these are situations where dissolution has been successful. We are also looking to these measures to act, to a certain extent, as a deterrent, in order to make it less attractive for those looking to abuse the system to try it on, as it were. So it may be that this event becomes less frequent in due course.
In fact, one of the processes that is clearly available is for creditors to object to an application for dissolution—and, indeed, the Insolvency Service at the moment is also able to object—on the basis of complaints at that earlier stage, where they have evidence of doing so. And because of evidence of significant numbers of attempts here, those objections have been done on a mass basis.
Ms Marie Rimmer (St Helens South and Whiston) (Lab)
Q Good morning, Mr Pegge. Clause 2(14) states that the provisions
“have effect in relation to conduct…occurring, and in relation to companies dissolved, at any time before, as well as after, the passing of this Act.”
Do you support making these provisions retrospective and, if so, how should the Insolvency Service make use of these retrospective powers?
Stephen Pegge: As I understand it, the support for this measure was confirmed as early as 2018 and it has really been a lack of parliamentary time that has made it difficult for it to be put in place. Given that we are aware of abuse that has happened in the meantime, I support this measure being retrospective. I appreciate that that retrospectivity is not often applied to such Bills, but we are talking about a fairly high evidence threshold and about situations where natural justice would support this measure being made with retrospective effect.
The Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy (Paul Scully)
Q It is good to see you again, Stephen. That is an interesting point about the retrospective nature of the measure, given what you were saying about businesses taking on more debt throughout the pandemic. Obviously, the insolvency practitioners will work through things, as you have rightly said, in order of public interest. What do you think they may look to do to give lenders confidence, by approaching the pandemic response finance first?
Stephen Pegge: Clearly, when lenders are undertaking a credit assessment, they will consider both the willingness to repay and the ability to repay, the probability of default and the loss in the event of default. All those could potentially be, and I would say probably at the margin, factors that could be influenced by the use of dissolution as a means of avoiding liability.
Quite clearly, it is very difficult for a company that has been struck off the register to make payments under a loan, so there will be the avoidance of debt in those circumstances. Given that currently there is time and cost involved in restoring a company to the register, the ability then to take this action against directors after the event both to deter and, if the activity should still carry on, to investigate and take action against directors in a more timely and cost-effective way should reduce the ultimate losses to creditors. I think there has been an estimate that creditors could be saved around £1 billion as a result of this measure, which would be significant in terms of credit assessments.
The net effect is the ability to provide more finance with less time having to be spent on assessment up front, on better terms, and in circumstances that should help the recovery. However, I will emphasise, Minister, that this is only one factor and it is all operating at the margin. Nevertheless, it is certainly something that during the past year has become a matter of concern, especially in relation to bounce back loans.
Paul Scully
Q It is a complicated scene, as you say, and this is only one part of it. I think you are, therefore, suggesting that strengthening the regime in this way will give further confidence to lenders, and especially SME companies within the supply chains.
Stephen Pegge: Yes, exactly. It will, therefore, be possible to focus more time and support on those who deserve the finance, without the distraction of those who are abusing the process.
Paul Scully
Q Finally, what effect do you think there would be on lending if this regime did not come into place or the loophole were not closed? Would there be a chilling effect?
Stephen Pegge: As you say, it is a matter of a chilling effect. It is one other factor that would weigh on finance providers’ minds when making lending decisions. This is a crucial time for lenders to provide finance. If you look at the latest Bank of England figures, for May, which were published last week, some £7 billion of new lending was provided to SMEs.
Latest surveys suggest that high proportions of loan applications are being sanctioned—something like 85%—and we want that to continue. The expectation that this sort of loophole is being closed should build confidence. It will ensure that there is discouragement of bad actors, so that it does not grow out of proportion, which we fear might otherwise be the case.
Peter Grant
Q Good morning again, Mr Pegge. I apologise because I think I mispronounced your name earlier because I tried to read it without my glasses on. In an earlier answer, you referred to the retrospective nature of parts of the Bill. You indicated that you supported them. In particular, you referred to the fact that the Government had made it clear since 2018 that the legislation was coming.
Clearly, we are not creating a new offence that was not illegal at the time. We are considering legislation to make it easier for the authorities to act against people who may have committed offences, which I think is an important distinction. Even given that, is there an argument that the retrospective power should apply only to the date when the Government first published their proposals to legislate? Would you still support the Insolvency Service if it wanted to take action in relation to things that had happened in, say, 2015 or 2016? Would you have any concerns about that?
Stephen Pegge: As you say, this is essentially a technical loophole, which the Bill seeks to close. All it does is confer powers of investigation, with significant and rigorous practices in terms of investigation. The risk of miscarriage of justice is relatively limited. I do not have a particular date in mind. The point I was trying to emphasise was that this has widespread support and has had for some time.
The Chair
Thank you for joining us today, Mr Pegge, and taking the time to give evidence to the Committee. We are grateful.
We should be moving on to the next panel now but apparently the next witness is not ready. I will adjourn the Committee for a short time. We will reconvene when we have the next witness online. Thank you.
Sitting suspended.
Examination of witness
David Kerr gave evidence.
The Chair
Q We will now hear oral evidence from David Kerr, a fellow at the Chartered Institute of Credit Management. We have until 11 for this session. Could the witness please introduce himself for the record and make a few remarks about the Bill? Thank you.
David Kerr: Good morning, and thank you for the invitation to join the proceedings today. My name is David Kerr. I am a fellow of the Chartered Institute of Credit Management, the largest such body for credit managers. It was formed approximately 80 years ago and provides professional support, training and representation for credit managers and the creditor community.
The CICM contributed to the 2018 consultation and broadly supported the proposed measure in relation to director disqualification. Creditors have often raised concerns about directors leaving behind unpaid debts; whereas in a formal insolvency process, there will be some inquiry by an insolvency practitioner, when a company is dissolved ordinarily there is not. As we have heard, at present, the Insolvency Service will rarely look at those cases because it would potentially involve the cost of restoring a company to the register. The Bill therefore plugs an important gap, as others have commented.
It is probably important to make the point that this was first considered as a suitable measure and had support back in 2018, and while the urgency to bring it in now is understood, this measure is not solely for the purposes of chasing after directors and recouping funds in relation to covid debts but potentially has wider implications as well. There has been reference to the fact that 2,000 or 2,500 companies with unpaid bounce back loans may have been dissolved over the last year or so. I do not think there is any suggestion that every one of those will be investigated, but presumably the Insolvency Service will apply the same public interest criteria as it has hitherto in relation to insolvent companies. That would certainly give it the power to investigate those companies where directors have left behind debts, whether they are bank or Government debts or any other. That should act as a deterrent, one would hope, to directors using this route to avoid liabilities, and will perhaps also restore some confidence in the creditor community, provided that the action taken is publicised and therefore serves its purpose, both in the compensation orders that might be made and the deterrent factor. Broadly, the CICM supports the Bill. With that, I will be happy to take any questions that Committee members may have.
Seema Malhotra
Q Thank you for giving evidence today, Mr Kerr. You talked about restoring confidence to the creditor community. Would you say that there has been a loss of confidence in the creditor community? In relation to the 2,000 or 2,500 dissolved companies that you mentioned as having received covid-related loans, would you say that a high proportion of those may require investigation? Based on your experience of the creditor community, do you think that there was the means to repay those loans that those companies then tried to avoid?
David Kerr: In relation to confidence, I would not go as far as to say that there is a lack of confidence in the system, but in order to enhance confidence this is a suitable measure. It removes one source of frustration among creditors, which is where they can see directors who are not taking steps to put their companies through a formal insolvency process and instead are seeking to avoid debts by using the dissolution route.
In terms of numbers, I have not made any inquiry into the 2,000 to 2,500 companies that have been mentioned, but there has to be a sense of realism about the extent to which any Government agency can inquire into their circumstances. A percentage of them, based on creditor inquiries, complaints or other information that may come into the hands of the Insolvency Service, would trigger some investigation.
In relation to insolvent companies, although perhaps insolvency practitioners and creditors may be frustrated from time to time about the number of cases that result in disqualification proceedings, again there needs to be a sense of realism around the extent to which that can be done. That will happen in cases where, despite all the information, there is also a public interest test that is passed to pursue those actions.
Seema Malhotra
Q If a case passes the public interest test, do you think there should be the resources to deal with that? There is concern that the Insolvency Service may not have the resources, and therefore the ability to follow up on the expansion of powers in the Bill in the public interest. Has your experience been that the Insolvency Service has been able to resource any investigations that might be needed? What tools should the Government use to pursue directors of dissolved companies that they identify as culpable? Do you have a view on that?
David Kerr: In terms of resources and the ability to pursue all the cases that the Insolvency Service might wish to pursue, I guess that is probably a question for the Department. Not all the cases that are investigated will pass the public interest threshold. To the extent that there are cases that pass the test but cannot be pursued for resource reasons, I am sure the Insolvency Service would welcome any additional resources that can be made available to it. From the point of view of creditors, if actions are pursued in relation to covid-related debts and not others, perhaps the measure works against them a bit.
That comes to the second part of your question. There are two elements to this. First, there is the potential disqualification of individuals who are proven to have acted inappropriately. Secondly, and on the back of that to some extent, there is the possibility of compensation orders against those individuals, with a view to putting money back into the hands of creditors. Again, I am sure CICM creditors would wish that to be as effective for its members as for any Government debt.
Jeff Smith
Q Mr Kerr, you said that the CICM is broadly supportive. Do you have any particular concerns about the Bill? Is there anything that you think is missing from it, or could it be improved?
David Kerr: I think the point has been made about resource. I have heard comments from others on Second Reading and elsewhere about that. It would be unfortunate if the emphasis were entirely on dealing with bounce back loan fraud and if that took resources away from other directors’ conduct investigation cases. That point is not, I suppose, directly relevant to the provisions in the Bill; it is more a question of how it is implemented and taken forward. There have also been some comments about the retrospective element; the previous witness touched on that. I think these cases have to be taken within three years of the relevant date—the date of insolvency or the date of dissolution. I do not think the Department would be able to go back before 2018 in any event, and that was the date on which the consultation was conducted, so I suppose one could argue that directors have had notice of the intended provisions for the relevant period.
Those were probably the only points where there might be concerns to a limited extent, but generally I think the provision is a sensible one that gives the service powers that it does not have currently and which can only be helpful, I would have thought, to trust and confidence in the insolvency regime.
Jeff Smith
Q That is very helpful. On the three-year cut-off, are you concerned that that is likely to have implications on other investigations that the Insolvency Service carries out if it is not funded properly?
David Kerr: I was referring partly to the point that had been made by the Committee to the previous witness about whether there would be any issues around natural justice if the retrospective provisions pre-dated the consultation. I do not think that, in practice, that would happen. Going forward, the compensation laws that might be sought can be obtained after the disqualification order or undertaking, so there may be more than three years available to the service from the date of dissolution. There has to be a cut-off. I do not think there is any suggestion that the provisions of the disqualification have to be changed in that respect, merely that they would be applied to these circumstances. They have proved to be satisfactory since 1986 in relation to director disqualification in the insolvency proceedings, so I have no reason to believe that, going forward, those time limits will not be effective in relation to dissolved companies.
Seema Malhotra
Q Are any sanctions that are currently available to use against directors who may have dissolved companies to avoid liabilities not being used as much as they could be?
David Kerr: None that I can think of immediately.
Peter Grant
Q Good morning, Mr Kerr. May I come back to the retrospective nature of parts of the legislation? The three-year period will be permitted because that is what the current timescale is. Given the notorious complexity of a lot of financial misconduct cases and the fact that they are long drawn-out processes, is there an argument for that three-year period to be extended in cases where there is an indication that there is not only misconduct, but potentially criminal fraud? I am thinking about cases in which the potential fraud runs into the tens of millions of pounds. Is there an argument that in those cases, there should be no hiding place for criminals of that scale, simply because of the length of time they have managed to get away with it?
David Kerr: That is a fair point. I suppose the statute of limitations could be considered a relevant backstop, but I will come back to my previous point that we have a three-year limit in relation to investigations into directors’ conduct in insolvent situations, and that has been with us for 35 years. I have not heard any suggestion from the Insolvency Service that that has proved to be inadequate. This is effectively an extension of the same power into dissolved company circumstances. I have not seen or heard any evidence to suggest that it is an inadequate period.
Peter Grant
Q You say that you have not heard any such representations from the Insolvency Service. Have you had any such representations from lenders or creditors? They may take a different view from the Insolvency Service if it is their money that is at stake.
David Kerr: Perhaps some in the creditor community would like it to be a six-year period, but I do not think they have argued strongly for it, and I do not think there is a necessarily a case made for that. From a creditor perspective, in an ideal world, perhaps it would be open ended. That may be unrealistic.
Paul Scully
Q Thank you for giving evidence, Mr Kerr. Can you talk a little bit more about the deterrent that you spoke about? How much of an impact do you think the measure, and especially the threat of disqualification, will have on providing the necessary deterrence?
David Kerr: The current disqualification provisions act as a deterrent to some extent, because directors know that, in respect of every company that goes into an insolvent liquidation or administration, there will be some inquiry. There is an obligation on the insolvency practitioner to carry out a certain amount of inquiry into the contacts of the directors of those companies and make a report in each of those cases to the Insolvency Service on their conduct. The provisions do not provide for the same report. It will have to be triggered by something else, whether that is a creditor complaint or other information, but it will provide the opportunity for the service to make the same inquiry.
Paul Scully
Q You talked earlier about the public interest test and prioritisation. Obviously, we are trying to strengthen the enforcement regime to deal with the most egregious cases of fraud in relation to the financial support that the taxpayer has given throughout the pandemic. In your experience, has the insolvency practice been prioritising this work? As well as having the public interest test, or threshold, has it prioritised approaching the most serious cases at the earliest stage?
David Kerr: Do you mean the work of the Insolvency Service?
Paul Scully
Yes. We are talking about Insolvency Service resources. We would have expected the Insolvency Service to prioritise the work that it does on the most egregious cases, and that would indeed be how we would anticipate it moving forward. Have you seen that first hand?
David Kerr: This may not be a direct answer to your question, but the concern of the creditor community might be that, if this provision were used almost exclusively for the purposes of pursuing bounce back loan fraud, perhaps it would not have the wider benefit that could come from it. Perhaps that has to be the emphasis in the short term, but in the long run—it is a provision that was considered worthy of introducing back in 2018, before covid came along—one would hope that it will be of broader use.
Quite how the service will prioritise its limited resources and decide which cases to look at is a matter for it to work out once it gets the powers. One would hope that the cases that come to its attention through the insolvency practitioners’ reports will receive equal attention and that it will not be to the detriment of those cases that these other cases are being pursued.
Paul Scully
Q We heard a little bit in the earlier panel about phoenixing. Do you think this measure will help to combat that malpractice, where one company is shut down and dissolved and another takes its place, with the same directors, doing the same business from the same premises with the same staff?
David Kerr: That can happen, whether it is through an insolvency process or a dissolution. To the extent that it has happened through dissolution, the measure plugs that gap, because it is gives the same investigative powers to the Insolvency Service. It comes back to the deterrent point that you made previously. If the service is seen to be taking action in these cases and publicising the fact that it has done so, that will, one would have thought, have a deterrent effect.
Paul Scully
Q Finally, in terms of your role in credit management, what do you think this will do for the confidence of lenders and supply chains, in particular SMEs in those supply chains?
David Kerr: Generally, if the system is seen to be working well and those who abuse it are brought to account, then it helps enhance the confidence of those engaged in providing credit, whether it is through loans, trade credit or anything else. In that sense, it is a welcome provision that, if resourced and used as intended, should have the desired effect.
Seema Malhotra
Q To follow up on a couple of points, there have been critics of the proposals in this small piece of legislation. From your experience and that of your members, how long can it take for companies that have been dissolved to be restored to the register? In 2019, over half a million UK companies were dissolved but only 33 restored. In terms of the time it takes in practice, what could that look like?
David Kerr: I think the cost issue is the bigger disincentive for creditors that previously might have wanted to take steps to try and get somebody appointed to investigate. The service itself has made the point that there are legal costs and other costs associated with that process, and it would not be practical for creditors to mount that kind of action alone or, in many case, at all, given the amounts of their own debts.
The bigger disincentive is probably the cost and this avoids that. You are right in the sense that if there is a lengthy time process and if it takes several months, that eats into the three-year time limit that we have talked about, so that could be a problem. I think here, with this measure, we avoid that because the Department can have the ability to make appropriate inquiries and take action, without the need to go through that process.
Seema Malhotra
Q How much could it cost? What sort of range of costs could creditors see?
David Kerr: I do not have those figures in front of me but I have seen the fees involved. They amount to a few hundred pounds, but that does not include the cost of a solicitor to spend the time doing the necessary work. I would imagine that it would be a few hundred running into a thousand or more pounds to get a company restored, but I could not give you any exact figures.
Seema Malhotra
Q May I probe you a little further on the three year issue? You are right that within legislation there is provision for courts to make disqualification orders within three years after a company has been dissolved. This legislation extends that in line with that current time limit. In light of the fact that we have very unusual circumstances at the moment, with potentially thousands of companies that could require investigation, do you think that with that increased workload for the Insolvency Service, the question about available resources and the court backlogs, there could be a particular issue with directors effectively being culpable but the Government running out of time for courts to issue disqualification orders against them?
David Kerr: We might have touched on this slightly previously. First, there is no suggestion, as far as I am aware, that the whole of the 2,500 companies that have been mentioned would be the subject of an investigation. We are talking about dissolutions in the last 15 months or thereabouts. The time limit is relevant, obviously, because the service has to work to that, but the previous witness made the point, which we should bear in mind, that the majority of the cases that it takes do not necessarily involve court proceedings. In a lot of cases, having presented the evidence to the directors and with the threat of court proceedings available to the service if necessary, many are resolved by the director giving an undertaking, which has the same effect as an order, so a lot of them will not involve court proceedings and that helps the service to achieve what it is seeking to do within that timeframe. Many of the cases in these instances of dissolved companies, I imagine, would result similarly in a relatively high proportion of those being concluded by undertaking.
Simon Baynes (Clwyd South) (Con)
Q Thank you, Mr Kerr, for your evidence. I have two questions. These measures clearly have widespread support. Can you give us a feel for the scale of the problem with dissolved companies? We have discussed quite a lot of different figures this morning, but do you feel this is a very significant problem, or a manageable problem, just to get some more idea anecdotally on that?
Secondly, clause 2 allows “easier investigation”. Can you give us some idea of the way in which the Bill improves that process of investigation?
David Kerr: I will deal with the second point first. We know that this provision means that we do not have to go through the process of restoring a company and instead the Department can commence an investigation in circumstances where it deems it appropriate without any barriers to doing that. In that sense it makes the process easier to commence the work it needs to do.
Many companies are dissolved every year, but I do not think there is any suggestion that all those, or even the majority, involve any misconduct by directors and those who have opposed or supported them. I do not think there is any suggestion among those who proposed or supported the measure that that process should be removed as an option for companies in appropriate circumstances. The question is really how many of those represent some form of misconduct or where misconduct might be hidden, or where there is some abuse. I have not seen any statistics on that and do not know if anybody would know for certain. Again, it comes back to the point that the service would have the power to investigate in circumstances where something was brought to its attention, suggesting a need for investigation. In that sense, it is a welcome provision.
The Chair
Thank you for giving evidence, Mr Kerr. If there are no further questions, we will move on to the next panel.
Examination of witness
Dr John Tribe gave evidence.
The Chair
Q We will now hear oral evidence from Dr John Tribe, senior lecturer in law at the University of Liverpool. We have until 11.25 am for this session. Please introduce yourself for the record and make some remarks about the Bill.
Dr Tribe: Thank you very much for the invitation and opportunity to address the Committee on this important Bill. I will address the second half of the Bill and the clauses on directors disqualification. Like all the contributions on Second Reading in the House of Commons, I welcome and support the changes that the Bill introduces to the Company Directors Disqualification Act 1986 and the extension of the public protection provisions in that Act to unfit directors of dissolved companies.
The measures are a welcome addition to the insolvency framework and system that work effectively and are well managed by the Insolvency Service and its diligent and hard-working staff. This new statutory addition to their armoury is a necessary power to maintain public confidence, to protect the public from unfit directors, and to maintain the integrity of the limited liability company form.
My contributions to this Committee come from an academic viewpoint, as a senior lecturer in law at the University of Liverpool. For 20 years, I have been researching and writing about insolvency law, both corporate and personal. For much of that time, I have been interested in the role and accountability of office holders, including company directors. I have been editor of the Mithani: Directors’ Disqualification newsletter, and continue to sit on the editorial board of that publication. More recently, I have written about the disqualification proceedings in Kids Company and Carillion. I have five brief points or observations to make on the Bill: if the Chair allows, I can run through those. They are brief, if you want me to address them at this point.
The Chair
Yes, of course.
Dr Tribe: The first is on limited liability and corporate form abuse. I view the corporate form as a statutory privilege—a concession of the legislature that should be managed properly and should be used by individuals adhering to the highest standards of commercial morality and probity. Put simply, directors should know their duties and live up to them. They should be held to account if they do not, and certainly if they stray further into the realm of the unfit.
My second point is on phoenixing. Contributions from across the House of Commons on Second Reading of the Bill, the explanatory notes to the Bill, and the Parliament Library document on the Bill have all mentioned the phenomenon of phoenixing, and comments suggest that the misuse of limited liability companies and of the bounce back loan scheme is the latest example of this sort of undesirable behaviour, or “unfit” behaviour, to use the language of section 6 of the Company Directors Disqualification Act 1986. I agree with the comments that have been made: phoenixing has been a perennial problem with the limited liability form because of the damage that misuse of that form can do to creditors, and it is right that it is troubling us now in the context of the bounce back loan system as part of the Government’s package of support during the pandemic. The taxpayer stepped up and provided these bounce back loans; the taxpayer should be protected now at this point, and the Insolvency Service needs the tools and, most importantly, the funding to do that work.
My third point is on directors disqualification and public protection. Through the history of our corporate insolvency laws, we have grappled with the balance between entrepreneurialism on the one hand and the kind of behaviour we are discussing today—unfit behaviour and malpractice—on the other. Indeed, directors disqualification provisions were first introduced in the Companies Act 1928, and there have been several reforms and updates over time since then—and hopefully, in my view, also with this 2021 Bill, if it is passed.
Over the past 20 years or so, we have also gradually increased the number of entities that are subject to the disqualification regime, and dissolved companies are the latest vehicle in a long-running trend, because there will always be some misuse. We need to ensure that the relevant regulator has the powers and funding to combat that unfit behaviour when it does arise, because public protection is, in my view, the main driver of the directors disqualification regime. As we know, the limited liability form is the basis of our credit system: if it is not protected properly, the whole system could ultimately be damaged.
My fourth and penultimate point is on the dissolution statistics. We know that dissolution is an important part of keeping the Companies House register in order. Dissolution is part of the normal life cycle of the company; dissolution keeps the register tidy and up to date. It happens regularly, and it is necessary. As you perhaps already know, there were approximately half a million dissolutions per year over the past six years, and the explanatory notes to the Bill explain that in the first quarter of 2021, we saw some 170,000 dissolutions. It is appropriate that these take place, for the reasons I have outlined—namely, keeping the register in good order—but unfortunately, among those dissolutions, there could be some of the unscrupulous activities that we have been mulling over, namely the dissolution of a company that has taken out a bounce back loan and has been dissolved before the loan has been paid back to what is ultimately the taxpayer-creditor. This is a loophole, and it should be closed so that directors of live companies, directors of insolvent companies and directors of dissolved companies are all treated the same way for the purposes of section 6 of the Company Directors Disqualification Act 1986.
In late June 2021—I think it was the 21st—the Public Accounts Committee projected a loss of between £16 billion and £27 billion of bounce back loans, from a total of approximately £90 billion that was lent by the British Business Bank via the banks. As you know, PricewaterhouseCoopers is due to report on the extent of fraud and credit failure within that £27 billion. There could be a huge loss to the taxpayer, unfortunately. Any loopholes that may have helped facilitate those losses, which, in turn, help evade responsibility for those losses, should be closed.
My final point is on funding. The Insolvency Service needs to be properly funded to ensure that this additional disqualification work can happen. Until appropriate funding is hammered out, the provisions in the Bill still provide a deterrent to those who seek to use limited liability forms in an unfit manner. The Bill’s clauses, and any compensation orders which may follow directors disqualifications, go some way to ensuring that limited liability corporate forms are protected, and that delinquent directors have an immediate, powerful deterrent against abuse of conduct, so that trust in our system is maintained. In short, the bigger the stick, the better the deterrent. That is my introductory statement.
Jeff Smith
Q Thank you Dr Tribe, that was a very helpful overview, and pretty unqualified support for the principle of the Bill. It did seem that your main concern is about resourcing it. You said that until appropriate funding is handed out to the Insolvency Service, the Bill will, at least, be a deterrent. Do you have a view as to the nature of the problem, and the funding that the Insolvency service would need to actually make this work?
Dr Tribe: It is my impression that this new work to deal with directors of dissolved companies who have potentially behaved in an unfit manner would be subsumed into the general run of business of the disqualification unit at the Insolvency Service. They prioritise the most egregious cases, or those that help send out a public protection signal to the public. In the interim, I think this kind of work would fall into that part of their function. My point about hammering out or ensuring funding is in place is partly in response to some comments on funding made on Second Reading of the Bill. Since the Companies Act 1928, and perhaps most famously in the Cork report of 1982, this question of whether the disqualification regime is properly funded has always existed. Its lack of efficacy between 1928 and 1982 was put down to a lack of resourcing.
That point is very important, because in essence this is the system that protects the limited liability form, the engine of capitalism that drives through our commercial activities. Unless the Insolvency Service is able to properly resource and ensure that this work is undertaken, we have a problem when we try to pursue those who are responsible for the loss of between £16 billion and £27 billion. This potentially unknown—we will find out when the PwC report comes in—and potentially large gap will need to be addressed in terms of where the money went and who was responsible for causing that money to be dissipated.
Jeff Smith
Q Thank you, that is helpful. Just as a follow-up, are you concerned that there might be a focus on making use of these new powers at the expense of current work on other insolvent companies?
Dr Tribe: Not necessarily. Going back to my prioritisation point, the Insolvency Service obviously has finite resources that it needs to deploy in the best way possible—I suppose that is a problem for many public bodies— if other types of abuse manifest over time. The most obvious and recent problem is the bounce back loan phoenixism problem, but in due course other things might come about that require us to tinker with our corporate and insolvency law so that we have an effective system that maintains trust and confidence in it. What the Insolvency Service wants to do in terms of prioritising threats to the system will depend on its internal guidance.
Seema Malhotra
Q Dr Tribe, I want to ask first whether you have a view about the existing sanctions that are available to use against directors who may be abusing the dissolution process—perhaps powers that are currently available but are not used as extensively as they might be. That is one of the challenges that critics of this legislation may make.
Secondly, are there any other more general problems with the dissolution of companies that are important to discuss at this time while changes are being made? Should changes be made to the eligibility criteria on dissolutions? What steps need to be taken prior to dissolution?
Dr Tribe: I will take the first question first. I think you are drawing attention to the compensation order regime, and you did so on Second Reading, too. There is some interesting research by Dr Williams at Cambridge in 2014, who looked—he sort of future-gazed—at how successful the compensation system might be. In that research, he highlighted that some of the directors in small closely held companies, which he argues the regime mainly targets, might end up being adjudicated bankrupt—they might go through the bankruptcy process, I should say—in due course. That would mean, of course, that any pursuit of those individuals would run into another layer of difficulty in trying to get to the value that might be there for the insolvent estate of the company or dissolved company that we are dealing with. His work future-gazed in that way at some of these issues.
It is true to say that, on the compensation regime, we saw one case in 2019, the Noble Vintners case, where insolvency and companies court Judge Prentis made a 15-year disqualification order. That is right at the top of what we call the Sevenoaks scale, after the case in which Lord Justice Dillon set out the various types of malpractice and where they fall on the scale, from two years up to 15. In the Noble Vintners case, it was the most unfit behaviour on the facts of that case that you could have —up at the 15-year period. Then, of course, that was followed by a compensation order that recouped for creditors just over half a million pounds—£559,000.
There has been some success with the compensation scheme. It is in its early days, in a certain sense. Although the reforms came in in 2015, there was a delay in implementation. You are right to say that we should pause for thought and mull over how effective that is. That takes us back to the resourcing and funding point, for one thing. Secondly, it takes us to the idea of that prioritisation agenda and how fruitful a claim that you are going to bring might be to get compensation. It is a power that exists and should exist. It goes some way—as you can see from the case of Noble Vintners—to getting value back into the insolvent estate for the creditors. It is a positive thing for creditors, and something that the disqualification regime did not do until that reform in 2015. Of course, it provided a protection mechanism, but in terms of getting value back into the estate, that is a good reform. That is your first question.
Your second question was on dissolution problems. I think you might be driving at the process of dissolution and how the registrar at Companies House deals with dissolution. After the directors have signed their form, made their declaration, paid the £10 and noted that there is going to be a striking off and that is published in the London Gazette, there is a period of two months where all the parties that should be informed—shareholders, creditors, employees and pension managers, for example—might know of this potential dissolution and should then, therefore, perhaps act on it as creditors. Some of the witnesses who have gone before me may have addressed this, particularly those from the credit community. In due course, as part of a wider analysis of what Companies House and its function is, that step in dissolution may be looked at.
As I said earlier, there are approximately half a million dissolutions per year, and many of those are for very good reasons in terms of, as I have said, maintaining the integrity of the register and getting rid of companies that have been through the insolvency processes but then get dissolved as well. The guidance for the Bill and some other sources note that among those half a million dissolutions, there could be about 5,000 that are potentially problematic that we would want the Insolvency Service to be able to investigate. Obviously, 5,000 is a lot more than the current levels of disqualification under the current provisions. Over the past decade or so, there have been about 1,200 a year, so you can see there is quite a significant upshift in the work that the Insolvency Service might have to do.
A Companies House review perhaps in due course mulling on what its function is—is it a regulator, is it a repository of information?—might look to dissolution, but in the short term I think you have this £17 billion to £26 billion problem, and there seems to be a loophole that needs to be closed.
Peter Grant
Q Thank you, Ms Rees, and good morning, Dr Tribe. Following on from that last question, there are three kinds of sanctions available now: the director disqualification, the compensation order and, ultimately, criminal prosecution. Are there significant differences, first, in the burden of proof required for each of those actions, and secondly, in the cost and time taken to bring any of those actions to fruition?
Dr Tribe: I think you are right to point out that there are different avenues that could be visited on the directors that we are talking about. We are not necessarily talking about directors in the general run of business; we are talking about people, as perhaps you suggest, who engage in criminal behaviour. For example, with the bounce back loan scheme, a form of fraud could lead to a prosecution.
What we are dealing with today, though, particularly with this amendment to the Company Directors Disqualification Act 1986, is a regulatory function, so we are dealing with a lower burden of proof than we would if it was a criminal sanction for any subsequent prosecution for fraud. In that sense, on the Insolvency Service’s work on what is known as a jury question in the context of directors’ disqualification, with each case being looked at on its facts, the determination whether whatever has occurred has been deemed to be unfit does have that lower evidential burden than any subsequent criminal activity that the prosecuting authorities might address. In that sense, the disqualification regime is perhaps better able to get deterrent-type results than mounting subsequent criminal prosecutions. We know, of course, that the criminal justice regime is also having some problems with funding. If the disqualification regime is able to achieve any public policy outcomes in terms of deterrent, in a regulatory manner, that is perhaps quite effective.
Peter Grant
Q You also mentioned, as some other witnesses have, what is known as phoenixing. There is a variant of that practice whereby, rather than creating a new company immediately after the old one has been dissolved, you create what looks on the surface like a legitimate group company structure, and then over time, you very quietly shift all the assets over to one company, leave all their liabilities in another one, wind up the company with the liabilities, and then the directors help themselves to the company with the assets. Does this legislation do anything to address that particular loophole, and if not, what further changes are needed to prevent, or at least strongly discourage, that practice?
Dr Tribe: That is an interesting question because it highlights the long history of English and Welsh and Scottish company provisions when we are thinking about the nature of groups of companies and then single entities, and how structures and groups are used and how we move value between one entity and another.
There is the quite interesting case of Creasey v. Breachwood Motors Ltd where, because of an employment claim, value was moved into a new entity, and of course the claim was left with the original company, meaning that that employee had an empty shell through which to pursue their claim, which was problematic. The judge at first instance was able to say, “No, in the interests of justice, you can switch your claim to that new entity.” That judgment was overruled subsequently, but it does raise an important point. Indeed, in the case that overruled it, the group reconstruction that occurred was held to be legitimate for tax reasons. There are instances of the kind of behaviour that you are talking about that can perhaps be problematic in the pure phoenixing sense, but then there are legitimate reconstructions that happen where the intentions of the directors were for tax efficiency or some other purpose that is not unfit or nefarious in the way that we are discussing.
In terms of the misuse of the corporate form, one can go right back through our company law history to recite many examples of essentially what we are talking about—phoenixing, or what has been called centrebinding—and some of the critique of pre-packaged administration is around the same point. Is it appropriate that the corporate form is able to be used in this way so that the creditors of company A are left languishing while all the value is moved into company B in the way you have described?
That takes me back to my introductory response point, which is that in English and Welsh and Scottish law, for a very long time we have used the separate juristic person—the company as a thing. It is a really sacrosanct idea that, just like I am not responsible for your debts, and you are not responsible for mine, we have that structure in place for policy reasons, and have done since the 19th century originally, to aggregate wealth and entrepreneurial activity. I suppose you as the legislature expect that, as part of that privilege that you have allowed incorporators to use, over time you will get some form of abuse, and that element, which is hopefully as small as possible, has to be dealt with, like we are trying to do today, or, to some extent, tolerated.
Peter Grant
Q Finally, I want to look at the retrospective nature of some of the provisions from a legal point of view. First, do you have any concerns not about the principle of creating a retrospective offence, which the Bill does not do, but about retrospectively giving powers to an enforcement agency that we used not to have? Do you have any concerns about the natural justice issues that that might raise? Alternatively, are there circumstances where the three-year time limit is too short and where you would be in favour of allowing the Insolvency Service to go back more than three years before the dissolution date?
Dr Tribe: On your first point, which was about retrospective activity, it is much like the Corporate Insolvency and Governance Act 2020 reforms, which have successfully been passed. We have seen lots of new cases on the provisions that were in that Bill; it has been very successful. The reforms in that statute were mooted much earlier, in 2018. It is the same with this suggestion to close the dissolution loophole. Much like with the 2020 CIGA provision, the coronavirus has freed up legislative time to get both sets of provisions—the CIGA activity and the dissolution activity—in front of you to get it on to the statute book. Some of this was discussed by Sarah Olney on Second Reading.
What does it mean in terms of the retrospective nature of what you are doing? We had the idea some time ago, and corona has meant that we have had to address it against the backdrop of the bounce back loan scheme. Unfortunately, the abuse of that scheme seems to be so massive—as we have seen, there is a £16 billion to £27 billion projected shortfall, or loss—that we need to go back in time to look at some behaviour. Of course, we are not generally speaking about breaches of duty in the general sense of directors’ duties. We are talking about what could be seen as the use of the corporate form purposely to avoid the insolvency provisions and the oversight that they can give, with the powers that are currently in the Act that we are dealing with.
That needs to be dealt with, and if it is in a retrospective way—you may have seen in late June that there was a disqualification order for 12 years because of some fraudulent activity that had occurred with a Mr Khan and his Birmingham-based business, where he had forged documents to get a bounce back loan of £50,000. The Insolvency Service successfully brought that action following administration. Some Glasgow-based companies have also been wound up in the public interest because of bounce back loan abuse. To answer your question briefly, it is the bounce back loan fraud that has meant we have had to act retrospectively. No, I do not have any issues on that point.
On your question about three years, I suppose that again goes back to funding and time limits, and whether the Insolvency Service is adequately resourced to deal with the amount of dissolutions—whether it is 5,000 as predicted, or whether the forthcoming PwC report shows that it is much worse. If it is well resourced, the time issues might not be such a problem. If it is not, they perhaps will be.
Paul Scully
Q I have just two brief questions, because you opened up and summarised well. The point about funding has come up quite a lot, and I wonder if you could expand on some of your comments. You talked about the public interest test and the prioritisation of the Insolvency Service’s cases, so that it would look at the bigger, most egregious issues first. Obviously, with the number of cases you are talking about, it would also presumably look at the ones where there is a realistic likelihood of a successful outcome, rather just investigating every case.
Dr Tribe: In some writing on this point in relation to Carillion, I suggested the reason that the Insolvency Service might be looking at a large public limited company to bring these mechanisms to bear is because that is a pretty well known, massive liquidation, which has lots of Government contracts linked to it and taxpayer money bound up in its activities. You can see why it would perhaps be appropriate, much as with previous well-known disqualifications, for the Insolvency Service to bring the action or the proceedings if the relevant public interest tests are met. That is because it helps with the agenda of sending out the appropriate messages to the commercial community that you should use corporate vehicles and corporate forms in an appropriate way, and that you should live up to your duties in an appropriate way generally, as well as facing some of the consequences if you misuse the form and harm creditors and other stakeholders.
On the prioritisation point, you could go for good messaging, in the sense of prioritising cases. I suppose that the problem with the bounce back loan scheme and this dissolution issue that we are dealing with is that, as I think one of the previous questions hinted at, the volume of cases could be so great that with prioritisation you will need to have quite a large group of civil servants working on the issue.
As for the question of how likely it is that we might get a result in a case, and therefore whether we should bring proceedings, we have seen recently that once the Insolvency Service’s tests are met, it is wholly appropriate that it should bring these proceedings, even if in due course the result is not what it thought or what its specialist advisers—the QCs and so on who have advised it—would have predicted. Hopefully, the money will be well spent in bringing proceedings, but sometimes we do not get the result for factual reasons, basically.
Paul Scully
Q I have a final question. You mentioned Carillion, which you wrote about and studied. Within Carillion and a number of other cases—Carillion is an interesting one, because there are a lot of supply chains in there—as I asked previous panel members, what extra confidence does plugging these loopholes bring to small and medium-sized enterprises?
Dr Tribe: Carillion, because it is a large plc, has messaging on the plc side of our regime, thinking about how directors behave in relation to those types of companies. This perhaps goes back to Mr Grant’s question about group structures—do not use group structures in a way that is problematic. That will be interesting to monitor on what is a live case; I do not want to mull on the facts of that case too closely.
Sorry, what was the second part of your question?
Paul Scully
Q It was about the fact that Carillion obviously has a large supply chain within it, and you have been dealing with and writing about cases with complex supply chains. What confidence can this measure to close that loophole give to SMEs in particular?
Dr Tribe: Thanks for that clarification. If we can ensure that any vehicle that is used in any form of creditor relationship with different entities has an individual put-off effect by going down this dissolution route that we have identified, it will hopefully increase confidence in the way people use the corporate form. The more loopholes we can close down that have caused us to think the form is being used inappropriately, the better.
Unfortunately, phoenixing, as we have discussed, has been going on for literally decades, and perhaps in the future we might be back here again with some other problem that has arisen because of nefarious activity.
Jeff Smith
Q I will just ask one final question. We have had some written evidence suggesting that the current regime is adequate. If you do not mind my quoting from it, it says:
“Applying the current controls properly, putting dissolved companies into liquidation and publicising that new policy will be a far more effective deterrent...That requires no new legislation at all.”
Do you have a view on that?
Dr Tribe: The trouble is that to get to that liquidation point, you have to go through the restoration stage. I think that submission might have also talked about the idea of restoring an entity to the register and then going through that insolvency route. I think the Insolvency Service did 33 of those in 2019—pre the bounce back loan issue and pre corona, obviously. Each one of those 33 will have cost it court fees, process fees at Companies House and so on, which means there is this extra layer of procedure that it has to get through before it can ultimately investigate the unfitness activity. I think the dissolution reform in this legislation ensures that that extra layer of bureaucracy—getting the companies back on the register, through restoration, then going through the insolvency processes—is cleared out, and we move straight to the enforcement section.
The other problem with restoration is that you perhaps undermine the integrity of the register itself if you take 33 companies off it, but you then want to put them back on because you need to go through the steps that we want for enforcement and so on. It is an interesting point, but I think you have a quicker public protection mechanism process that you can do now that gets you to a less costly enforcement outcome.
The Chair
If there are no further questions, I thank you, Dr Tribe, for giving evidence this morning. It is much appreciated. I thank all the witnesses for appearing this morning.
Ordered, That further consideration be now adjourned. —(Paul Scully.)
Adjourned till this day at Two o’clock.
Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill (Second sitting)
Tuesday 6th July 2021
(2 years, 9 months ago)
Public Bill CommitteesRead Full debate Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 View all Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 6 July 2021 - (6 Jul 2021)
The Chair
Good afternoon. We are now in a public session and I can welcome our fourth panel of witnesses: Adrian Blaylock, revenues adviser at the Chartered Institute of Public Finance and Accountancy, and David Magor, chief executive of the Institute of Revenues Rating and Valuation. Gentlemen, may I confirm that you can see and hear us? And can you each introduce yourselves?
Adrian Blaylock: I am Adrian Blaylock, lead revenues adviser for the Chartered Institute of Public Finance and Accountancy. My role in the institute is to provide specialist technical advice to local government on matters relating to council tax and non-domestic rates.
David Magor: My name is David Magor. I am the chief executive of the Institute of Revenues Rating and Valuation—I run a professional body; it’s that simple. In a previous life, I was a chief officer in local government.
The Chair
Thank you. This session will run to 2.45 pm. As you will understand, you will be questioned by members of the Committee. Are you going to start the questioning, Mr Smith?
Jeff Smith (Manchester, Withington) (Lab)
Q
Adrian Blaylock: Local government has faced significant financial pressure since the start of the pandemic—and before that, for other reasons—and the Bill attempts to address, potentially, some of the issues that local government could face if the covid restrictions are not prevented from being considered in the material change of circumstance appeals. The potential loss of income to local government could be pretty significant, and what local government really needs is continuity of funding and certainty of funding, so to carry the risk of material change of circumstances, which could be the case for many years, depending on how long they take to actually make their way through the system, is significant. I think that the Bill addresses that potential issue; it does what it is intended to do.
David Magor: Adrian is correct in his summary. Certainly the impact of the material change of circumstances and the challenges that were outstanding will have had a significant financial effect on local government, and of course that will have reduced Government revenues. The Chancellor, in the Budget, had not forecast the anticipated loss as a result of these material changes in circumstance. The rating professionals, the rating advisers to the ratepayers, had chosen what was the only route available to them at the time; the route that they lawfully had to take was to treat the coronavirus impact as a material change of circumstance and act reasonably on behalf of their clients, which they did. But of course the financial impact was going to be considerable and so we have a situation where Government have intervened and said that a better way of dealing with it is through a relief scheme. All things considered, and provided that the relief is paid in a timely manner and the amount of relief is appropriate, that is a satisfactory way of dealing with it.
That having been said, the reductions in assessment that were being mooted with regard to the material change of circumstance were quite considerable, and it has raised expectations of ratepayers. One hopes that when the Bill is passed into law, as we expect it to be, and the relief scheme is put in place, the amount of relief will be sufficient to satisfy the desires of those particular ratepayers. Certain sectors, like retail, hospitality and leisure, have done very well out of the reliefs that have been awarded to them. This measure, of course, picks up others, who were not covered by those particular rules. One hopes that, when the Bill becomes law and the relief scheme is put in place, it will meet the needs of the ratepayers.
Jeff Smith
Q
David Magor: Obviously, the Chancellor made provision for the airports with a special airport scheme, but of course the rateable value of the major airports in England is very significant. One can look at Heathrow, for example. It has a very significant value, and the amount of relief that was made available to it was nowhere near its rates liability. You can look at all the airports in England and compare those airports with the way airports have been treated in, for example, Scotland, where they have had 100% relief. The expectations of the airport providers and the companies running the airports are very high. However, the amount does not appear to be sufficient to meet the desires of all the ratepayers who had outstanding challenges and large assessments, like the airports. The challenge for the Government is to ensure that those particular ratepayers are satisfied.
As far as businesses generally are concerned, there are of course those that have done very well through the pandemic: their trading positions and profits have remained stable. You can argue that giving relief to them, as well as to those that have really suffered—particularly companies in the supply chain—would be unfair. Of course, if the new relief scheme is going to be dealt with by application—companies can choose to apply—one hopes the criteria of that relief scheme will ensure that relief is paid to those who are entitled to it. Meeting the expectations of the ratepayers who have had challenges in is going to be the real problem with the outcome of this Bill.
Jeff Smith
Q
David Magor: The challenges are laid down in legislation; we know what the challenges, and the circumstances surrounding those challenges, are. It is for the valuation officer to look at every individual challenge and how that challenge is made up, and to decide whether it is covid-related or related to a normal material change of circumstance.
The important thing is that the valuation officer inspects every challenge and makes a reasonable decision in every case. That will be absolutely critical. The ones that are covid alone will stand out quite clearly. However, with those where you perhaps have a change in the high street, with the closure of a major retailer because of trading patterns, you have to be very careful to make sure that you do not mistake the fact that the retailer was intending to close anyway for the impact of covid. Remember, the valuation officer is very experienced in this process. The material change of circumstance legislation has been around for a long time, and there is lots of case law. There is absolutely no reason why the valuation officer cannot act in a reasonable and transparent way.
Adrian Blaylock: What David says is absolutely right. It is important to recognise that there are material changes of circumstance that are not related to covid. These can still go through the normal process, and the Valuation Office Agency should be able to distinguish between the different types.
Seema Malhotra (Feltham and Heston) (Lab/Co-op)
Q
The second question is more specifically to Mr Blaylock and relates to the IRRV’s evidence, in particular to paragraph 6, where you are talking about the benefits of amending provisions of section 47 of the Local Government Finance Act 1988. It would be useful to talk through your argument there to help us understand it.
Adrian Blaylock: That is probably aimed at Mr Magor, rather than me. It is really hard to know whether the size of the pot—the £1.5 billion—is large enough or not. The way I expect this scheme to work is for the Government to release guidance on the types of business they expect local government to support. In the announcement on 25 March, they gave a couple of examples of types of businesses that have not been affected but would see a reduction due to a material change of circumstance, and one that has been affected but would not see a reduction through a material change of circumstance.
Local government has to follow guidance issued by the Ministry of Housing, Communities and Local Government. That is in the regulations; section 47 of the Local Government Finance Act 1988 says that it must be taken into account. Until we know exactly the types of business the Government are expecting local government to give support to, it is really hard to say whether £1.5 billion is enough. Airports were given as an example. If airports appear in the guidance as something that the Government want local government to support, as Mr Magor says, their rateable values are large, and therefore the pot probably would not be sufficient, but it is really hard to say at this point in time.
David Magor: On the size of the overall pot, we at the institute have the advantage of having a comprehensive database going back to 1990 of all non-domestic properties. We have been looking at that database and trying to do some early forecasting of how big the pot should be.
You can see from the ministerial statements that the Minister has made quite clear exactly the direction that he wants the relief to go in. You can do a rough calculation by taking out retail, hospitality and leisure properties, exempt properties, small businesses and so on, and you are left with an effective amount of rateable value and an effective number of properties that would get the relief. Of course, the Government have also added local economic factors into the decision on the distribution of the pot, and we do not know the detail of them.
If you look at the eligible rateable value and the eligible properties, once you take out the exempt properties and those that have already received relief, you start to come to a figure well in excess of £1.5 billion. You are starting to look at a figure perhaps three times that amount. Initially, that sounds quite frightening, but of course we do not know the economic impact of covid on individual companies. Again, the Minister said in his guidance that the scheme will be by application, so it will be for companies to choose whether they apply.
No doubt, if we see the draft guidance and it gives clear indications of the way local government is to work, you can frame an application form in such a way that it will target the relief at those in most need. Until we see the guidance, it is difficult to give a clear forecast of whether the pot is large enough, mainly because of the mysterious economic factor. The implication from the Minister’s statements is that it will differ from area to area, so it will be impossible to know what figures the Minister has taken into account unless we have absolute transparency and those figures are made available.
Of course, there is a danger that individual local authorities will challenge the figure. If it is not sufficiently clear, the first thing that elected members will do is compare their figure with that of a similar local authority, and if it is significantly different, they will want to know why, so there are a few challenges ahead for the Minister.
The Minister for Regional Growth and Local Government (Luke Hall)
Q
David Magor: When this legislation was introduced, you saw various significant events that triggered MCC changes. When you are looking for things that are similar to covid, you perhaps look at the crash of 2008 and things like foot and mouth disease. These are factors that are taken into account when you are looking at the broad picture. The covid situation, as we all know, is quite unique. The normal material change of circumstance is an essential part of the overall evaluation process. You need to reflect the changes in communities and in the environment, such as buildings being demolished or empty and so on—the material changes that happen in every neighbourhood from day to day. There are roadworks and 101 different things. Those have been dealt with very adequately by the Valuation Office Agency. The agents, on behalf of ratepayers, put in the challenges under the new challenge and appeal process, and it has worked very effectively. It has ensured that the distribution of the rate is as fair as it can be when you have got a five-year cycle of revaluations.
The special circumstances that come to mind are the crash in 2008 and foot and mouth disease. It worked quite adequately but, of course, it was nowhere near on the scale of covid, and the impact of covid on the economic wellbeing of communities.
Adrian Blaylock: The only thing I would add is the position since the end of March 2020. From 1 April 2017 to 31 March 2020, just short of 160,000 MCCs were lodged against the 2017 rating list. By the end of June, that had grown to just over 300,000, so had almost doubled in that three-month period. By the end of March 2021, 568,000 MCCs had been lodged with the Valuation Office Agency. There has been a significant increase, and it is fair to say a good proportion of those will be related to the pandemic.
Luke Hall
Q
David Magor: Since the introduction of the rates retention scheme, local authorities have had to forecast the impact of changes in the valuation list from year to year when preparing their budgets. You started with 50% retention, and moved to pilot schemes of 75% and 100%. When you have a rates retention scheme that works in that way, if you make a mistake in forecasting the reduction in value, you will significantly affect the finances of the local authority and the budgeting process.
Every chief financial officer has to make a forecast of the impact of a change. They would have to make a provision against that forecast and, of course, provisions prevent you from spending money, because you are providing for an event that is likely to happen. Certainly, as far as forecasting for the 50% rates retention scheme was concerned, every time you looked at your rateable value and the changes in that over the forthcoming year, you were conscious that any forecast you made, 50% of that reduction in value would fall on your budget.
That was the way the retention scheme worked, and it created a great deal of concern because chief financial officers were making very significant provisions. As I said, making provisions curtails the local authority’s ability to spend. Elected members quite rightly get very concerned about that. Then the MCC checks and challenges came in, with the checks first. As Adrian said, the enormous number of checks has now reached half a million, and the challenges emanating from those are well in excess of 100,000. You are talking about a massive impact on the valuation resources of the list. Local authorities have to make provision for that.
Through this Bill you would remove that risk and, as the Chair said, transfer it to central Government, because you would fund it through a relief scheme. The real problem is whether the relief will be sufficient to meet the needs of the ratepayers who are expecting a reduction in rateable value.
Adrian Blaylock: That is right. The risk and the responsibility of a local authority to set aside sufficient funds to cover any potential losses to the rating list could be significant. If I can just give you some indication of where we were: at the end of 2019-20, local government had just short of £3 billion sat in provisions for alterations of lists and appeals. This is all pre-covid. This is nothing to do with the pandemic, just essential changes to the rating list. Every year, they have to forecast what they think they will lose in the forthcoming year and there is roughly £1 billion a year being added to that pot, regardless of covid. So the potential loss on top of those normal everyday changes to the rating list—well, I would not like to think what would happen to local government finances if it went ahead. You would need a significant level of provision to be able to carry that. We have already seen local authorities applying to MHCLG for capitalisation directions because they are struggling to pay the day-to-day costs of running their services. How many more authorities would need to go down that route if that is where we get to? That is what concerns me.
Ms Marie Rimmer (St Helens South and Whiston) (Lab)
Q
David Magor: I must admit that the Bill is very well framed. We have looked closely at the Bill, clause by clause, and it meets its specific purpose. The approach to dealing with the material change in circumstances and to withdrawing or removing the covid ones is very sound. I find the provisions of clause 1 fit for purpose and they meet the needs of Government. That is a relief, in the sense that it seems to be fair. Of course, it is important that in making decisions in relation to the clauses that you have mentioned the Valuation Office Agency is transparent and gives the ratepayer and ratepayer’s agent every opportunity to make their case for other matters that are outside the covid situation.
Adrian Blaylock: I have nothing to add to that. I agree with David.
Ms Rimmer
Q
Adrian Blaylock: It is really hard to say because there was a suggestion of what level of reduction ratepayers would see in their rateable value from discussions between the Valuation Office Agency and rating agents. However, it is hard to say. Would that be across the board? Is that for a specific area? Is it for a specific kind of property? Without knowing exactly what the extent of the reductions in rateable values would be through material change of circumstances, it is really hard to say. The other thing to think about is longevity. Is it for the period of the lockdown? Is it from now to perpetuity? Forever? It is hard to say what the actual loss would be. There are too many unknowns, I would suggest.
Ms Rimmer
Q
David Magor: The problem with the pot of money is that when the Bill is passed and the relief scheme is released and we have guidance—of course, along with that guidance, one assumes you will have the distribution of the pot as well by individual local authorities—as well as making sure that they fully understand that individual pot and how it is made up, each local authority will then have to develop its own scheme and that scheme will be approved by members. In developing that scheme, you would have to look at the potential eligible properties in your area. From ministerial statements, you can take out RHLG properties, exempt properties and so on, because they will not get any relief, or it is the Government’s intention that they do not get any relief. You will then be left with a number of properties that are entitled to relief. What you do not know is what the economic factor in the distribution will take account of, but one assumes that you will look at the economic factor from individual company to individual company, and a company that has traded satisfactorily through the pandemic will, no doubt, not qualify for relief. One assumes, certainly from the statements that have been made in Parliament, that that is the way the Government wanted it to work.
When you get to that situation, you have to decide exactly how much relief you will pay to each individual ratepayer. There is no indication of what a reasonable amount is. There were some press releases from certain rating agents suggesting reductions as high as 25%. A couple of examples were put forward in statements from the Treasury where the amount of relief granted was a good deal less than 25%, but at the end of the day a local authority has to be really careful because it has a cash-limited pot that it has to distribute fairly to everybody to ensure that it has sufficient resource to meet the needs of every applicant. That in itself will be a challenge.
As Adrian says, you have to know how long the pot will last. The problem is that, if it is a cash-limited pot and you cannot go back for more, local authorities will be in a really difficult situation with those ratepayers who may be entitled but you did not have enough money to go around. You then revert to your other discretionary powers, particularly the hardship power. Then the cost of that starts to fall on the shoulders of the council tax payer, so it really is a massive challenge to local authorities. On top of that, in a practical sense there have already been adverse reports from the ombudsman about a lack of transparency in some local authorities with regard to the grant schemes. That was a significant problem with the grant schemes, and local authorities handled it really well. This problem, I think, is greater.
Ms Rimmer
Q
David Magor: When the new values come into force there will be rights to appeal against them. The effect of the Bill, of course, is to prevent any applications under the check, challenge and appeal process from going forward in relation to the pandemic. That seems to be the intention of the Bill. Due to that being the law—it has closed down that particular area of activity, and the impact of the pandemic on the material change of circumstances definition—they cannot make any more appeals about that, but of course they can still continue to make normal material change of circumstances appeals right up to the closing of the existing list.
Ms Rimmer
Q
Adrian Blaylock: Definitely. The way I read it, the Bill prevents any announcements regarding the pandemic from being taking into account, but it does not prevent any other methods of check or challenge from being taken forward by a ratepayer if something different is affecting their rateable value.
Simon Baynes (Clwyd South) (Con)
Q
The Chair
For our witnesses, the Commons is being suspended for three minutes. It is not a vote or a fire bell.
Simon Baynes
Thank you, Mr Mundell. Is there a sense in which the timing of the rate revaluation is a helpful coincidence, in that it could mitigate some of the issues that ratepayers might have with the change to their business arising from coronavirus, perhaps particularly where a business has been badly affected and has to change its whole focus? Is the revaluation a way to mitigate that, and is that a helpful coincidence of timing?
David Magor: It is a helpful coincidence of timing. There is an antecedent evaluation date, and the rental evidence gathered to determine the values for the next evaluation list will reflect the circumstances of the pandemic and what is happening in the property market. The valuation officer has started to call for that evidence, which is required by statute and will reflect the current situation. Therefore, the list coming into force in 2023 will reflect the current difficult circumstances and, as you rightly say, potential changes in trading patterns and other things.
Adrian Blaylock: I agree. It is convenient it coincides, so will do exactly what David says.
Seema Malhotra
Q
David Magor: I know Adrian will pick up on the impact of it, but I will start. On the guidance, for reliefs under section 47 of the Local Government Finance Act 1988, the Minster is required to give guidance and local authorities to have regard to it. You would expect the guidance to be sufficient to enable local authorities to develop a scheme within the Government’s wishes. From ministerial statements, we know that that scheme will not include awarding relief to retail, hospitality and leisure, or those in receipt of other reliefs that remove their rate liability, and that economic factors will be considered from company to company. I would expect the guidance to clarify those issues and make it clear how the individual pots will operate.
I would also expect it to give local authorities an element of discretion—after all, section 47 is about discretionary relief—to have a scheme shaped for their area. This is why it has to be done in stages. The first is passing the Bill into law. Then, you issue the guidance with the distribution, give local authorities a chance to analyse that distribution and understand whether it is fair, and what to do at a local level. Local authorities then have regard to that guidance and devise a scheme, which has to be done quickly.
If we had not had this proposed change in the law, the valuation officer and ratepayers’ agents would be settling matters now, and I suspect refunds would have started to circulate. If this scheme is to replace those MCC challenges, you would like to think it would be in force later this year, and that any reliefs would be paid during the current financial year— that must be the aim.
The pot is a one-off that would be distributed as quickly as possible, because now is the time when the money is needed. The real issue for local authorities is devising a scheme and ensuring that they can distribute the pot fairly, and that they do not run out of money. That, in itself, will be a massive problem.
Adrian Blaylock: The only point I would add to that is timing. I think you questioned the timing and the need for haste; as David said, businesses need this money now. The only thing I would question is to ask what this relief pot meant to be compensating for. The majority of the lockdown measures and the restrictions applied during 2020-21 rather than during 2021-22, and there is a specific part of section 47 of the Local Government Finance Act that says that a local authority cannot take a decision more than six months after the financial year to which the decision relates. So, strictly speaking, as at the end of September a local authority will not be permitted to give discretionary relief rate back into 2020-21. That means that either everything needs to be in place and all the local schemes need to be up and running by the end of September, or the relief is not given for 2020-21 but is given for 2021-22 instead. However, what then happens to the businesses that had a material change of circumstances lodged for 2020-21 that are no longer in existence? They have missed out on that.
As for the timing, it is important that the Bill gets through as quickly as possible, but it is also important for people to understand that local government also have to go through their own governance processes. Devising a scheme is not just a case of somebody sitting at a desk and saying, “There you go, this is our scheme”. It needs to go through the proper governance process, which will take time. It could take two or three months for all that to go through its own internal processes, on top of whatever time it takes for the legislation to be passed and the guidance and allocations to be issued by MHCLG. Timing is crucial in this process.
Jeff Smith
Q
Adrian Blaylock: I do not see why not. If the Government have already taken the decision on the value of the pot—I do not know what they are doing about the allocations, but if they can work out what the allocations need to be for each local authority, they must have a clue now what they want to support, what areas they want to support and where they want local government to focus their attention. If that was to happen, it would allow local government to start formulating plans and start going through the process of putting together their own local policies. I think that would be a positive step.
David Magor: I agree wholeheartedly with that. Draft guidance and an indicative figure of the amount for each local authority would be most welcome at this stage. It would enable planning to start; it would also enable the local authorities to challenge. Better those challenges come now, as we are preparing. We are going through—let us hope—a long, hot summer, and through that long, hot summer local government accountants have nothing better to do than to work out what their relief should be, so I am sure that they would be pleased to see some indicative figures and draft guidance.
Jeff Smith
Q
Adrian Blaylock: Not to my knowledge.
David Magor: I think the overall reaction to where we are now has been relatively positive. The Government are in the process of removing this element of the material change of circumstance, and are replacing it with a grant scheme—with funding of a relief scheme. I think the only problem is the timing—that is the issue. If there is any lesson to be learned, it is that ratepayers are expecting their relief now and local authorities need to provide it in the current financial year, because they are the customer-facing service. They face the ratepayer and have to deal with the complaints that the relief has not been paid promptly enough.
The Chair
Gentlemen, your timing has been excellent, because you have concluded answers to the questions just within the time limit. On behalf of the Committee, I thank you both for your evidence this afternoon.
Examination of Witness
Sarah Pickup gave evidence.
The Chair
Q
Sarah Pickup: I can, thank you.
The Chair
Q
Sarah Pickup: I am Sarah Pickup. I am deputy chief executive of the Local Government Association, with a lead on finance. I do not have the level of technical, detailed knowledge that your preceding witnesses had, but I can certainly bring you the LGA’s views on questions.
Jeff Smith
Q
Sarah Pickup: You are correct: we welcome the principle of the Bill. An unquantified amount of material change of circumstances resolved over an unspecified period of time would be a really difficult prospect for local government to manage, and the need to make provisions would have been substantial. We have spoken to Manchester City Council, for example, which said it had calculated that it might need to make provision of around £11 million in respect of these material change of circumstances, which obviously would have meant that it had to take that resource from somewhere else. We think that there is a substantial level of challenges—we understand around 50,000 nationally. Manchester alone has had a 569% increase in those appeals on the year before, and 88% of those were to do with material change of circumstances, so certainly something needed to be done.
We welcome the prospect of a discretionary scheme, because we think councils will be able to assess where the real damage and the hit is on businesses in their area, but there are of course some challenges in devising a scheme within a fixed sum of money, so we await the guidance. A plus to local discretion is that you can try to fit it to your circumstances, but of course you have to fulfil the promises you set out in your scheme, and the resources put a cap on that. There are some challenges here, but in principle we absolutely welcome this as a way forward.
The other thing I just refer to is the timing issue, which was referred to by the previous witness. Our understanding is the same—that if someone has not made a decision by September, they cannot relate the change to the previous year. The appeals that have come in have come in largely for 2020-21; certainly, the Manchester increase refers to 2020-21. I think that is what businesses were applying for. The fact that it is ongoing into 2021-22 raises another question. There is a question about whether this fund is intended to apply to 2020-21, 2021-22 or to an unspecified period over which coronavirus has an impact. Those things will need to be addressed in the guidance, and we will need to understand whether we are trying to meet the losses to businesses in one year or in more than one year, and the timing of the regulations is important there as well.
Jeff Smith
Q
Sarah Pickup: It is extremely difficult, actually. If we assume that it is meant to be for one year, I think Manchester’s assessment of £11 million represents about 1% of its rateable value. If in a very rough, back-of-the-envelope calculation you were to extrapolate that up to a national picture, it would take you to about £1.1 billion. However, that is a big extrapolation. Manchester has calculated what share it thinks it might get of the £1.5 billion pot, and it thinks that will permit it to offer reductions of around 10% to non-hospitality and leisure properties across its area. Of course, not all of them may need a reduction or will qualify for a payment from this fund, but I think it reinforces the point made earlier—that the expectations of business of what the fund might be able to deliver for them might not be realised in reality, for two reasons. First, more than one year is at stake here, and, secondly, people will have to design their schemes within the confines of the resources available through the distribution mechanism.
It is difficult without knowing how prescriptive the guidance will be. We understand there will be discretions here, for the very reason that you have to fit your scheme to the money available. What we do not want is some guidance that leads businesses to expect more than councils can possibly deliver within the sum available in their area.
Jeff Smith
Q
Sarah Pickup: Not that I am aware of. The guidance would normally follow from the legislation. Obviously, people will have to give some thought to it alongside the passing of the Bill. We have not been involved to date in discussions about developing that guidance. We would welcome the opportunity to get involved in that with the Department.
Navendu Mishra (Stockport) (Lab)
Q
Sarah Pickup: These provisions mitigate against the need for having to make provisions against the material change of circumstances. In that sense, they are beneficial to local government, because it takes away that uncertainty, albeit we need the clarifications around timing and discretion as part of this.
If we stand back and think about business rates as a source of finance for local government and the Treasury’s fundamental review of business rates, they form 25% of local government income and are really important. Alongside council tax, business rates are one of the two main sources of funding, but where we stand now is that there is a whole patchwork of reliefs and new provisions for relief to businesses against their core business rates commitment. It means that the future is very uncertain. The way in which the next revaluation will go is uncertain and, arguably, while business rates have a role going forward, some significant reforms are needed to make them a stable source of finance for local government going forward.
Luke Hall
Q
Sarah Pickup: Gosh, it is really hard to recollect precisely; so much has gone on in the last year. It was probably about a year ago; it may be slightly less. There was a lot of discussion at the point when the Valuation Office Agency started to discuss how it might address these appeals. I think there might have been some leaks in the press. That is when the discussion started to come to the fore a bit more, because there were some quite substantial proposals around the adjustments to valuations that might go forward. I think there was an attempt to address this on a uniform basis, rather than deal with every appeal and address it individually. We have gone from there to this scheme which approaches the issue differently, probably more straightforwardly and in a more timely way, certainly in the short term.
The anxieties around appeals are ever present and this was just an addition to the pre-existing issue about businesses’ ability to put in appeals right up through a rating list with no time limit on it. The check, challenge, appeal process has made a difference to that, but we have not yet seen the end result of the number of appeals from the 2017 list, because the time window has not closed yet.
Luke Hall
Q
Sarah Pickup: There is a greater degree of certainty, because they do not face a period of time of not knowing whether an appeal will be successful or not, nor the extent of that success, and therefore having to make additional provisions on their balance sheet. Instead, they have a scheme to operate that offers them resources to provide discretionary funds to local businesses, which is welcome. As we have said, there is still some uncertainty in relation to what the guidance says and whether the scheme delivers what businesses expect, and whether, if not, there is either a pressure on the council to fund beyond the resources that have been made available, or a pressure because businesses cannot manage without the relief that they had been expecting, and therefore some businesses start to fail.
Seema Malhotra
Q
Sarah Pickup: I do not have detailed knowledge of its precise funding at the moment, but over time, we certainly have made a case that we support the Valuation Office Agency being funded adequately to deal with the task in hand, because there has been a very big backlog of appeals on the books. It has been pulling those down, and the change to check, challenge, appeal has impacted on that. Nevertheless, there is still a backlog, and our fears were that if the Agency was not properly resourced, you would end up with overlapping backlogs of appeals from different rating lists creating ever more uncertainty and not really taking away that need for councils to keep assessing the provisions that they need to make on their balance sheets.
One of the things that we certainly would support is a time limit on the time when businesses can put forward checks, challenges, and especially appeals against any given rating list. We think that would help, and it is in place, I believe, in some of the other UK nations.
Ms Rimmer
Q
Sarah Pickup: This was probably picked up by your previous contributors. Because the basis of a valuation is based on rent as of March 2021, that valuation date sits in the middle of the pandemic, so the question is whether any adjustments are made to that or not. You would think that the impact of the pandemic on rental values would be reflected in the valuations going forward for the list starting in 2023, but clearly we will not know that until we go forward.
The other point is that it is a very changeable picture, and businesses will continue to be able to appeal based on changes in circumstances. Things that are currently due to covid could turn out to be long-term impacts on businesses, in which case I think they move into a different category. If you lose trade as a result of covid, that is one thing, but if your business goes into permanent decline, it becomes a very substantial and permanent change in circumstances, and that probably falls into a different category.
Ms Rimmer
Q
Sarah Pickup: Yes, we are aware, and we think that the exclusions seem reasonable—as you say, they are very specific. They would be limited to very small numbers of businesses. Loss of trade goes across a much wider range of businesses and therefore the scheme is aimed at addressing that.
Ms Rimmer
Q
Sarah Pickup: That is something that they would have to address. We have had concerns in the past about whether the resource was sufficient to deal with the backlog quickly enough. It is in the interests of local government for there not to be a big backlog and for things to be dealt with as and when they arise. That is much more efficient in the long run.
Jeff Smith
Q
Sarah Pickup: I could not give you an estimate of the amount of funding, but it is clearly a new burden. In most of the instances when new burdens have come along during the pandemic, some resourcing has been put in place to help with the design of new schemes.
Of course, revenues and benefits officers—in particular, finance officers in councils—have implemented a huge number of different schemes, some of which they have had to consult on and some of which have been much more directed and put in place by the Government. They have done that throughout the pandemic and this is another instance of something they will have to do.
The key thing, of course, is that those officers are given time. Sometimes, what we have found is that the money is announced, the guidance is passed or the regulations are put in place and then immediately everyone starts asking councils, “Where is the money? Why has it not been put out yet?”. As you said, councils need to be given time to go through due process to put schemes in place. A lot will depend on what the guidance says—and yes, early sight of it or early drafts and indications of the direction of travel, as well as early indications of the sums of money available, would be extremely helpful in helping councils to prepare.
The Chair
There are no further questions for Ms Pickup. I thank you for your time this afternoon giving evidence to the Committee.
Sarah Pickup: A pleasure—thank you.
Examination of Witness
Andrew Agathangelou gave evidence.
The Chair
Q
Andrew Agathangelou: Good afternoon. I am Andy Agathangelou, the founder of the Transparency Task Force. The Transparency Task Force is a certified social enterprise dedicated to helping ensure that consumers are treated fairly by the financial industry. I should also mention in passing that I am involved with two all-party parliamentary groups: one on pension scams and the other on personal banking and fairer financial services. My involvement is as the chair of the secretariat committee to both those APPGs. If the Chair would like, I would be very happy to elaborate on the work of the Transparency Task Force and our particular interest in this matter.
Jeff Smith
Q
Andrew Agathangelou: The Transparency Task Force is all about trying to bring about regulatory reforms so that consumers get a better deal from the financial industry. An increasingly large proportion of our time and effort goes towards trying to sort out the terrible mess that occurs when people are scammed. We are very interested in cases such as Blackmore Bond, London Capital & Finance, Connaught, Lendy and Ark. There is a very long and very sad list of scams that have affected quite literally thousands of people in our country.
The reason I am particularly interested in the Bill is that we have noticed over many years that a colossal amount of carnage is being caused by a relatively small number of criminally minded individuals. It will not surprise you that one of their methodologies—one of the ways that they work—is phoenixing. As soon as they start to feel the temperature rise around them, they close down shop and reappear somewhere else. These individuals tend to be highly intelligent, very sophisticated and very good at planning and strategising their next step. They always have a plan B, C, D, E and F up their sleeves. Frankly, they have been running rings around the regulators and enforcement agencies. One of the most powerful weapons they have is the ability to dissolve their organisations and pop up somewhere else. That is why the Bill is of real interest to me. It will also be of enormous interest, I am sure, to the many tens of thousands of people out there who have lost as a consequence of criminal activity.
I do feel the need, if I may, to elaborate on the loss. When somebody finds that they have lost their entire life savings, quite literally in some cases, when they are in their 60s—in other words, too late in their life to do much about it—the financial loss is absolutely horrific, but the emotional consequences, the shock to the system, can be so bad that they find themselves self-harming. People find themselves under huge amounts of emotional stress and strain. It is particularly bad when, let us say, it is the husband who has had his entire pension savings taken from him by crooks; he is so fearful of the situation he has created for himself and his family that he has not even told his wife that it has happened. There are people out there who are living day by day with a horrific secret—that they have lost a lot of money—and they have not quite got it in them to tell their partners and families what has happened.
I am very deliberately painting this picture for you, Mr Smith, because the work that you are doing with the Bill is of great importance. If there is anything that can be done to mitigate the risk of that kind of emotional and catastrophic carnage, I would be very pleased to give it all the support I can, and I am sure everybody else would feel the same way.
The very, very worst manifestation of this—in fact, I will give you two. The worst manifestation is when you learn about children who self-harm routinely and repetitively because of the stress-induced state of the household resulting from the family’s life savings being tricked away from them by criminals. Of course, one step beyond that is when people take their own lives. There have been many suicides as a direct consequence of this kind of malpractice. That is why I am so pleased to be here today to share whatever I can about this Bill.
Jeff Smith
Q
Andrew Agathangelou: The short answer is yes. I would characterise this Bill as a worthwhile step in the right direction. However, there is ample scope for improvement in relation to all the other areas that it touches on. I see it, hopefully, as a spearhead that might lead to other things happening as a direct consequence.
I will give you one quick example. There has been so much in the way of catastrophic regulatory failure over recent years that all the related enforcement agencies and bits of the regulatory framework need to wake up to the fact that our country has a horrific situation on its hands, in terms of the amount of crime that is going on. I believe I am right in saying that the National Crime Agency says that the annual cost of fraud in this country is something like £190 billion. That is a very big figure. Just to put that in context, I think it is well over half what the NHS costs. However, according to Anthony Stansfeld, the former Thames Valley police and crime commissioner, who is a man we have admired for quite some time for reasons that I will go on to, something like 0.03% of the amount lost in fraud, white-collar crime and economic crime is being given to the police as a resource to go and fight it. I believe I am right in saying that only 1% of the police budget goes towards fighting those sorts of issues.
My point is: yes, brilliant, let us stop criminally-minded directors from phoenixing, but please understand that this is just one small part of the ecosystem. What Parliament might want to do as a consequence of this Bill is to sit back and say, “Fine. We’ve done something really worth while in moving this Bill forward, but let’s not kid ourselves that the job is done. We’ve actually only just started to scratch the surface.”
Organisations such as Action Fraud, which, by the way—I can’t resist the joke—we call “Inaction Fraud”, the Financial Reporting Council, the Financial Conduct Authority, the Pensions Regulator, the National Crime Agency, the Serious Fraud Office, City of London police, the Insolvency Service itself, the Solicitors Regulation Authority and the professional bodies for the accounting and audit professions are all part of the landscape. They all need sorting out because of the part that they play in allowing a lot of crime to go on that really should not happen.
Let me give one further quick example. I am aware that there are people who are at risk of being scammed by directors of organisations operating today that were doing exactly the same thing last year, the year before that and the year before that. I think we can go back as far as 11 years. We are aware of dodgy directors who were scamming people 11 years ago, and were known to be scammers, but are still operating. Frankly—excuse my language—it drives me nuts.
Jeff Smith
Q
Andrew Agathangelou: I am quite a plain-speaking person, so forgive me, but I am about to be quite plain. The regulators need to enforce. There is evidence to suggest that, for example, despite the fact that one of the most important statutory duties of the Financial Conduct Authority—our primary conduct regulator in the UK for the financial service industry—is to try to protect consumers from harm, it is a little reluctant to enforce. That is not my opinion; the chief executive and the chairman of the Financial Conduct Authority gave evidence to the Treasury Committee earlier this year—I will try to find the link for you—admitting, frankly, that they were risk averse, I think the phrase was, when it comes to enforcing and mitigating. That is not verbatim, but that was the gist of it.
Would it not be good, ladies and gentlemen, if as well as having rules in place designed to protect consumers, we had a regulatory framework that had the gumption to go after the baddies whenever it could? There are two very important reasons for that. First, we might get them locked up or make them pay fines, and so on. That is great. That is exactly what we want, but even more importantly than that, it will show that there is good reason for these dodgy directors to not carry on their wicked craft.
It is currently a very low-risk career path for somebody to become a criminally minded director of a company. The chances of their getting caught are very low. The chances of their paying a fine are very low. The chances of their being banged up are also very low. Why? Because the regulatory framework as a whole is not built to cope with the tsunami of criminal activity that is going on. I would say, from a long list of potential improvements, that one of them would be to please encourage our regulators to regulate robustly and enforce effectively.
Seema Malhotra
Q
Andrew Agathangelou: I will answer your question, but before I do I would like to elaborate on a small point that you made. I actually think that the regulatory framework has been built by Parliament to do what it is designed to do. The problem is not that it is not capable of doing it; it just does not do it. It is a bit like having a really fast car that is just not being driven fast by the driver. The problem is not the vehicle; it is who or what is controlling it. I just thought I would throw that in.
To respond to your question more specifically, again I am a plain-speaking person. The Transparency Task Force ran an event last Thursday, with the title “The Great Insolvency Scam”. I can provide the Committee with the recorded video testimony of that. The reason why we ran an event called “The Great Insolvency Scam” is that we see insolvency as a very dark and murky part of the world of business and commerce. We believe that there is a pile of evidence suggesting that the Insolvency Service has been weaponised. That is where the Insolvency Service is frankly abusing its very extensive powers.
The net result is that people sometimes have their homes or businesses taken away from them, as a consequence of engineered bankruptcies. It really is an horrific, dark area. It sometimes results in people self-harming, committing suicide and all the rest of it. I will now answer your question directly. Personally, the Insolvency Service is a can of worms. I will repeat that it is my personal opinion. I think the Insolvency Service, in part, is a can of worms that needs to be opened up and looked into. It needs to be properly regulated.
I have enormous concern about giving the Insolvency Service lots more money to carry out the additional work that is going to be necessary as a consequence of this Bill going through, if it does, without first ensuring that the service is fit for purpose. These are very strong views. I am not an extreme individual who has crazy ideas. I have just listened to and seen the testimony of people who have suffered as a consequence of the types of things I am talking about.
Think of this Bill as the start of an ongoing process of reform. Please do not think of it as the end point. Please do not make the mistake of thinking that it is a “job done” situation. It really is not. There is so much to be looked at. I ask the Committee to do all it can, on behalf of the British public, to ensure that the Insolvency Service stops doing what it sometimes does.
Peter Grant (Glenrothes) (SNP)
Q
Andrew Agathangelou: If the purpose of the Bill is to have a positive effect, of course they would. You manage what you are monitoring. If things are being looked at and checked, and if the progress you are hoping will happen does not, you have a chance to review, to modify and to ask challenging questions about why what Parliament wanted to happen has not.
There is a great parallel. I was involved in giving evidence on the Compensation (London Capital & Finance plc and Fraud Compensation Fund) Bill 2021-22 a while ago. The parallel there applies here. It is absolutely vital that there is a requirement for those responsible for executing the will of Parliament to be accountable and to be able to demonstrate that they have done so.
I would be disappointed if it took an amendment to make that happen. It should go without saying that you do not just abdicate your authority, pass the Bill and hope it happens. That to me would be a very poor approach to governance in terms of ensuring that legislation is effective. Essentially, if you want the Bill to work, you must ensure that what is supposed to happen after it is passed does actually happen. To my mind, frankly, that is very clear and obvious, and I cannot begin to think what the argument against that would be. How on earth could somebody argue against the idea of making sure that something you hope works does work? I could not even begin to think about how to argue that.
Peter Grant
Q
Andrew Agathangelou: First, yes. In my opinion this most certainly should be made retrospective. Why not make it retrospective? If the purpose of the Bill is to catch the baddies and to mitigate the risk of others deciding to go about doing this stuff as a direct consequence of the very powerful deterrent effect, why on earth would you not make it retrospective? To my mind that is really clear. I cannot imagine why you would not want to make it retrospective, if you had the power to do so. You are Parliament and obviously you do have the power to do so, so why not do it?
Three years is the blink of an eye in this context. There are all sorts of things that directors can—and do—do to play the game. They know the rules and regulations, and they know how to dance in, on and around them. The longer the time that you can go back, the more good you are going to do. It is as simple as that. The further you can go back and prosecute people who have broken the law, and wilfully and callously committed offences, the better. Why not make it 10 years or 15 years? I do not know what the right timeframe is, but to my mind three years seems like a very short period of time.
If the objective is to try to clean up our country, then make the timeframe as long as you can. I make this point because on the international scale I should mention that we have about 1,000 members outside the UK. It shames me to know that outside the UK, the UK is considered to be one of the worst places in the world when it comes to economic and financial crime and fraud. Some countries think the UK is the laundromat of the world. There are huge concerns over money laundering and over international drug money, terrorist money and so on.
Given how bad the level of fraud, white-collar crime, corruption and those sorts of things are within the UK, I would suggest that Parliament should come at this from the point of view of, “We should now be as powerful as we can be in opposing these dark and dangerous forces, unless there is a really good reason not to, because we have a national duty to do so.” I was brought up with the idea that the UK was a world leader when it comes to these sorts of things, but frankly the evidence really does not show that.
I want to make one particular point, Peter, if I may? There is a very powerful database called Violation Tracker that tracks the levels of violations by companies against the US authorities. When you look at the data in there, you find some startling trends, and the first is this: there are about $667 billion-worth of infringements against the US authorities by all kinds of industries. I think 52 industries are listed. The worst offending industry on the Violation Tracker database is the financial services sector, despite the fact that there is a long list of reasons why the financial industry actually ought to be the most trustworthy industry of all. That is not the case; it is actually the worst offender out of all of them. In fact, it is so bad that roughly half of all the infringements in that $667 billion total are directly attributable to the financial sector. In other words, it equates to all of the other industries put together.
My point is that the jewel in our crown, in terms of UK plc, is our financial services sector. I am of the opinion that if similar analysis to that which has been done in the US market were done in the UK, it would likely show a very similar picture. Therefore we should be fighting extremely hard to hunt down all perpetrators, all criminal dodgy directors. From my point of view, given the interest of my organisation, I think we should be relentless when it comes to chasing down people who operate scams such as Blackmore Bonds, Connaught, LCF, Premier FX, Lundy & Associates, and all the others.
Peter Grant
Q
Andrew Agathangelou: Yes, that is absolutely the case. I will elaborate on my answer, if I may. Last year, the Work and Pensions Committee led by Stephen Timms MP opened an inquiry on pension scams. Many of our members are victims of pension scams, so as a consequence it is a topic we know rather a lot about. I will share a document with the Committee produced by the Transparency Task Force as part of our response to that inquiry, and that document will evidence without any doubt why it is absolutely necessary that the three-year limit is extended to five, six, seven, 10 years, however far back you can go.
I say this because I am working on the basis that if the regulators, the enforcement agencies and the Insolvency Service can prosecute criminals and have them pay fines or be locked up, or whatever it might be, they would want to do that. Why would they not want to prosecute the baddies? To my mind it is simple, and I absolutely assure you that in the document I will provide to the Committee, as well as other supporting documents and evidence, you will see named individuals who have been dancing around prosecution over many, many years—I think one is 11 years. This Bill, if extended to a proper duration of time, would become a problem for them.
I would take great satisfaction if this Bill helped to finally lock up individuals who are currently in very expensive villas in Florida, with properties all over the world, with all kinds of fancy cars and fancy homes, all paid for by the life savings of British pension savers and investors. That would be very rewarding to know.
Navendu Mishra
Q
Andrew Agathangelou: I cannot answer your question directly, forgive me—I do not have that data and have not done that research. Let us think of it like this: roughly four or five years ago, a man called Roberto Saviano, an investigative journalist, became quite famous for a period because he did some investigative journalism on the mafia, and as a consequence of that investigative journalism, he now lives, I believe, under police guard 24 hours a day because he lifted the lid on a whole load of really bad, really heavy stuff.
I am mentioning Roberto Saviano because about five years ago, at something called the Hay Festival, he made the point that London is the heart of global financial corruption. That is a pretty powerful thing for somebody to say, especially if they have been investigating the mafia for years and years. You can google it and find it yourself. This is a very serious heavy-duty investigative journalist.
I mention that because it is reasonable to assume that a lot of that corruption involves entities and companies set up for special purposes. If the UK is the worst country in the world when it comes to global financial corruption—or if it is not the worst, let us say it is in the top quarter of really bad countries when it comes to financial and economic crime and corruption—it is reasonable to assume that the artful dodge of phoenixing is part of the modus operandi of the “community” that does this kind of stuff. I cannot give you any facts or figures, but a little deduction suggests that it is a massive problem.
I will make one further point, if I may. One of the reasons why it is a problem is Companies House. It is still shocking to me that, despite about nine years of Parliament having an interest in Companies House, finally getting its act together and asking even really basic questions about the people behind a new company that is being set up, Companies House has been allowed to carry on behaving in the nonchalant way that it does, with its casual, risky and dangerous way of granting companies the chance to come into existence when no proper due diligence has been done.
Similarly, in the pensions world, there was a period of about three years when Her Majesty’s Revenue and Customs was happy to authorise the setting up of new pension schemes with the lightest-touch due diligence you can imagine. Basically, people were allowed to go online, fill in a form and create a new pension scheme, which would then be the perfect vehicle for scammers to use. That has happened so much.
While I am on this little rant, allow me to stay there with one more point. When the pension freedoms legislation was being introduced, many people said, “Woah, woah, woah, woah, woah! Before you go allowing people to transfer their entire pension savings in a lump sum, why don’t we stop and think what the risks of this are? Why don’t we have a conversation about whether this might lead to some kind of fraudster’s paradise?” But no, pension freedoms legislation was rushed through, and now, many years later, even the regulators, such as the Financial Conduct Authority, are making the point that not enough thought was given to the risks associated with that kind of casual, fast policy-making.
So there we go. Companies House is effectively advertising to criminals, “Come and set up a company in the UK. Don’t worry, we’ll turn a blind eye to pretty much anything that happens because, frankly, we won’t know what you’re doing or what you’re about because we won’t bother asking you.” That is one example of these sorts of issues. The second example I have given you is in relation to HMRC, and it goes on.
I honestly think that if anybody was to do some kind of independent, objective, evidence-based evaluation or analysis of the work of City of London police, the Insolvency Service, Companies House and the financial regulators—that very long list that I mentioned—around how effective they are at preventing crime from happening in the UK, I am pretty sure that report would be rather scathing.
Navendu Mishra
Your contribution is quite depressing, but thank you for making it.
The Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy (Paul Scully)
Q
It is interesting: you talked about the amendment, which actually asks for a single report in a year. Clearly, we want to be managing the situation and making sure that it is effective. In terms of the time that you are looking at, obviously that does not negate the ability for criminal action to be taken; it is to restore directors.
I really want to focus on the Bill itself, and the focus within that and what we are doing positively to try to tackle some of these issues—including on phoenixing, which you started off talking about. I know you talked about lots of other things, and other things that we can be doing and are doing, but do you agree that the Bill adds an extra weapon to tackle phoenixing itself?
Andrew Agathangelou: I certainly do. As I said earlier, it is a significant, valuable, worthwhile step in the right direction. My plea—forgive me; I guess I am repeating myself here—is that we look at the whole ecosystem. For example, why on earth are we not including fraud and so on in the online safety Bill? I know that is another topic, but can you see how, from my point of view, these are all interconnected issues—this is all the ecosystem?
I guess I am saying that Parliament can take one of two views here. You can either deal with this tactical, ad hoc Bill, which is of course worthwhile, in isolation of everything else. However, for goodness’ sake, please do not do that; actually look at the bigger picture here—the interconnected matrices of other issues that Parliament ought to be grabbing by the scruff of the neck and finally sorting out.
Paul Scully
I appreciate that. If you look at corporate governance and Companies House reform and all these issues, and indeed at the online harms Bill, I am sure you will have plenty of opportunity to comment on that. As I say, this deals with one specific issue because of the impetus now. That is all I wanted to raise.
The Chair
If nobody else has any questions for our witness, I thank you on behalf of the Committee for your evidence, Mr Agathangelou. I am sure the Committee welcomed your frank speaking throughout. Thank you very much.
Andrew Agathangelou: Thank you all.
Examination of Witness
Kate Nicholls gave evidence.
The Chair
We move on to our fourth witness panel for this afternoon. The next witness we will hear from is Kate Nicholls, the chief executive of UKHospitality. We have until 4.45 pm for this session. Ms Nicholls, could you formally introduce yourself for the record?
Kate Nicholls: I am Kate Nicholls, chief executive at UKHospitality, the national trade body representing hospitality businesses—pubs, clubs, bars, restaurants, hotels and holiday accommodation. We have 700 member companies, which between them operate 95,000 sites across the UK, which is about 90% of the total hospitality market.
Jeff Smith
Q
I suppose my first question is this: what is the general view of UKHospitality of the measures, allied with the £1.5 billion funding package that goes with them?
Kate Nicholls: The key point that we would make is that we have had a high degree of support from the hospitality sector and the supply chain that goes alongside it throughout the course of the pandemic. We have a challenge in the supply chain in so far as the discretionary grants made available to our businesses within the supply chain have been allocated by local authorities, and by and large that has not flowed through as swiftly or as seamlessly as could possibly have been the case.
In addition, the business rate support made available to the supply chain businesses, and those businesses operating in the wider hospitality community that have been excluded from the hospitality and leisure grants, is not flowing through to the level that it needs to. Perhaps that is an indication of the large volume of businesses that are trying to get to grips with things and trying to get part of the wider funding available. There is a relatively small pot for a large number of businesses, particularly small and medium-sized enterprises.
Jeff Smith
Q
Kate Nicholls: Part of what would be really helpful would be to have greater guidance made available to local authorities about the types of businesses that are particularly impacted by the pandemic and particularly dependent on the hospitality sector.
Hospitality is quite unique in that it has a supply chain that almost exclusively derives its income from hospitality businesses; with hospitality businesses, either 90% or 100% of their income comes from hospitality, but 75% of supply chain businesses within the sector gain more than 80% of their income from hospitality. More detail needs to be given to local authorities. Local discretion is meaningless unless you have really clear national guidance about the type of businesses that are to be supported and the impacts that they have had.
Greater clarity and economic advice centrally would help, as well as a comprehensive overhaul of the central guidance to make it clear that a multiplicity of funds have been available throughout this process—some of which have closed now, some of which remain open and some of which have been extended. That would be helpful: to provide greater clarity to those local authorities about the types of businesses that are able to be supported and how long this money is expected to last. There has been a general reticence about giving out funds when you might have a further call on income going further forward. However, now that we are towards the end of the pandemic, overhauling that guidance and providing greater certainty would be helpful.
Jeff Smith
Q
Kate Nicholls: The businesses that need to be prioritised are those that have been most significantly affected by the covid crisis: both those frontline businesses in hospitality that have not benefited from the grants and the supply chain businesses to tourism, hospitality and leisure—and also those that are not business-based.
One of the areas that has been missing in a lot of the grant distribution has been food wholesale and food distribution—logistics companies wholly dependent on hospitality—but also our event caterers, business caterers and contract caterers. Those are the businesses that operate from a museum or an office, and not from their own units. They have therefore been totally excluded from grant support going forward.
In terms of the quantum available, we need to look at the allocation per local authority and make sure that that is given on the basis of the number of businesses they have that are disproportionately affected, so that we do not end up with the situation that we have had in the past, where constituencies in local authority areas that have a high concentration of these adversely affected businesses get a relatively small pot of money, because it is allocated per head, or per resident, or it reflects a different form of demographic.
We need to look at the pockets of deepest concern. As we come out of this, we want to avoid a whole-economy approach and be much more targeted and specific with the funds that need to be available in a greater volume to businesses particularly affected.
Jeff Smith
Q
Kate Nicholls: Yes, they are. We are having conversations with the three main Departments that we work with—the Department for Business, Energy and Industrial Strategy, the Department for Digital, Culture, Media and Sport and the Department for Environment, Food and Rural Affairs, on the food supply and wholesale side—to ensure they are pushing to make sure that grant guidance is as comprehensive as possible and identifies the businesses that need to be caught that have been missed in the past but are disproportionally affected by covid. We are also urging that concern and care are taken to include businesses that have been particularly adversely affected as a result of the delay in step 4.
Seema Malhotra
Q
Kate Nicholls: The quicker, the better is all I can say. A lot of hospitality businesses and their supply chains are clinging on by their fingertips, particularly given that they have had an extra month of restrictions imposed on them. A quarter of hospitality businesses have not been able to open and legally cannot until 19 July.
The remainder are subject to severe restrictions, meaning a loss of revenue of £3 billion. That impacts up the supply chain because if we are not operating at full capacity, we cannot get our supply chain kickstarted. The delay and cooling effect of that month of extra restrictions is significant, particularly in our town and city centre businesses.
We need to have that money as rapidly as possible, particularly because business rates bills started to kick in again for hospitality from the 1st of this month. Some £100 million of business rates bills started to be felt by the most affected businesses; that flows up through the supply chain as it tightens the credit and liquidity within the market.
The money needs to come as rapidly as possible and local authorities need to be given incentives to make that payment as rapidly as they can through the mechanism, so that delays do not hit. The danger is that if you leave it too late, you fail to get support to the businesses that are teetering on the brink and nearly surviving. We have lost an awful lot within hospitality in our supply chain, and we need to make sure we can keep those that are on the brink. The more swiftly we get money to them, the better.
On those businesses that have not benefited and need to be prioritised in this round of funding, the main ones highlighted are events, contract and office catering, particularly those in town and city centres where the delays will happen. You need a concentration on activities in central London, where businesses will not get back on their feet until we get international travel and office workers back in significant volumes. London hospitality is operating at about 20% to 30% of normal revenue levels; in the rest of the country, it is about 60% to 70%.
There is a severe lag on the central London activity zone and a heavy concentration of affected businesses in those two local authority areas, as well as Southwark on the south bank. You need to have focus on town and city centre areas, as well as the other businesses such as catering, weddings, events, conferences and banqueting, the freelance support and supply chain businesses that sit alongside those, and food wholesale, distribution and logistics.
Seema Malhotra
Q
Kate Nicholls: Yes, we had businesses that started to put in MCC appeals midway through the pandemic, when it was obvious that its effect was going to be much longer lasting than was first anticipated at the beginning of last year. A number of holiday parks, camping and caravan parks, golf courses and bigger holiday and hotel resorts put in MCC appeals. A number had been lined up for town and city centre pubs, bars, restaurants and hotels. Then there was the announcement that the MCC appeals would not be allowed under covid—that would not be a legitimate reason for an MCC appeal.
In our sector, MCC appeals are one of the few ways in which we can adjust our rateable value and our rates bills, which are incredibly high: they are the second biggest overhead as our businesses adapt to structural changes in the economy. While we might have thought that covid would be a temporary blip and a temporary impact on the economy, it is quite clear that for many businesses, particularly in towns and city centres, where there are changes to ways of working and to retail office accommodation, we are seeing a structural change that will have a longer-term impact.
People are very concerned, particularly as we move through this period when we have support and a tapering of relief on business rates at hospitality venues that comes to an end in April 2022. The concern is about what happens when we revert to rateable values and rates bills as normal in April 2022, because those bills will be set according to rateable values that were set for rents in 2015, at the height of the property market.
We are going to come back to rates bills at the highest levels we have ever seen them, having had a delay in revaluation. We will have had a long term without a market adjustment and therefore there is a concern that those businesses for which there is clearly a structural change in the marketplace are prohibited from making an appeal now that allows them to get ready for April 2022.
Seema Malhotra
Q
Kate Nicholls: Thankfully, we have seen very few companies in this sector go into liquidation. We have seen some administrations and some companies being revived with inward investment, particularly in the late-night sector. The areas where we have seen the biggest contractions are office-based and London-based.
We have seen a high number of business failures of individual sites and small and medium-sized enterprises. In particular, we have had contraction in the market of 12,000 hospitality businesses from covid from April 2020 to March 2021. That is a contraction of about minus 8% for pubs and bars, plus 10% for restaurants and hotels, but in major conurbations in the heart of our cities, one in five businesses has failed through the covid crisis. Part of that is very high levels of debt, and that will continue to accelerate business failure and business closure as we come out of this. The first date at which our sector can go cash positive is 19 July, but it is estimated it will take two years before the sector can recover to 2019 pre-pandemic revenue levels and profitability.
As we come out of this, we see a heavily in-debt sector. Previously, debt was used to fund growth and further investment. Pre-pandemic, we were opening two sites a day as we expanded our pubs, bars, restaurants and hotel chains; that was funded largely through the debt and earnings of the businesses. Over the course of the pandemic, we have seen that while the rest of the economy has corporate deposits that are twice the level of corporate debt, in hospitality it is exactly the opposite. We have twice the level of debt as corporate deposits, which means that our sector is going to come out with an anchor on its potential growth and recovery, because it will have to pay down and service that debt and that will delay the recovery further.
You are looking at about £2 billion or £2.5 billion of rent debt. We are waiting to see the Government’s proposals in the detail of the Bill that will help to resolve that. There is also £6 billion of Government-backed loans, which many businesses started to repay this month. That is very challenging when they have limited revenue coming in or heavily restricted revenue. Paying down that debt will to take a lot of time to get through and to get over, and we fear very much that the level of business failure that we saw during the covid crisis will be replicated in the two years as we come out of it, as we try to recover.
Jeff Smith
Q
Kate Nicholls: It is certainly challenging to be able to get into, and I am not sure it would drill down as closely as local authority by local authority level, but there are certainly indications. You can measure footfall drops by high street data: there is good data from Springboard about footfall in our high streets, towns and city centres, as well as shopping centres. They are measuring it for retailers, but that would also apply to hospitality businesses. It is not just the international tourists: it is the offices, the work from home, and it affects different city centres differently according to the demographic that uses them. It is less to do with our coastal towns—they are benefiting from more domestic tourism and domestic footfall—but you are seeing it in London, Edinburgh, Glasgow, Manchester, and to a lesser extent Leeds, Sheffield and Newcastle. They are seeing a drop, but London is particularly badly affected because 70% of London hospitality is inbound tourism, and we are not going to see any pick-up in inbound tourism any time soon.
I think there are broad regional differences that you can apply: it is a very rough and ready crude assessment that you can place on it, but there is a possibility of looking at footfall data. However, I would urge the Government to look at the areas of the country and the constituencies where you have a disproportionately dense population of hospitality and tourism businesses—many of which will be SMEs—and where you have the supply chain businesses that support them. They tend to be local supply chains and to be geographically co-located, so that would be a good indicator of where that support needs to be directed.
Luke Hall
Q
Kate Nicholls: We would urge local authorities to work with us to identify themselves where the areas of greatest need are. One of the things that has frustrated a lot of our businesses is that there is a central message from Government, and it is not necessarily interpreted on the ground as fluidly as Government might have hoped. When you look at some of the local authority areas, we have had businesses that are clearly designed to be captured and covered by the support mechanisms that are available, but local authorities have often taken the view that if it is not directly specified in guidance and it is not a named company or a named type of business, they are precluded from using their discretion and being able to provide support to those businesses. That is the frustration that our businesses have had on the ground going forward.
It would be helpful if local authorities could be a bit more permissive in identifying the businesses that they know are hurting at a local level, rather than applying a prescriptive approach that says, “If your name’s not down, you’re not coming in,” or “Here’s a tick, you are covered.” That would help immeasurably in those businesses that tend to fall between the cracks because they are not clearcut: if you are a coach operator, are you a tourist business or are you not? A local authority should be able to understand its local area and know which ones are and therefore need to be helped, and which ones actually managed okay. Those are the kinds of areas in which we would like local authorities to use their own discretion, not wait to be told specifically by Government that they can help those businesses.
Paul Scully
Q
Kate Nicholls: There are a few notable exceptions, but you can measure on the fingers of fewer than two hands the local authorities and businesses we have been able to help that have had a positive response to that request. All too often, the response has been that the grants that we are talking about are closed, there is no more money, and they will get back in touch with the businesses if more money becomes available.
It is incredibly frustrating that you have this disconnect at a central level. We hear what is being pledged, and we hear and understand the work that is being done by Ministers to communicate to those local authorities, but the operators on the ground just get a “No”. Some local authorities have been more creative than others, and some have been more proactive than others, but generally speaking it has been a long, slow process, and it has been very difficult to get money out of the local authorities for the businesses that desperately need it. It has been too slow in being processed. We know, because of the work we are doing we are doing at a central Government level, that it is there and has been made available; it is just not cascading out.
Simon Baynes
Q
Kate Nicholls: There is clearly a value judgment that needs to be made, and local authorities know their own local markets and the businesses within them, but these businesses will be coming out with such high levels of debt that, however quickly they spring back with revenue, it will take them years to repair the damage that covid has done to them. In the past 16 months, the hospitality sector has been closed with no revenue for 10 months and so severely restricted by the social distancing restrictions that it is not profitable for the remaining six. Businesses in our night-time economy, late-night businesses and entertainment businesses, many of which have struggled to access this grant support, have been closed for 16 months with no revenue. That takes an awfully long time to recover from. The sector has lost £280 million a day. Although certain parts of the sector had a strong performance last summer, the best they achieved was 60% of normal revenue, and that is below break-even.
Yes, demand is strong, and we anticipate that people will be coming to our venues this summer, but there are still constraints that will prevent those businesses from rapidly bouncing back into being sustainable and profitable, and they remain wobbly. Debt is one that could topple them over. There are issues to do with driver and labour shortages across the supply chain. They remain in a very fragile state and there is no resilience left in the industry, so we need to work to make sure we have strategies in place and build back resilience into the hospitality sector. We can then support our supply chain. A bit of pump priming and support now will pay dividends in the longer term.
The Chair
Thank you very much, Ms Nicholls, first, for your evidence and, secondly, for your flexibility with your timings so that you were able to join us early. We appreciated that very much.
Examination of witness
Duncan Swift gave evidence.
The Chair
I now come to our next and final witness of the day. We are going to hear from Duncan Swift, formerly the president at R3, and we have until 5.15 pm for this session. Mr Swift, could you please introduce yourself for the record?
Duncan Swift: Thank you. My name is Duncan Swift. As you have just heard, I am the immediate past president of R3, which is the UK’s trade association for restructuring and insolvency professionals. I am a chartered accountant and a licensed insolvency practitioner with over 30 years in practice, and I am a partner in Azets restructuring and insolvency practice.
Seema Malhotra
Q
Duncan Swift: I will be pleased to do so. It is fair to say that the Bill is regarded by R3 and the profession as a step in the right direction. It has been something that we have been seeking for several years now. However, I have to say that it is not a complete solution to the use of company dissolution as a vehicle for fraud.
To expand on that point, the shortfalls relate to the scale of the problem, which the Bill does not address. It also does not necessarily address fully what remedy is applied in the prosecution of directors or in relation to gaining redress for creditors who have lost out in the use of company dissolution for fraud.
Seema Malhotra
Q
Duncan Swift: There are two things in the context of scale. One is that the Insolvency Service undertakes company director disqualification in relation to the 17,000-odd UK corporate insolvencies that occur annually. It typically achieves about 1,200 disqualifications per annum. R3 members report that they often encounter cases involving significant breaches by directors of Insolvency Act 1986 and Companies Act 2006 requirements that are not included in the company director disqualifications at all, which would suggest that the Insolvency Service is somewhat resource-constrained.
On the flip side, there are about 400,000 to 500,000 company dissolutions per annum. Nobody is quite sure just how many of those are insolvent company dissolutions, but the last time it was looked at in any detail, it was thought that about 50% of that total might be insolvent company dissolutions. That is 10 to 15 times greater than the corporate insolvency volume I talked about earlier. One has to ask whether the Insolvency Service will be scaled up 10 to 15 times to deal with that magnitude of investigation into insolvent dissolutions, or whether the investigation of insolvent dissolutions will come at the expense of investigations into errant director behaviour in insolvencies.
Seema Malhotra
Q
Duncan Swift: Yes, R3 will be happy to supply that to you.
Seema Malhotra
Q
Duncan Swift: From the reports of R3 members, we are seeing surprise that adverse director conduct reports on serious misconduct have not resulted in disqualification of the directors. Whether that caused phoenixism or meant that the directors went on to commit the same type of misbehaviour in other corporate situations, I am not able to advise.
As a trade association, our member feedback is that the number of 1,200 disqualifications per annum, which is a fairly regular number over the past several years, appears to be fewer than the volume of cases where adverse director conduct reports have been submitted, which would warrant such disqualifications being issued.
Seema Malhotra
Q
Duncan Swift: That is one area where the Bill, as presented, appears to be incomplete. Mention is made to using things such as compensation orders, but that ordinarily benefits only a single creditor. I would anticipate that in this scenario that would be the public purse in the form of HM Revenue and Customs. Director disqualification in itself, which is the investigation and prosecution process that is envisaged, does not yield compensation to any party. All it yields is a decision that the behaviour of a director is such that they should be disqualified from acting as a director in future. It does not set the compensation mechanism or the process for compensation, whether to a single creditor or the creditor body as a whole.
Seema Malhotra
Q
Duncan Swift: On what needs to be done, disqualifications that prevent directors doing the same errant actions again is clearly a step in the right direction. Other actions that could be taken include enabling restoration of dissolved companies more readily to the register where such errant behaviour has taken place. I mentioned the number of 400,000 to 500,000 dissolutions—as in strike-offs—per annum, of which it is estimated about half are insolvent. Yet only 1% of strike-off companies are put through a process to restore them to the register. We are talking about 4,000 to 5,000 companies a year. That process, from experience, is a court-driven process that typically costs the applicant, normally a creditor, a few thousand pounds in legal costs, to get the company restored to the register, in order to have a licensed insolvency practitioner appointed to it, whether in a compulsory liquidation or a creditors’ voluntary liquidation, so as to investigate the company’s affairs, and recover assets that might have been misappropriated by its directors.
Seema Malhotra
Q
Duncan Swift: From experience, in terms of restoration pre-pandemic, you could be looking at 12, maybe 18 months. With the restrictions on court time in the pandemic, it is taking a lot longer.
Peter Grant
Q
Duncan Swift: Yes, sir, that is correct. Although director disqualification—banning a director or person from acting as such—is a deterrent, we also see instances of disqualified directors continuing to act as though they are the controlling party in corporate affairs subsequently. The serious rogue directors do not see being disqualified as a significant deterrent. A more significant deterrent is being held to account for the assets that they may have misappropriated and incurring personal liability for such actions that they have wrongfully undertaken while holding the office of director. That goes to the heart of the fact that more thought needs to be given by Government to how they will actually prosecute those directors. It is not just a matter of disqualifying them as directors. Crucially, what are the Government going to do in terms of revisiting the dissolved company that those directors have inappropriately dealt with through dissolution, rather than conducting an office holder investigation of their affairs, to enable some form of redress through the company’s position to recover assets and to compensate creditors who have lost out as a result of that individual’s actions?
Peter Grant
Q
Duncan Swift: That is a very difficult question to answer. I am not a lawyer, so I am not entirely certain where the legal privilege lies. There is the risk that a well-intended but adverse report by an office holder based upon, more often than not, incomplete information might open up that office holder to legal action by the person who is the subject of that adverse report for defamation and impact on their character. It is a very difficult area.
In terms of the position of directors and dissolved companies generally, certainly suppliers, the providers of credit and those who rely upon the good name of an individual as a director are able to assess the quality of that name by dint of Companies House records on the track record of dissolutions and formal insolvencies of those individuals, as long as the Companies House data upon which that assessment is made is known to be accurate. Although this sits somewhat outside the Bill, reforms have been proposed to improve the veracity of the data that Companies House provides to all its users for that assessment.
To go back to an earlier question on improvements that can be made, and going back to the scale of the problem that this Bill currently does not really address, one thing I have not mentioned is that 95% of all company dissolutions are actually at the behest of Companies House. They are not at the behest of directors. Companies House has automatic strike-off for non-filing of accounts and non-filing of conformation statements. It is no surprise that those who would abuse the position of director choose not to file accounts and choose not to file confirmation statements.
One clear improvement would therefore be to remove the automatic strike-off power of Companies House, and to have that 95% of companies that would be struck off put into some form of quarantine or screening process—whether that screening is done by the Insolvency Service or some other Government body—as a precursor to deciding what to do with those companies earmarked for strike-off, and also for their registered directors. What was their behaviour leading up to the circumstances where such strike-off was being contemplated? At the moment, there is a huge volume of companies coming up for dissolution at the behest of Companies House, not at any other party’s behest.
Peter Grant
Q
Duncan Swift: It would certainly act as an effective deterrent. I would have to ask—not having considered the question before—whether that would proportionate to the size of the problem. It would certainly be a proportionate deterrent in the context of this Bill if, rather than it being left to the Insolvency Service to investigate dissolved companies that were found to be insolvent after the event, the companies about to be automatically struck off for non-filing of accounts and confirmation statements had their position reviewed by the Insolvency Service at that point, pre-strike-off, to identify whether they should go through a compulsory liquidation process to address and fully investigate the director’s behaviour, and to recover assets for the benefit of creditors.
Peter Grant
Q
Duncan Swift: I understand where the question is coming from, but actually what I am proposing is a lot more work for the Insolvency Service, which is the party that this Bill identifies as performing it. What I am saying is that that work should occur a lot earlier than after the event of a company being struck off—more than likely at the behest of Companies House—and subsequently found to be insolvent.
Pre-strike-off by Companies House, that review is undertaken, ideally, by the Insolvency Service, if it is scaled up to do that investigation. But as I say, the volumes are 10 to 15 times more than the volume of insolvent companies. Should it go into a compulsory liquidation process following that investigation or initial review by the Insolvency Service, it is the official receiver that is first appointed by the court to be the liquidator in the compulsory liquidation—so, it is Companies House, Insolvency Service, Insolvency Service. That is not a direct benefit to the private sector members of the insolvency profession.
Peter Grant
Q
Duncan Swift: I have to say, from experience, it is too short. Rogue directors or individuals who abuse the position of director go to great pains to extract all the asset value out of the companies that they are abusing and to provide a false, or certainly incomplete, trail of their actions as directors of the company. As an office holder coming in after the event, it is like pulling together a 3,000 or 4,000-piece jigsaw puzzle when holding only about five pieces to start with. You are having to make inquiries with multiple stakeholders, as well as interviewing the directors and their associates, to start to get the bits of the jigsaw puzzle necessary for a picture of what actually went on, in order to convince a court that what went on was actually a fraud upon the creditors and that the director had not acted properly. Again, from experience, although a relatively speedy pulling together of the jigsaw puzzle and convincing of the court takes three years, there are many cases where it takes far longer.
Paul Scully
Q
Duncan Swift: What I was explaining about the timeline was that for the office holder—whether it be the Insolvency Service or the official receiver as liquidator, or the Insolvency Service coming in to pull together a picture of the company’s financial dealings and the director’s conduct in the course of those dealings—it takes time. In the first phase in particular, it can take two years to get a reasonably complete picture before one can be confident of putting forward an application to court, either for a recovery of assets or, I would have thought, the disqualification of a director in circumstances where that individual may well be using the proceeds of such activities to defend their position, as well as seeking to confuse it to defend against the likelihood of such claims being brought against them.
Paul Scully
Q
Duncan Swift: Forgive me, but my understanding and experience of compensation orders is that they are brought on behalf of a single creditor or a few creditors. I suggest a more comprehensive approach: that the insolvency process that already exists is applied, and if a dissolved company is found to be insolvent, it is readily restored to the register and put through the insolvency process. That will have two consequences: a full investigation by the office holder, who in the first instance of the compulsory liquidation is the official receiver of the directors’ conduct; and for that process to recover such assets that are available for the benefit of all creditors of that company, not only a few.
Paul Scully
Q
Duncan Swift: All I can go on is the statistics issued by the Insolvency Service on disqualification orders or undertakings from directors for misconduct relative to the total number of corporate insolvencies per annum, and the member feedback that R3 receives. At an anecdotal level, members report that they have submitted serious adverse conduct reports against individuals, only to find that no action has been taken against said individuals by the Insolvency Service. We are not told why. Clearly there is a threshold.
Coming back to the statistics, it would appear that the Insolvency Service is consistently—year in, year out, irrespective of fluctuations in the total number of corporate insolvencies—disqualifying about 1,200 individuals per annum. That suggests to me that there is a resource issue. I am not in a position to ask the Insolvency Service whether that is the case, but that is what it feels like.
Paul Scully
Q
Duncan Swift: Yes. As I said at the start, this is a step in the right direction, but unfortunately it does not go far enough.
Paul Scully
Q
Duncan Swift: I repeat: it is a step in the right direction, but it is not enough. Individuals who would choose to abuse the benefits of directorship of limited liability companies are not dissuaded by the prospect of being disqualified—that is my experience and that of the members of R3. A more significant deterrent is that they are not only disqualified but the ill-gotten gains of said actions that led to their disqualification are required to be repaid and recovered for the benefit of those who have suffered as a consequence of those actions. If that also includes criminal liability, so much the better; I am sure that will add to the weight of the deterrent. They are far less likely to do it if they can see the routes to the gains that they obtain from such behaviour being readily recoverable.
The Chair
There are no further questions, Mr Swift. We thank you for your evidence this afternoon, and for your flexibility on timing, which we greatly appreciate. That brings us to the end of today’s sitting. The Committee will meet again on Thursday 8 July to begin line-by-line scrutiny of the Bill.
Ordered, That further consideration be now adjourned. —(Paul Scully.)
Northern Ireland (Ministers, Elections and Petitions of Concern) Bill (Third sitting)
Tuesday 6th July 2021
(2 years, 9 months ago)
Public Bill CommitteesRead Full debate Northern Ireland (Ministers, Elections and Petitions of Concern) Act 2022 View all Northern Ireland (Ministers, Elections and Petitions of Concern) Act 2022 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 6 July 2021 - (6 Jul 2021)
The Committee divided: - Ayes: 2 / Noes: 10 - Question accordingly negatived.
The Chair
Before we begin, I remind hon. Members to observe social distancing and sit only in the places that are clearly marked. I also remind Members that, in line with the House of Commons Commission decision, face coverings should be worn in Committee unless people are speaking or medically exempt. Electronic devices should be switched to silent mode. Tea and coffee are not allowed during sittings. The Hansard Reporters would be grateful if Members emailed electronic copies of their speaking notes to hansardnotes@parliament.uk.
We will now begin our line-by-line consideration of the Bill. The selection and grouping list for today’s sittings is available in the room. This list shows how the selected amendments have been grouped for debate and the order of debates. Decisions on each amendment will be taken when we come to the clause or schedule that the amendment would affect.
Clause 1
Period for making Ministerial appointments
Question proposed, That the clause stand part of the Bill.
The Minister of State, Northern Ireland Office (Mr Robin Walker)
It is a pleasure to serve under your chairmanship, Mr Stringer. If I may, I will speak to the first three clauses of the Bill, which do not have any amendments on the amendment paper.
Clause 1 amends the Northern Ireland Act 1998 to extend the period of time available to appoint a First Minister and Deputy First Minister after the resignation of either, or after the first meeting of the Northern Ireland Assembly following an Assembly election. Currently, the period for ministerial appointments is only 14 days from the first meeting of the Assembly after an election and seven days from the First Minister or Deputy First Minister ceasing to hold office. The Bill will extend the period for filling ministerial offices to six weeks, which is automatically renewed—unless the Assembly resolves otherwise on a cross-community basis—a maximum of three times, up to a total of 24 weeks. By extending these periods, the Bill will allow more time for discussions between the parties and for the Secretary of State to facilitate a resolution before they come under an election duty. It also allows Northern Ireland Ministers to remain in post, after an election, until the end of the period for appointing new Ministers. This change will allow greater continuity in decision making.
Under clause 2, Ministers will no longer cease to hold office after the election of a new Assembly. It provides for up to a maximum of 24 weeks after an election or for a maximum of 48 weeks since there has been a functioning Executive in place—whichever is the shorter—in which Ministers may continue to hold office, subject to those offices otherwise being filled, or if a Minister is not returned as a Member of the Assembly. This measure will ensure that institutions becomes more sustainable and resilient.
On Second Reading, concerns were raised about so-called caretaker Ministers. We are not discussing that matter at length today, but I do want to make the following points. While the Executive were not functioning, civil servants were left trying to maintain the machinery of government and to provide public services in the absence of ministerial decisions. Without the direction or control of Ministers, civil servants are significantly limited in respect of the powers that they may exercise. I want to reflect on the examples that we heard in evidence last week from Lilah Howson-Smith on public services. The health service was left to deal with “long waiting lists”; Belfast City Council was unable to resolve sewage issues; and in schools there was what Lilah described as
“a sense of overall stasis.”––[Official Report, Northern Ireland (Ministers, Elections and Petitions of Concern) Public Bill Committee, 29 June 2021; c. 21, Q24.]
Keeping Ministers in a caretaker position means that civil servants can continue to take direction and everyday issues can be resolved. Ministers will not be in post to take new decisions or implement new policy. The purpose of this measure is to ensure that Northern Ireland does not shut down in the way it did during the absence of devolved government. As Sir Jonathan Stephens said:
“The fundamental protection is the absence of an Executive if there is not a First Minister or a Deputy First Minister, meaning that significant, controversial, cross-cutting decisions cannot be taken”.––[Official Report, Northern Ireland (Ministers, Elections and Petitions of Concern) Public Bill Committee, 29 June 2021; c. 31, Q40.]
Under the 1998 Act, Ministers cannot take decisions that ought to have been taken by the Executive. We therefore believe that there is no need to provide further statutory clarifications, given that legal safeguards are already in place. We also know that the courts are ready to step in, should Ministers act unlawfully.
Let me turn to clause 3. Currently, the Secretary of State is required to propose a date for an Assembly election in the following scenarios: when the Assembly resolves to dissolve itself or when the period for appointing Northern Ireland Ministers or the First Minister and Deputy First Minister expires without those offices being filled. Clause 3 allows the Secretary of State to certify or call an Assembly election at any point after the first six weeks in the period for filling ministerial offices, if the Secretary of State considers that there is not sufficient representation among Ministers to secure cross-community confidence in the Assembly. I commend clauses 1, 2 and 3 to the Committee.
Louise Haigh (Sheffield, Heeley) (Lab)
As ever, it is a pleasure to serve under your chairmanship, Mr Stringer.
I appreciate the Minister laying out clauses 1 to 3 and his exposition of some of the issues raised on Second Reading, in particular on caretaker Ministers. As I made clear on Second Reading, we welcome these limited attempts to safeguard power sharing and to improve the sustainability of the Executive and the Assembly, which reflect commitments made in New Decade, New Approach. We believe that all parties to that agreement, including the UK Government, should fulfil all the commitments made in it. That is the basis of amendments that we will come on to.
On clause 1, I appreciate the Minister’s description of the safeguards to ensure that caretaker Ministers do not step beyond the bounds of what is reasonable. I want to tease some of that out, not to put it in statute but to make it clear on the record. On Second Reading, the Minister said that there were well-defined limits for caretaker Ministers and explained that they would be constrained by the ministerial code. Will he confirm that only the ministerial code constrains Ministers in that regard, and not the programme for government?
It will not have escaped the Minister’s attention that at the moment, there is no programme for government, so if there were to be an election and this scenario envisaged, in that situation there would be no programme for government to constrain Ministers. Also, the ministerial code is silent on powers in that situation. I will be grateful if he could make it clear which section of the ministerial code would constrain Ministers.
On the courts being able to step in to hold Ministers to account, exactly what would they hold them to account on—on what point of law, or on what code? Will he clarify that? How exactly do we stop Ministers taking decisions that are significant, controversial and cross-cutting in the absence of an Executive in that scenario? In evidence, Professor Jon Tonge posed questions that need an answer today. What ministerial decisions will be taken that are not significant, controversial or cross-cutting? Will the Minister give us examples of what does not fall in that description? In a caretaker capacity, will Ministers be able to take decisions with financial implications? The reality is that few decisions will fall outwith those scopes.
On Second Reading, we discussed the possibility of Ministers going beyond their mandate and their remit. The reality is that what we are constraining them with is potentially extremely limited. We might be in exactly the same situation as we found ourselves in during the three years of collapse, with Ministers able to take very few decisions. I will be grateful if the Minister explains how he envisages that working.
In the evidence session, Mark Durkan expressed concerns about the possibility of the Assembly being up and running for 24 weeks during this period, albeit a caretaker one, but with potentially no protection for the operation of the north-south institutions. The ministerial code is clear that Ministers are required to attend the north-south institutions, so I will be grateful if the Minister confirms that that would remain the case and that strand two of the Good Friday agreement would be respected equally in such a period, while the Assembly is up and running.
The clause also excludes the possibility of a six-week extension period for filling the offices of First Minister and Deputy First Minister if the Assembly passes a resolution to stop that extension. It further states “without cross-community support”. In evidence, concerns were expressed about exactly what cross-community support looks like in that scenario. What is his definition of “sufficient”?
Clause 3 gives effect to a point that was of some debate during the NDNA talks in late 2019 and early 2020: paragraph 3.15 of the sustainability annex to the agreement. It was aimed at ensuring that a caretaker Executive that might be in place for up to six months had
“sufficient representation to command cross-community confidence in the Assembly.”
That finds expression in the Bill at clause 3, with the authority for the Secretary of State to call an election
“if the Secretary of State considers that it is necessary to do so in order to give effect to the purpose underlying paragraph 3.15 of Annex C of Part 2 of The New Decade, New Approach Deal”.
That leaves open the possibility that all the Unionist parties or all the nationalist parties refused to continue as caretaker Ministers, but that there would not be cross-community support in the Assembly to call an election, so the caretaker Executive could limp on with only one community represented for the six months before an election had to be called, subject only to the judgment of the Secretary of State. It would of course be open to the parties to ensure representation by staying in the ministerial roles as caretakers. However, it is clearly a dilution of the safeguard and places it as much as possible in the hands of the Secretary of State.
There is a difficulty quantifying absolutely what would constitute sufficient cross-community representation in circumstances where, for example, the Deputy First Minister resigns and Ministers withdraw. The common-sense view is that it would be sufficient if either the Ulster Unionist Party or Social Democratic and Labour Party stayed on. I concede it is difficult to quantify in legislation, and would be grateful if the Minister could expand on that.
At a basic level, the safeguard could be strengthened by saying that the Secretary of State “will” rather than “may” call an election if there is not sufficient representation in the Northern Ireland Executive to command cross-community confidence in the Assembly. Is the Minister comfortable that the Bill reads the Secretary of State “may” rather than “will” call an election? Can he explain the circumstances in which the Secretary of State would not call an election, even in the absence of sufficient cross-community support?
The Chair
I make it clear to the Committee, before I call Members to speak, that the Minister spoke to the first three clauses of the Bill. We will vote on clauses 1 to 3 separately at the end of the debate.
Claire Hanna (Belfast South) (SDLP)
It is a pleasure to serve under your chairmanship, Mr Stringer. Apologies for my lateness. I was outside the Boothroyd Room, uncharacteristically on time, and am new to this process.
On the ministerial code, we welcome clause 4—
Louise Haigh
We are just doing clause 1 to 3 at the moment. We are not on to the amendments yet.
Mr Walker
I am grateful to the hon. Member for Sheffield, Heeley for her broad support for the principles of the Bill and for her questions. She asked important questions about the safeguards on what we have come to know as caretaker Ministers. It was agreed in New Decade, New Approach that Ministers will remain in office in a caretaker capacity to allow for greater continuity of decision making. The deal also stated that Ministers would be required to act within well-defined limits, including those set out in the ministerial code and the pledge of office, in accordance with the requirement for an Executive Committee to consider any decisions that are significant, controversial or cross-cutting. As appropriate, restrictions are put in place during the pre-election period.
Limits have not been defined in the legislation because we anticipate they will operate as a matter of convention, rather than a legal issue. This approach to drafting allows a degree of discretion for unforeseen circumstances. I reiterate the expectation that Ministers will act responsibly.
The NDNA deal also stated that Ministers would be required to act within well-defined limits, as set out in the ministerial code, to operate within the framework for government, as the hon. Lady says, agreed by the previously functioning Executive endorsed by the Assembly. Ministers will act in accordance with the statutory requirement, included within the ministerial code, that any decisions that are significant, controversial or cross-cutting are required to be considered by the Executive. As appropriate, restrictions are in place during the pre-election period, as I have said.
The point is that this is not a good situation to be in—we do not want caretaker Ministers to be required. We would prefer to have a fully-functioning Executive and the institutions of devolution up and running at all times. We are trying to put in place—this was agreed by all parties—is a preferable situation to leaving civil servants with no ministerial cover at all, which is important. We heard in the evidence session of the problems faced during that time.
The hon. Lady asks about the decisions Ministers will be able to take—an important question. They will be able to take decisions within their responsibilities and areas previously agreed by the Executive as a priority for their Department. That puts us in a significantly better place than the absence of devolution. She asks about the north-south institutions, and I confirm that those can operate in this scenario and Ministers will be free to take part within the broader constraints.
The hon. Lady asks about cross-community support and is right that this is important. We need to ensure that any Executive meets the requirements of power sharing. She will understand, as she set out in her explanation, why we have not written into legislation the full detail of how that could work, as there are all sorts of scenarios with different outcomes from elections and political crises that could emerge. Her example of only one party being represented in the Executive would clearly not be sustainable. We would want to ensure that the Executive represents more than one community. It is important that a Secretary of State has a degree of discretion, depending on the political circumstances, as to when to exercise that power.
On the question of “will” or “may”, if a Secretary of State were in the position where they thought they were on the verge of a breakthrough in talks, they might need that discretion, but I cannot think of any other scenario in which they would not move towards calling an election if there were not that cross-community representation. I hope I have answered the hon. Lady’s key points.
Louise Haigh
Will the Minister confirm that if a programme for government is not in place, as is the case in the current mandate, Ministers will not be able to take any decisions?
Mr Walker
I am not sure that is quite right because Ministers would be able to take decisions within their departmental remit, which are running-order decisions for their departmental business. Clearly, they would not be able to take decisions that are about making significant changes to policy. The offer of working together is also part of the pledge of office. It is an important part of power sharing and that is one of the things that they are constrained by in their activities. Where a programme for government is agreed, they will also be stuck within its limits and will be working forward with that.
As Sir Jonathan Stephens said, the fundamental protection in the case of caretaker Ministers is the absence of an Executive. If there is no First Minister and Deputy First Minister, significant, controversial or cross-cutting decisions cannot be taken by the Executive. In a resignation scenario, Assembly Committees will also continue to function for the Assembly’s duration and can continue to discharge their important duties of scrutinising Ministers and Departments and holding them accountable. Under the Northern Ireland Act 1998, Ministers cannot take any decisions that ought to have been taken by the Executive. We therefore believe there is no need to provide further statutory clarifications given that legal safeguards are already in place. We also know, and as we saw during the period of absence of an Executive, that the courts are prepared to step in if they feel that decisions are being taken beyond the remit of whoever is taking them. We have seen examples of that.
Question put and agreed to.
Clause 1 accordingly ordered to stand part of the Bill.
Clauses 2 and 3 ordered to stand part of the Bill.
Clause 4
Ministerial Code of Conduct
The Chair
Before I call Claire Hanna, just to be helpful, once you have proposed the amendment, I will call members of the Committee, the Minister will then reply and then you can have a chance to respond. Please indicate to me and to the Committee whether you wish to withdraw or push the amendment to a vote.
Claire Hanna
I beg to move amendment 13, in clause 4, page 5, line 22, after
“be accountable to the Assembly”
insert “users of services,”.
This amendment would ensure that Ministers and Departments are accountable and responsible to users of services, as well as to the Assembly and the public.
The Chair
With this it will be convenient to discuss amendment 14, in clause 4, page 5, line 25, at end insert—
“(ba) ensure all reasonable requests for information from the Assembly, users of services and individual citizens are complied with; and that Departments and their staff conduct their dealings with the public in an open and responsible way;”.
This amendment would ensure that the principles of transparency and openness, as well as a duty to comply with requests for information, as outlined in Strand One, Annex A of the Good Friday Agreement, are maintained within the Ministerial Code of Conduct.
Claire Hanna
Thank you very much, Mr Stringer. I appreciate your guidance. We welcome the strengthening of parts of the ministerial code, which we think will protect, enhance or potentially and eventually deliver good governance in Northern Ireland. Indeed, we think it could have wider purchase. Amendments 13 and 14 refer to our concern that parts of the ministerial code that were in the Good Friday agreement in the 1998 Act have been diluted or omitted here, purposefully or otherwise, and our amendments seek to restore those.
Amendment 13 specifically mentions accountability to users of services. That is topical, as there is much discussion at the moment about the awarding of contracts for the processing of social security payments and the potential processing of the victims’ payment. Amendment 13 would restore the accountability of Ministers for the services they deliver, including the services their Departments may be delivering through a third party.
Mr Walker
I am grateful to the hon. Lady for her presentation of the amendments. We are legislating to update the ministerial code of conduct in accordance with a request made by the then First Minister and Deputy First Minister, following agreement of the revised code by the Executive Committee. The changes have not come from the UK Government; they come directly from the Executive themselves.
It is important to note that the ministerial code of conduct will continue to require that Ministers uphold the seven principles of public life, known as the Nolan principles. Some of the changes to the code that we are making will make that a little more explicit. The principles include selflessness, integrity, objectivity and—crucial to the amendment—accountability, openness, honesty and leadership.
The changes strengthen the code of conduct, as we heard from witnesses last week. We are legislating to strengthen the code to reflect the request that we received from the First Minister and Deputy First Minister, agreed by the Executive. That forms part of the wider package outlined in NDNA, which the Executive were committed to, but it will strengthen the codes governing ministerial accountability and conduct.
I gently propose that it is not for us here as Members of Parliament in Westminster to suggest amendments to a ministerial code of conduct that affects Members of a separate legislature. I urge the hon. Lady to withdraw the amendment. I assure her that the principles of openness and accountability are reflected in the original code and are strengthened in the changes we are making to the ministerial code here.
Claire Hanna
I thank the Minister. We appreciate that this flows from NDNA, but I am unclear whether there was a specific request for those particular provisions to be withdrawn. They existed before the New Decade, New Approach deal. Other aspects have been enhanced, and this one has been diluted. It is not clear to me why that would be the case—why it would have been weakened.
I will keep my powder dry, in order to perhaps push subsequent amendments. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Louise Haigh
I beg to move amendment 4, in clause 4, page 5, line 23, at end insert
“in accordance with the current Programme for Government drawn up in accordance with section 20(3) of the Northern Ireland Act 1998 and paragraph 20 of Strand One of the Belfast Agreement,”.
This amendment requires Ministers to pay regard to the statutory duty under the Belfast (Good Friday) Agreement for the Executive Committee to seek to agree each year, and review as necessary, a programme incorporating an agreed budget linked to policies and programmes, subject to approval by the Assembly, after scrutiny in Assembly Committees, on a cross-community basis.
The Chair
With this it will be convenient to discuss the following:
Amendment 17, in clause 4, page 5, line 25, at end insert—
“(ba) seek in utmost good faith and by using their best endeavours to implement in full the Programme for Government in “The New Decade, New Approach Deal” as regards the transparency, accountability and the functioning of the Executive;”.
This amendment requires Ministers to implement the Programme for Government agreed in January 2020, as it relates to transparency, accountability and functioning of the Executive.
Amendment 18, in clause 4, page 5, line 25, at end insert—
“(ba) seek in utmost good faith and by using their best endeavours to implement in full any future deal on the operation of devolved government between the parties to “The New Decade, New Approach Deal” which may be approved by the Assembly;”.
This amendment requires Ministers to implement any future deal on the operation of devolved government in Northern Ireland.
Amendment 19, in clause 4, page 5, line 26, at end insert—
“(ca) abide by and implement in every respect Annex A to Part 2 of “The New Decade, New Approach Deal” as regards the transparency, accountability and the functioning of the Executive;”.
This amendment requires Ministers to strengthen and enforce the Ministerial Code and other codes including the Special Adviser Code of Conduct.
Amendment 6, in clause 4, page 5, line 28, at end insert—
“(da) comply with paragraph 2.11 of the Northern Ireland Executive Ministerial Code in relation to the inclusion of ministerial proposals on the agenda for the Northern Ireland Executive, with areas for resolution to be recorded in the list of “Executive papers in circulation” against those papers still outstanding after the third meeting, in accordance with paragraph 62(c) of Section F of the Fresh Start Stormont Agreement and Implementation Plan;”.
This amendment implements a commitment further to the Fresh Start Agreement providing that an item may not be blocked for more than three meetings of the Executive through lack of agreement on the agenda.
Amendment 3, in clause 4, page 6, line 8, at end insert—
“(1A) ‘Key performance targets and objects’ include commitments made in the Belfast Agreement (1998), the Hillsborough Agreement (2010), the Stormont House Agreement (2014), the Stormont House Fresh Start Agreement (2015) and the New Decade, New Approach Deal (2020).”
This amendment makes it a requirement of the Ministerial Code of Conduct that Ministers are accountable to the Assembly and the public for fulfilling the Belfast (Good Friday) Agreement and subsequent Agreements.
Louise Haigh
I shall speak to amendments 4 and 3, and in support of amendments 17, 18 and 19 that appear in the name of my hon. Friend the Member for Belfast South.
Amendment 4 seeks to address an issue that was discussed in the earlier debate—an issue that we see with the current absence of a programme for government. As hon. Members know, the programme for government is drawn up in accordance with section 20(3) of the Northern Ireland Act 1998 and paragraph 20 of strand 1 of the Belfast/Good Friday agreement. It provides Ministers and the public with a clear mandate and agenda and a basis for decision making. As we have discussed, any issue that a party in the Executive deems significant or controversial that is outside the programme for government can be referred for approval by the full Executive. Since New Decade, New Approach, that mechanism has been used on at least six occasions.
Despite the draft programme for government having been published in New Decade, New Approach, no programme has been adopted in the current mandate. The amendment would make Ministers accountable under the code of conduct for agreeing a programme for government, providing an additional layer of accountability. It would also be important for sustainability. In the absence of the powers of a caretaker Executive being codified in the Bill, the Committee is being asked to rely, in essence, on a programme for government to limit those caretaker ministerial powers. The amendment is therefore an additional safety mechanism, requiring Ministers to agree a programme for government. I would be grateful if the Minister could explain why he chooses not to accept it, if indeed he does not.
I will allow my colleague to speak on amendments 17, 18 and 19 more comprehensively, but the broad thrust of them is absolutely right and we wholeheartedly support them. Agreements made must be honoured, and too often elements of agreements made in the past—from the Belfast agreement through to the St Andrews agreement and, indeed, too much of New Decade, New Approach—have not been honoured. That has damaged trust in the operation of the Assembly and the perception of its ability to effect change. The amendments in the names of the hon. Members for Foyle and for Belfast South simply codify agreements that have already been reached. For that reason, we are very happy to support them.
Mr Walker
To respond to amendment 4, the Committee will know that clause 4 substitutes a revised ministerial code of conduct, setting out expectations on the behaviour of Ministers, including provisions around the treatment of the Northern Ireland civil service, public appointments and the use of official resources and information management. We are legislating to update the ministerial code of conduct in accordance with the requests made by the then First Minister and Deputy First Minister following agreement to revise the code by the Executive Committee. The changes, as I said, have not come from the UK Government but from the Executive themselves, to reflect what the parties agreed in the NDNA deal.
We do not think that the amendments are, in any event, necessary, as the pledge of office already requires Ministers to participate with colleagues in the preparation of the programme for government, and to operate within the framework agreed within ExCo and endorsed by the Assembly. We therefore feel that amendment 4 is not necessary, and I ask the hon. Member for Sheffield, Heeley to withdraw it.
Louise Haigh
I am grateful to the Minister for placing it on the record that the provisions in the pledge of office will constrain Ministers. I am therefore happy to withdraw the amendment.
The Chair
There was no debate on amendments 17, 18, 19, 6 and 3. I probably should have explained this at the beginning. We were debating amendment 4. I said at the beginning that it would be convenient to debate the other amendments at the same time. I think the hon. Member for Belfast South probably did not understand that. With the Committee’s indulgence, I will listen to the points that she wishes to make.
Claire Hanna
Once again, Mr Stringer, I appreciate your indulgence. I promise that we will be expert going forward, and I will be very brief about amendments 17, 18 and 19.
As the hon. Member for Sheffield, Heeley outlined, the amendments are about compelling and encouraging Ministers to implement the programme for government. Notwithstanding the fact that one is not currently agreed, a programme of work has been laid out. Amendment 18 is a pre-emptive amendment that is designed with the sustainability of the Executive in mind. It would require Ministers to implement future programmes for government. By my count we are, since 1998, yet to make it through a full mandate without at least one period of crisis talks and a refreshing of the programme for government, so it would appear to make sense to have that future-proofing amendment.
Amendment 19 would require a strengthening of the code of conduct. We have some concerns around enforceability. Members who were at the evidence sessions the other day may recall that the Speaker and staff of the Assembly were not particularly expansive in terms of how they thought that enforcement should take place. We have emerged from a period of explicit poor governance in the Assembly, with the likes of the renewable heat incentive debacle, where the ministerial code was perhaps not sufficiently powerful to curb the powers of Ministers. Amendment 19 is designed to strengthen it.
The Chair
I call Colum Eastwood. [Interruption.] I am sorry, I was looking at the names of the proposers and not around the room. I call Stephen Farry.
Stephen Farry
Thank you very much, Mr Stringer. It is a pleasure to serve under your chairmanship. I take no offence at the mis-association of me with the hon. Member for Foyle—I have been called far worse, so I will take it on the chin.
I will speak briefly to amendment 6, which appears in my name. It relates to the ministerial code and the insertion into law of what is known in Northern Ireland as the three-meeting rule, which was agreed by the Northern Ireland political parties as recently as the Fresh Start agreement in 2015. At the moment, my understanding is that it is in essence guidance and not part of law, and we see partial implementation of the rule in the Executive. Sometimes papers can be blocked for considerable periods, causing considerable frustration for Ministers. In recent weeks, for example, the Northern Ireland Health Minister has had a Bill on organ donation blocked. My party colleague, the Justice Minister, has had a Bill blocked for a considerable time.
There has been a lot of talk about the petition of concern and vetoes in discussion of the Assembly, but a lot less attention has been paid to what happens inside the Executive where, in essence, there are two vetoes. The first is in the way in which the First Minister and Deputy First Minister have almost full control over the Executive agenda. It takes almost a double sign-off from both for a matter even to get on to the agenda for debate. Secondly, a cross-community veto can be deployed by three Ministers to block a decision. My amendment addresses the former issue of the agenda, so that there is at least scope for a discussion and a vote to take place on any Executive paper. No Minister puts a paper to the Executive that is without merit, and they all deserve discussion.
The purpose of amendment 6, in essence, is to put into the ministerial code something that has already been agreed by the Northern Ireland political parties in the Fresh Start agreement of 2015.
Gavin Robinson (Belfast East) (DUP)
It is a pleasure to serve under your chairmanship, Mr Stringer.
I promised myself this morning that I would not get into the mould of opposing every amendment that has been proposed by my colleagues from Northern Ireland, but I have a couple of points to make about SDLP amendments 17, 18 and 19, which were tabled by the hon. Member for Belfast South. The danger is that we seek to legislate too much on such issues. I understand entirely the thrust of her argument and, indeed, the way in which the amendments have been structured is to talk of best endeavours and the relationships that we want to see in our political situation. In truth, however, they bring with them no legislative consequence should we not see best endeavours. How I would frame it is that if we need to rely on such provisions being in legislation, the system is not working as it should in any event. Without a consequence, and given the positive but loose nature of the amendments, I do not think that the proposals would add significantly to the Bill or to the agreement reached in New Decade, New Approach.
I also understand why the hon. Member for North Down has advanced amendment 6. He served in the Executive when I was a special adviser in the Office of the First Minister and Deputy First Minister. He will understand not only that the nature of that joint office brings political challenges with it, but that there is still an importance of that office’s chairing and maintaining the efficiency of the business brought before the Executive. He and I will both remember times when things were much more terse around that table, but to reflect on his time as a Minister, whenever he brought forward papers for the Department for Employment and Learning, we engaged in discussions prior to any difficulty emerging around an agenda. His special adviser and I used to spend a lot of time problem solving before issues were brought formally to the agenda.
Mr Walker
I am grateful to all hon. Members who have spoken in this discussion of the amendments. The hon. Member for Belfast East brings important experience from his time working with the Executive. I also recognise that the hon. Member for North Down represents an important strand of opinion in that respect and, indeed, has great experience.
Turning to amendment 17, although the parties made a commitment in New Decade, New Approach that the Executive should bring forward a programme for government, Westminster cannot compel them to deliver a particular programme for government, and nor should we. The programme is for the Executive and Assembly to determine and agree, as is set out in paragraph 20 of the Belfast/Good Friday agreement:
“The Executive Committee will seek to agree each year, and review as necessary, a programme incorporating an agreed budget linked to policies and programmes, subject to approval by the Assembly, after scrutiny in Assembly Committees, on a cross-community basis.”
That is implemented in law by section 20 of the Northern Ireland Act 1998. We therefore ask that amendment 17 be withdrawn.
Turning to amendment 18, the purpose of the Bill is to implement reforms to the institutions of Northern Ireland agreed in the New Decade, New Approach deal, not to use the ministerial code of conduct as a means to instruct Ministers to implement future deals. I appreciate the optimism of the hon. Member for Belfast South in seeking to legislate for future potential deals—or perhaps pessimism that they might be required—but I do not think that it would be appropriate to use the ministerial code of conduct. Should we need to revisit the code in the future, we should do so then. I therefore ask that amendment 18 be withdrawn.
Turning to amendment 19, although we acknowledge the importance of the Executive producing strengthened drafts of their relevant codes, as is set out in annex A to part 2 of the NDNA deal, that is an action for the Executive. We therefore do not think that it is appropriate at this moment for Westminster to legislate on it. It is for the Executive to agree to the amendments to relevant codes and, where appropriate, they must be agreed by the Assembly. It is not for this Parliament to make those changes. The hon. Lady will be aware that the Assembly has recently legislated in respect of some of these matters in the Functioning of Government (Miscellaneous Provisions) Act (Northern Ireland) 2021. That is the appropriate forum for such provision to be made.
Turning to amendment 6, as I have mentioned we are here to amend the ministerial code of conduct in line with requests received from the Executive and approved by the Office of the First Minister and Deputy First Minister. I acknowledge the concerns that the hon. Member for North Down raised about the process to secure Executive discussions on specific issues, and the points that the hon. Member for Belfast East made about the importance of having discussions behind the scenes about them. Ultimately, though, parties did not agree to address that as part of the NDNA deal, and it is not for Westminster to try to go beyond the carefully agreed package of reforms in the Bill.
The Bill is not, of course, the only or final means through which reform to the governance of the institutions of Northern Ireland can be delivered, but we will be guided by the needs and requests of the Executive. Should there be further consensus from the parties that they would like to revise the issue of alternative vetoes, we stand ready to support that, but I say to the hon. Member for North Down that that is not part of the deal that we are in the process of implementing. I therefore urge him to withdraw amendment 6.
The Chair
As the Opposition do not wish to press amendments 4 or 3, I call Louise Haigh to withdraw amendment 4.
Louise Haigh
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Claire Hanna
I beg to move amendment 15, in clause 4, page 6, line 11, at end insert—
“(3) If an investigation by the Commissioner for Standards finds that a Minister has breached the Ministerial Code of Conduct by engaging in harassment, bullying or inappropriate or discriminatory behaviour, then the Minister shall be deemed to have resigned their ministerial post at midnight on the day of the report’s official publication, unless they have resigned before this time.”
This amendment would ensure that if the Commissioner for Standards found that a Minister had engaged in harassment, bullying or inappropriate or discriminatory behaviour, in breach of the Ministerial Code of Conduct, then the Minister would be deemed to have resigned.
The Chair
With this it will be convenient to discuss amendment 16, in clause 4, page 6, line 11, at end insert—
“(3) Ministers shall cooperate with any relevant investigation by the Commissioner for Standards, give due respect to the findings of any report by the Commissioner in respect of themselves or their Special Advisers and responsibly reflect on the findings of other reports by the Commissioner in order to enable them to duly comply with the obligations of their Pledge of Office, the Ministerial Code of Conduct and/or related rules or codes.”
This amendment would ensure that Ministers cooperate with any investigation and give due regard to existing standards including reports from the Commissioner for Standards.
Claire Hanna
These amendments are part of the same package. Essentially, amendment 15 would ensure that if the Commissioner for Standards found that a Minister had engaged in harassment, bullying or inappropriate or discriminatory behaviour—
Claire Hanna
Certainly, Mr Stringer. In that case, the Minister would be deemed to have resigned. Amendment 16 would ensure that Ministers co-operated with any investigation and gave due regard to existing standards, including reports from the Commissioner for Standards. The Minister has made an argument, about legislating for the ministerial code of conduct within the Assembly, that I think has the broad support of this Committee, so I will be happy to withdraw the amendment.
Mr Walker
I am grateful for the hon. Lady’s indication that she is prepared to withdraw the amendment. I will just offer a little further explanation. I understand the intent behind the amendment and agree that there should be a fair system of checks and balances through which to hold Ministers accountable. Provision for that already exists in section 30 of the Northern Ireland Act 1998: if the Assembly resolves that a Minister or junior Minister no longer enjoys the confidence of the Assembly, or the Secretary of State is of the opinion that such a resolution should be considered, the Minister can be excluded from holding office for a period of not less than three months and not more than 12 months. As that provision already exists, I ask the hon. Lady, in addition to making the points that she has made, to withdraw the amendment.
Claire Hanna
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 4 ordered to stand part of the Bill.
Clause 5
Petitions of concern
Stephen Farry
I beg to move amendment 7, in clause 5, page 7, line 12, leave out from “or” to end of subsection.
If appropriate, I will also address the other amendments in my name to this clause in relation to the petition of concern. The petition of concern is something that my party and, indeed, many others have been—
The Chair
Order. This debate is specifically on amendment 7. We will come later to amendment 11, and we will discuss amendment 12 with amendment 11. This debate is just on amendment 7.
Stephen Farry
I apologise, Mr Stringer. I will focus exclusively on amendment 7. My party has been very keen to see the petition of concern amended. Our views and, indeed, those of many others on this issue are very clear. In some senses, it would be almost logical for us to try to make the signing of a petition of concern as difficult as possible. However, I was very struck by evidence that we received orally last week and also in writing from the Speaker of the Assembly. Concern was expressed that if the proposal for Deputy Speakers not to be able to sign a petition of concern were put into law, that might well deter people from coming forward to become a Deputy Speaker in the Northern Ireland Assembly. It is worth referencing the fact that the way Deputy Speakers operate there is somewhat different from the practice at Westminster, in that they continue to have a political role.
I should say that my party does not have at present a Member of the Assembly who is a Deputy Speaker, and nor do we intend to seek any of those offices in the future, so I may be speaking from a position of a certain objectivity in this regard. I do think it is worth the Committee’s considering whether what was a sincere commitment made in New Decade, New Approach—I accept that it is in black and white in that document—may have, in the cold light of day, some unintended consequence and therefore that there may be some scope for reconsideration. I would be happy to hear the views of other Members in that regard.
Gavin Robinson
I just want to give my reflections on the evidence that we heard from the Speaker of the Northern Ireland Assembly. I do not agree that there is a chilling effect associated with the agreement reached––New Decade, New Approach–that would have a material impact on parties’ willingness to provide a Deputy Speaker for the Assembly. I would go further and say that our Deputy Speakers are not the same as Deputy Speakers here. Neither is our Speaker. Our Speaker in Northern Ireland does not resign from their political party. When they seek re-election, they do so as a member of a political party.
The element that I do not think the Speaker reflected on appropriately in his evidence last week is that, as each of the four parties provides a Speaker and three Deputy Speakers—one from each of the four parties—the consequence of assuming that office and so being unable to sign a petition of concern applies to the four largest parties. Each is supplying somebody and each takes the consequence. In that sense, what was agreed in New Decade, New Approach is fairer than one party losing a signatory from a petition of concern because they assume the position of Speaker, so I take quite a different view from that of the Speaker of the Northern Ireland Assembly and I do not believe that the fears that he outlined are merited.
Mr Walker
The New Decade, New Approach deal was explicit that the Speaker and three Deputy Speakers shall not sign a petition. I therefore question why we would seek to amend the deal, which delivers on a key concern of the party of the hon. Member for North Down during the negotiations: that a petition of concern should be used only in rare situations.
I acknowledge the concerns that were raised by the Speaker, but as we have just heard, there are different views on their strength and there is the fact that four out of the five major parties in the Assembly are represented in the speakership or deputy speakership. There is a balance in its impact in that regard. I have offered a follow-up conversation between officials at the Northern Ireland Office and the Speaker’s officials to look into the matter further, but I cannot at this moment support an amendment because we are not aware of how real a risk this poses. We have heard divergent views on that. The Government are willing to return to the issue after further engagement with the Speaker, but for the time being I ask that the amendment be withdrawn.
Stephen Farry
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Claire Hanna
I beg to move amendment 11, in clause 5, page 7, line 12, at end insert—
‘(5A) When a petition of concern is lodged and confirmed against a measure, proposal or a decision by a Minister, Department or the Executive (“the matter”), the Assembly shall appoint a special committee to examine and report on whether the matter is in conformity with equality and human rights requirements, including the European Convention on Human Rights and any Bill of Rights for Northern Ireland.
(5B) Consistent with paragraphs 11, 12 and 13 of Strand One of the Belfast Agreement, a committee as provided for under Section 13(3) may also be appointed at the request of the Executive Committee, a Northern Ireland Minister or relevant Assembly Committee.
(5C) A committee appointed under this section—
(a) shall have the powers to call people and papers to assist in its consideration; and
(b) shall take evidence from the Equality Commission for Northern Ireland and the Northern Ireland Human Rights Commission.
(5D) A committee appointed under this section shall—
(a) report in terms that reflect evidence regarding human rights and equality assessments relating to the matter; and
(b) identify relevant clarification, adjustments and amendments (in the case of legislation) and/or other assurances which would address the stated concerns.
(5E) The Assembly shall consider the report of any committee appointed under this section and determine the matter in accordance with the requirements for cross-community support.
(5F) In relation to any specific petition of concern or request under subsection (5B), the Assembly may decide, with cross-community support, that the procedure in subsections (5A) and (5C) shall not apply.”
This amendment provides for a petition of concern to lead to a special procedure, described in paragraphs 11-13 of Strand One of the Belfast Agreement, whereby a special committee shall consider the stated concern(s) relating to equality requirements and/or human rights. Such a special committee could also be appointed at the request of the Executive Committee, a Northern Ireland Minister or relevant Assembly Committee.
The Chair
With this it will be convenient to discuss amendment 12 in clause 5, page 7, line 27, at end insert—
“(ca) specify the size, timescale and terms of reference for such a committee;
(cb) specify procedure(s) to allow for subsection (5E).”
This amendment is consequential on Amendment 11 and would further clarify how standing orders should make due provision for the working terms for the sort of special committee/procedure in respect of stated human rights or equality concerns as outlined in paragraphs 11-13 of Strand One of the Good Friday Agreement.
Claire Hanna
While we welcome minor amendments to the petition of concern to make it a little more difficult to table one, that does not improve how the POC works or restore it to its intended purposes. Amendments 11 and 12 seek to do that by restoring some of the Belfast agreement’s factory settings, as it were, and reinserting the special procedure described in paragraphs 11 to 13 of strand one, whereby a special committee should examine the rationale and viability of a petition of concern so that it is used as a mechanism to protect minority rights and not, as has been practised during the previous mandate, to thwart them. Amendment 11 would restore that original intent, which has not been adequately used. Amendment 12 enables that by specifying how such a committee could be established at the request of either the Assembly Executive Committee, a Minister or a relevant Committee.
Gavin Robinson
I am not doing very well on my commitment at the start. I want to push back politely on the notion of factory reset, and that we are getting back to the original intent of the provision. That is not agreed. Going through last week’s evidence, it is fair to say that there are those who were involved in the process in 1998 who are now trying to retrofit and read into the 1998 agreement what they hoped to attain or achieve at that stage, and did not.
Mr Walker
I was very interested to hear the hon. Member for Belfast South use the term “restore factory settings”. It is a good technological phrase with which we are all familiar. The issue is that the factory settings lie under what is there and are available to return to at all times. In this case, there is already such a provision for a committee in section 13(3)(a) of the Northern Ireland Act 1998. The Bill requires the Assembly to implement Standing Orders to make provisions for referral to that committee, in the same terms as exist in section 42 of the Northern Ireland 1998.
This is a matter for the Assembly’s Procedure Committee to implement through changes to Standing Orders. The parties did not reach agreement on this in New Decade, New Approach; the hon. Member for Belfast East made that point as well. I urge the hon. Member for Belfast South to understand that her party colleagues in the Assembly can take forward the issue of those changes to Standing Orders, but on the basis that the provision that she is calling for already exists in law, I ask that she withdraw the amendment and consequential amendments.
Claire Hanna
I acknowledge that they exist, but they are not enacted and, when I questioned the Speaker at the evidence session last week, it was not clear why they have not been established. While I understand where the hon. Member for Belfast East is coming from, there is a creeping narrative that the attempt to thwart the vetoholic nature of some Ministers is somehow pulling up a ladder as demographic change happens in Northern Ireland and in the Assembly. That is not the case. It is due to public concerns about the use of that veto on issues that have nothing to do with the in-built traditional divisions, for example around equality for lesbian and gay people, which is the most prominent use of that provision.
I acknowledge the Minister’s comments about the provisions already being there, but they are not being used. I agree with the hon. Member for Belfast East when he said that if these provisions have to be used it is because power sharing is not working, but I would argue that unfortunately the last few years would indicate that in many cases that is not working.
Sir Jonathan Stephens told us last week that no amount of regulation will push parties to power share if that is not what they want to do. Until we have parties that share power appropriately and use power in the interest of everybody, because they think it is in everybody’s interest and not because the law tells them to do so, then unfortunately we need these amendments. On the basis that the Committee is in agreement with the Minister in terms of the Assembly’s legislative ability, then I am happy to beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
The Chair
With this it will be convenient to discuss the following:
Government amendment 2.
Amendment 8, in clause 5, page 7, line 19, at end insert—
“(aa) make provision for the minimum period under (a) to be reduced in prescribed circumstances to be determined by the Assembly;”.
Mr Walker
Clause 5 reforms the petition of concern mechanism to reduce its use and return it to its intended purpose, as set out under the Good Friday agreement, as a safeguard to ensure that all sections of the community can participate and work together successfully in the operation of the Northern Ireland institutions, that all sections of the community are protected when the Assembly legislates, and to prevent one party from blocking measures or business. The Government have tabled two technical amendments to correct an unintended consequence in drafting.
The Bill, as introduced, required that Standing Orders should specify a minimum period between when a vote is due to take place and when the petition in connection with it must be tabled: at least a day would be required. That was not the intention. Currently, the Standing Orders enable the Speaker to waive notice of the petition in exceptional circumstances. The amendment will enable Standing Orders to continue to include such provision, if that is what the Assembly agrees. The amendments ensure that there need not be any change to the timings for tabling a petition of concern.
While the Government have committed to reforming the petition of concern mechanism to return it to its intended purposes, we are not trying to legislate beyond what was agreed in the NDNA agreement. I can therefore reassure the Committee that the changes are purely technical and aim to ensure that we do not inadvertently alter things from what was agreed between the parties.
Stephen Farry
I want to refer to my amendment in this grouping that probably goes beyond what the Government are trying to rectify with their technical amendments. It goes back to some of the evidence we received from the Speaker of the Assembly. The New Decade, New Approach agreement talks about a 14-day timeframe in relation to the processing of petitions of concern. I welcome that and want to see that become normal practice in what I hope will be the very rare event of a petition of concern being tabled.
It is also important that we are conscious that there may well be some extreme situations in which the 14-day window becomes somewhat of a straitjacket. It may be in relation to some sort of statutory instrument or legal deadline or some other emergency in trying to take something forward. In parallel with that, there is probably a need for petitioners to have the right to withdraw a petition of concern rather than its sitting on the books for 14 days, particularly in the event that they are convinced there is no need for the petition to continue or they have changed their mind. It is essentially a means of trying to ensure there is some flexibility. That is best addressed by giving the Assembly the scope within its own Standing Orders to address the issue.
I am not minded to press my amendment today. I can see the Minister is nodding at some of the comments I am making and I welcome that occasionally. Can the Government give an assurance that they recognise that there is a genuine issue here? The Government might wish to reflect on what I have said today and, indeed, more importantly what the Speaker of the Assembly has said and come back with a Government amendment on Report.
Mr Walker
I am grateful to the hon. Member, particularly for the way he has presented this. I recognise the concerns, but it is important to recognise that we heard a number of positive comments about the 14-day cooling-off period envisaged in the legislation. I draw his attention to the fact that what we have tried to do with the Government amendments is return to what was specifically agreed in the NDNA agreement. I agree with the hon. Gentleman’s comment that this is something the Assembly should be able to address through Standing Orders, and we encourage them to do so. We do not think it is necessary to put in the Bill what should be in the Standing Orders of the Assembly, but I see no reason, if the petitioners who have signed the petition of concern agree to its being withdrawn, that it cannot be made possible to withdraw it at any stage during the 14-day period. That is an eminently sensible approach for them to take. Our view is that this is not the place to deal with it because that should rightly be for the Assembly and its Committee on Procedures to agree on.
Stephen Farry
I am grateful to the Minister for giving way and also for his comments. For the purpose of the record, can he assure me that there is nothing in the Bill today that would inhibit the Northern Ireland Assembly through Standing Orders from making its own decisions in relation to how it would manage a petition of concern around timeframes?
Gavin Robinson
I think this is a constructive proposal. We have to be mindful of the concern that was raised last week in evidence: that Assembly authorities might be slow to consent or assent to such a restriction on the 14-day timescale should it not be elucidated very clearly—not just here, but on Report and so on. If we cannot find a form of words that is acceptable on Report, the exchange that has just been had needs to be expanded on and very clearly delivered on Report in Hansard. There should be no doubt or equivocation among the Assembly authorities that, should petitioners decide that the 14 days are no longer required, or that the issue is of such urgency or significance that it needs to be resolved within that timeframe, that flexibility is permissible.
Mr Walker
I absolutely take note of the hon. Gentleman’s comments, and agree with his intent. I am happy to come back to that issue on Report, as appropriate.
Amendment 1 agreed to.
Amendment made: 2, in clause 5, page 7, line 17, leave out from beginning to first “the” on line 18 and insert “the presentation of the petition and the time when”.—(Robin Walker.)
This amendment means that the standing orders may specify a minimum period of notice of less than a day for a petition of concern.
Stephen Farry
I beg to move amendment 9, in clause 5, page 7, line 31, at end insert—
“(e) make provision to allow petitioners to withdraw a petition of concern at any stage in the process.”
The amendment relates to the wider package of comments I made earlier. I will not press it to a vote today. I just flag it up as part of that wider discussion and hope that the Government reflect on it and, indeed, as the hon. Member for Belfast East said, speak further to this general issue on Report.
Gavin Robinson
When you see the physiology of that amendment, it is clean; it does exactly what we have described. We may have to consider whether it is appropriate for us to do this through the Bill or whether it can be reflected through the Standing Orders of the Assembly, but it is exactly what the intent behind amendment 8 was; amendment 9 does it very cleanly. I am positive about the spirit and the text of the amendment, but it may not be pressed to a vote this morning.
Mr Walker
I am grateful for the brief discussion we have had on this. As the Committee will know, the Bill makes provision for a 14-day consideration period after a petition has been presented by 30 Members. The 14-day consideration period was part of the NDNA deal on the basis of which the five parties entered into the Executive. The consideration period provides MLAs with a vital opportunity to lobby those who are petitioning their item of business, persuade them of its merits and prevent it from going to a cross-party vote.
The question here is where this is most appropriately dealt with. We all broadly agree with the principle that petitions of concern should be able to be withdrawn. However, putting that on the face of the Bill and making it explicit could—we were warned about this in evidence—have the effect of actually making petitions of concern more common. I think Gareth McGrath commented to that effect. We think this would be better dealt with through the Standing Orders of the Assembly, and I am very happy to reiterate the commitment I made on the previous item—to discuss this further on Report if necessary.
Stephen Farry
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Question proposed, That the clause stand part of the Bill.
Mr Walker
I thank the Committee for the detail in which it has scrutinised this measure. As I said before, the purpose of this clause is to reform petitions of concern and return them to their intended purpose.
The UK Government are not seeking to legislate beyond what was agreed in the NDNA deal. That is exemplified by the amendments I have introduced today, which correct a technical error relating to the time period in which the petition of concern may be tabled. The Bill requires that petitions be signed and confirmed 14 days later by at least 30 MLAs from two or more political parties to prevent one party from being able to block measures or business that would otherwise have cross-community consensus. The changes and commitments from the Northern Ireland parties aim to reduce the use of the mechanism to only the most exceptional circumstances and as a last resort, having exhausted every other available mechanism.
Question put and agreed to.
Clause 5, as amended, accordingly ordered to stand part of the Bill.
Clause 6
Repeal of spent provisions
Question proposed, That the clause stand part of the Bill.
Mr Walker
I can be very brief on this one. Clause 6 repeals the Northern Ireland Executive (Formation and Exercise of Functions) Act 2018, and sections 1 to 7 of the Northern Ireland (Executive Formation etc) Act 2019.
Question put and agreed to.
Clause 6 accordingly ordered to stand part of the Bill.
Clause 7
Extent
Question proposed, That the clause stand part of the Bill.
Mr Walker
The Bill extends to the United Kingdom, but applies only in Northern Ireland. It deals only with excepted matters under Northern Ireland’s devolution settlement, and does not alter the legislative functions of the Northern Ireland Assembly or the Executive functions of Northern Ireland Ministers or Departments. With that assurance, I commend the clause to the Committee.
Question put and agreed to.
Clause 7 accordingly ordered to stand part of the Bill.
Clause 8
Commencement
Stephen Farry
I beg to move amendment 5, in clause 8, page 8, line 8, leave out “at the end of the period of two months beginning with” and insert “on”.
Stephen Farry
Everyone appreciates that politics in Northern Ireland is extremely fluid—that is probably a massive understatement. We never know what political crisis is around the corner.
This is an excellent Bill, and I am keen to see it implemented as quickly as possible following Royal Assent. I am not conscious of what the reason is for the two-month delay in commencement after Royal Assent, so I would be very grateful if the Minister outlined the Government’s thinking in that regard. I am conscious of the laws of unintended consequences, and while this otherwise excellent piece of legislation is sitting on the statute book, about to be implemented, a situation could emerge to which the implementation of one or another aspect of the Bill was very pertinent. We could have the bizarre situation where these good measures could not be deployed because of the two-month delay. Obviously, New Decade, New Approach was not specific about commencement dates, so it is in the gift of this Committee and subsequently the Chamber to look at them further.
Louise Haigh
I rise briefly to speak in support of the amendment in my name and that of the hon. Member for North Down. Recent events could scarcely have proven more how important this legislation is. Because it is clearly the will of this Committee and the House to support the measures in this Bill, it is important that they commence as soon as possible. It is baffling that it has taken 18 months to get here. As I said on Second Reading, covid is not a good enough excuse for why it has taken this long. If it progresses as quickly as it has so far, it will still not be in place until Christmas, which would be two years since NDNA was signed. That is just not good enough, as that will be approaching the end of the mandate for the May Assembly elections. We have made it very clear that we are prepared to do anything we can to help speed up the passage of the Bill and would welcome movement from the Minister on the commencement date.
Gavin Robinson
There are no surprises in this Bill to the parties of Northern Ireland. There is no period of time that is required to get ready, implement or reflect the changes brought forward in the Bill. The shadow Secretary of State has clearly outlined that the agreement was reached 18 months ago. But for coronavirus—whether we accept it as an excuse or not—the provisions in the Bill would be in place and we would be able to fall back on them if they were required.
I am not sure what the rationale is for two additional months beyond Royal Assent. A strong argument has already been put forward by the hon. Member for North Down and the shadow Secretary of State. Subject to a compelling reason why an additional two months are required, there is merit in curtailing that timescale.
Mr Walker
Committee members will know that it is usual practice and parliamentary procedure to allow two months before provisions come into effect following Royal Assent. The type of preparatory measures we might be referring to in this case could be the very changes to Assembly Standing Orders that we have debated. Nevertheless, I recognise the strength of feeling among Committee members.
The hon. Member for Sheffield, Heeley talked about recent events in Northern Ireland. The Bill was not brought forward as a response to recent events. It was brought forward as a response to NDNA and what was agreed between the parties. In terms of the time that has elapsed, she will know that Parliament has been extremely occupied with covid legislation, thanks to the pandemic, but we made a point of introducing this Bill early in this Session. We have also given the time for the Bill not to be rushed through as emergency legislation, but to be subject to full parliamentary scrutiny, which has been welcomed by all sides. That is good news and is all too rare an occurrence for a Northern Ireland Bill.
We are not minded to accept the amendment, but should the political context in Northern Ireland and an early commencement be beneficial for Executive stability, we are content for it to be considered in the other place. I urge the hon. Gentleman to withdraw the amendment for the time being and allow the process of parliamentary scrutiny to continue. Should the progress that we have seen today be repeated in the other place, and the level of cross-party support that we are seeing at this stage, I see no reason why they could not allow for an amendment of this nature to proceed.
Stephen Farry
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 8 ordered to stand part of the Bill.
Clause 9 ordered to stand part of the Bill.
New Clause 1
Report on implementation of The New Decade, New Approach Deal
“(1) The Secretary of State must lay a report before each House of Parliament and before the Northern Ireland Assembly no later than six months after the date on which this Act is passed.
(2) The report under subsection (1) must set out —
(a) whether, and how, each provision of this Act has been implemented, and
(b) what plans the Government has to bring forward further legislative proposals to implement the remainder of The New Decade, New Approach Deal.”. —(Louise Haigh.)
This new clause requires the Government to report on what parts of The New Decade, New Approach Deal have been achieved under this Act, and what plans the Government has to implement the remainder of the deal.
Brought up, and read the First time.
Louise Haigh
I beg to move, That the clause be read a Second time.
I thank you, Mr Stringer, for chairing us through the speedy but proper scrutiny of the Bill this morning.
On Second Reading and this morning, the importance of all political parties abiding by commitments that are made in forming the Northern Ireland Assembly and Executive has been discussed at length. The Government have made that very clear on important elements of NDNA. If it is true for the Northern Ireland political parties, it must be true for the UK Government as well, as one of the co-signatories, just as it holds true for the Irish Government.
The provisions of annex A of NDNA outline a financial commitment that the Government were prepared to provide about 18 months ago. Much of that has still not been delivered, by the Government’s own admission—£1.5 billion of the funding set aside has yet to be delivered. I know the Minister will have figures on how much has been given for covid, but it still remains that much was promised to be delivered on public policy to support the mandate set out in NDNA.
The standstill budget for Northern Ireland when covid support is removed means the 7,500 police officers promised is little more than a pipe dream. Indeed, the Police Service of Northern Ireland has confirmed that it will cut numbers if that budget remains at a standstill this year. That also apples to the investment in transforming public services, such as the health service, which has been repeatedly mentioned because of the appalling waiting times in Northern Ireland, and infrastructure delivery.
The Prime Minster, who could not build a bridge when he was Mayor of London from one side of the Thames to the other, seems more concerned with one that will not be built from Scotland to Belfast, than delivering commitments the UK made just 18 months ago on urgent infrastructure requirements. The Stormont House agreement, recommitted to New Decade, New Approach, seems further way than ever, with the Government unilaterally rewriting it in briefings to newspapers.
The establishment of a Northern Ireland hub in London is nowhere to be seen, neither is the connected classroom initiative. Little wonder that the NDNA review panel has met just twice, as the Minster confirmed on Second reading, when it was supposed to meet quarterly. The Government would clearly rather not review their progress on their commitments.
The new clause is important because it requires the Government to report on which aspects of NDNA have yet to be delivered, especially when there is little time left of this mandate. It would provide an important parliamentary mechanism for Members across the House to keep to their side of the bargain, just as we ask all Northern Ireland political parties to keep to theirs.
Mr Walker
Before I comment on the new clause, I want to correct an error I made in my closing speech on Second Reading on this issue, when I stated that the Government have released £556 million of £2 billion-worth of funding agreed in the NDNA deal. I want to put on record that to date, the Government have released over £700 million of the £2 billion funding agreed over a five-year period.
The Government made good progress on the delivery of commitments under the New Decade, New Approach deal. We provided support for the resolution of the nurses’ pay dispute by securing the advance drawdown of funding. The revision of immigration rules governing how people in Northern Ireland bring family members to the UK took effect from August 2020. The appointment of a Veterans Commissioner took effect in September 2020. The launch of the programme for the centenary of Northern Ireland in 2021, supported by £1 million from the shared history fund, and regulations to bring Union flag-flying days in line with guidance in the rest of the UK, came into force in December 2020.
I am grateful to the Northern Ireland Affairs Committee, which has been scrutinising NDNA delivery closely, and we continue to welcome that. In “New Decade, New Approach Agreement: Government Response to the Committee’s Second Report of Session 2019-21”, the Government were supportive of the Committee’s recommendations to produce an annual report and offered to explore this further with the joint board. The Secretary of State also offered to attend a one-off oral evidence session before the Committee to discuss implementation of the New Decade, New Approach deal.
Given the commitments the Government have already made to bring forward reports and offer further discussions on implementation, as well as the existing scrutiny function in NIAC, we do not consider it necessary at this stage to lay a further report on the NDNA agreement. I ask the hon. Lady to withdraw her amendment.
Louise Haigh
Will the Minister confirm that £1.3 billion has still yet to be made available to the Northern Ireland Executive to fulfil the Government’s NDNA commitments? Can he confirm when the annual report will be published?
Mr Walker
On the first point, those commitments were made over a period of years. Much of the financial commitment has been front-loaded, and is why £700 million has already been brought forward in the first year. It is certainly the case that the commitments from NDNA will continue over that period of years. On the second point, I cannot give the hon. Lady a specific date, but am happy to write to her when that has been agreed with NIAC.
Louise Haigh
On that basis, I beg to ask leave to withdraw the motion.
Clause, by leave, withdrawn.
New Clause 2
Appointment of First Minister and Deputy First Minister
“(1) The Northern Ireland Act 1998 is amended as follows.
(2) In section 16A (Appointment of First Minister, deputy First Minister and Northern Ireland Ministers following Assembly election), in subsection 4, omit the words “of the largest political designation“.
(3) For subsection (5) of that section, substitute—
“(5) The nominating officer of the second largest political party shall nominate a member of the Assembly to be the deputy First Minister.”.
(4) In section 16(B) (Vacancies in the office of First Minister or deputy First Minister), in subsection (4), omit the words “of the largest political designation“.
(5) For subsection (5) of that section, substitute—
“(5) The nominating officer of the second largest political party shall nominate a member of the Assembly to be the deputy First Minister.”.
(6) In section 16C (Sections 16A and 16B: supplementary), omit subsection (6).”—(Stephen Farry.)
Brought up, and read the First time.
The Chair
With this it will be convenient to discuss new clause 3—Appointment of First Ministers—
“(1) The Northern Ireland Act 1998 is amended as follows.
(2) In subsection 16A (appointment of Ministers following Assembly election), leave out subsections (4) to (7) and subsection (9), and insert after subsection (3)—
“(3ZA) Each candidate for the office of First Minister or deputy First Minister, or jointly First Ministers, must stand for election jointly with a candidate for the other office.
(3ZB) Two candidates standing jointly shall not be elected to the two offices without one or more of the following measures of representational support—
(a) the support of a majority of members, a majority of designated Nationalists and a majority of Unionists; or
(b) the support of 60 per cent of members, 40 per cent of designated Nationalists and 40 per cent of designated Unionists; or
(c) the support of two thirds of members.
(3ZC) The First Minister and the deputy First Minister—
(a) shall not take up office until each of them has affirmed the terms of the pledge of office; and
(b) subject to the provisions of this Part, shall hold office until the conclusion of the next election for First Ministers.”.
(3) In subsection (3)(a) the reference to “subsections (4) to (7)” shall be replaced by a reference to “subsections (3ZA) to (3ZC)”.”.
This new clause would restore the Good Friday Agreement provision for joint election by the Assembly of the joint First Ministers.
Stephen Farry
The issue is essentially about being proactive and the Government and Parliament recognising changes in Northern Ireland, recognising where problems may well arise in the near future and acting to get ahead of those, as opposed to responding to what may well become a crisis in the future.
At present, there is a lot of concern about the precise approach to the determination of the First Minister and Deputy First Minister in Northern Ireland, which has been through quite a number of changes over the years. Obviously, new clause 3, tabled in the names of my friends in the SDLP, potentially takes us back to the original wording of the Good Friday agreement and the Northern Ireland Act 1998, which was of course changed by the St Andrews agreement and the subsequent legislation.
We now have a situation where, under law, the determination of First Minister and Deputy First Minister is closely linked to designations. In effect, at present, the largest party in the largest designation chooses the First Minister and the largest party in the second largest designation chooses the Deputy First Minister, with the proviso—slipped into the legislation in 2007—that when that does not apply to the largest party overall, that largest party takes the First Minister role.
This has become, shall we say, the focal point for a lot of polarisation—even more polarisation in what is already a polarised society—and has led to elections becoming focused around who will become the largest party, rather than recognising First Minister and Deputy First Minister as a joint office, and that in practice it does not matter terribly much which party has the First Minister and which has the Deputy First Minister. None the less, this is part of the narrative of our politics and acts to squeeze out the consideration of other issues during election time.
Beyond that, there is a specific issue. The system of appointing the First Minister and Deputy First Minister is very much linked to the designation system in the Assembly. We do not believe that that was ever legitimate, but it was put in in 1998. Not everyone in Northern Ireland is a Unionist or a nationalist, and not every elected representative is a Unionist or nationalist; people wanted to see themselves in a different light. The situation has changed dramatically over the past 20 years, both in terms of the number of elected representatives who do not identify as Unionist or nationalist, and—perhaps even more significantly—within the wider public. Our people, particularly our young people, have moved away from traditional labels.
It is important that our institutions keep up with the changes and evolution in society. We could see a situation in the near future where a party—I cannot think of one that springs to mind at present—may well emerge as one of the largest two political parties in Northern Ireland, but the current formation of the rules around the appointment of the First Minister and Deputy First Minister, and in particular the link to designations, would act to prevent that from happening. I think that would create a crisis of legitimacy, in terms of the political institutions.
New clause 2 is designed to reflect the changing demographics within Northern Ireland, to move away from the 1998 situation, in which perhaps only a small number of MLAs were neither Unionist nor nationalist, to what may be a very different situation after the next Assembly election. It would also avoid, therefore, what could become a major political crisis of legitimacy, in which the Government would have to intervene to rectify in due course—perhaps with some period of the institutions not being operational. That is why it is important that the Government are proactive: not in a massively speculative way, of course, but by dealing with realistic changes that may be just around the corner in Northern Ireland’s society.
Claire Hanna
The previous amendments to the Bill tabled by SDLP Members were probably probing amendments, but we believe that new clause 3 is fundamental and fairly existential for the Assembly. It is worth saying that for the last 20 years the SDLP has advocated adherence to the Good Friday agreement and the mechanisms and safeguards designed in good faith during that process.
The reason why we have protected some of the changes that happened at St Andrews is that the agreement was designed in good faith and endorsed by a very large number of the people north and south. Subsequent changes have been made by politicians and for politicians in their own interests, frankly—and, we believe, over the heads and to the detriment of the electorate.
The joint election of First Ministers was a centrepiece of strand 1. In recent months, we have heard much debate about the concept of parallel consent, but this is really the clearest example of parallel consent as designed in the Good Friday agreement. In theory and in practice, in those early years the First Ministers would have been jointly elected by all the Assembly Members and in practice by a majority in total and a majority of each designation at the time.
The current distorted process, arrived at at St Andrews, has essentially privatised the election to the two larger parties. That was done to spare the blushes of those parties so that they did not have to endorse one another in the voting lobbies, but that has had knock-on effects on the joint character of the office. Leadership comes from the top, and that has an effect on the character of the Assembly and of political conversation more widely. The current process has also undermined the accountability mechanisms that had been designed for the Assembly and removed the primacy of the Assembly as an authority to hold Ministers to account.
The flaws in that approach become very clear in December 2016, when the Assembly was limited in its ability to hold to account Ministers who had presided over a substantial and fairly catastrophic example of poor governance. Restoring that joint election, as we have outlined in new clause 3, would restore some primacy to the Assembly as the key source of devolved authority. It would also facilitate the cross-party working and cross-party mandates, allegiances and alliances envisaged in 1998.
The St Andrews in this Bill is about sustainability and the new clause is very much in that spirit. The St Andrews change has also facilitated the ransom tactics that we saw most acutely in the 2017-to-2020 stand-off, but that we have also seen in recent weeks as well. The fact that the nominations are private decisions for those parties allows them to withhold a First Minister and therefore to withhold an Assembly. That prevents any potential emergence of a coalition of the willing, as might have come forward in the last three-year stand-off of MLAs from all parties. They wanted to get on with the job to which they were elected but, because of the privatisation of the First Minister’s nomination, had essentially been relegated to being bystanders and commentators with no power to implement a different mandate.
That change at St Andrews also has a ground-level impact, in that it has allowed parties to make every Assembly election a first-past-the-post race to be top dog. It effectively makes Assembly elections into many border polls; we have to race to become them’uns or us’uns as the biggest party and get the top job. That has sucked oxygen away from every other issue and prevented the emergence of a politics and discourse more about the everyday issues that affect people here.
Our new clause seeks to address those issues and would also formalise the joint and coequal nature of the offices in removing the word “Deputy”; the reality is that one First Minister cannot order paperclips without the say-so of the other First Minister. The “Deputy” and “First” mechanism undermines the joint nature of that office. The new clause is in the wider interests of this Bill, which is about sustainability, and would head off any potential existential crisis following a future election if the few hundred votes that separate those parties were to change and people in one were anxious about being deputy to the other.
The mechanisms that we have outlined would also go some way to address the issues discussed by the hon. Member for North Down and for which the SDLP has much sympathy. The designation system was designed and is in place to manage the traditional divides and the two communities, as was, and as has been spoken about, but it is a fair point that it is entrenching those communities, in which people are separated and divided out on that basis.
The mechanism that we have outlined in our new clause designs in other potential ways to ensure that the First Ministers have the support of sufficient numbers of the Assembly, through either majorities of each designation or, in essence, a form of qualified majority voting that would in practice ensure that those First Ministers were acceptable to different sides of the communities—different potential identities, but without negating the role and the vote of those who designate as others, which is a perfectly rational way to designate, whatever the constitutional outlook.
Mr Walker
I turn first to the new clause tabled by the hon. Member for North Down. As I have stated previously, the purpose of the Bill and the reason why we are in Committee today is to legislate for commitments made to support the institutions and to improve sustainability under the New Decade, New Approach deal. I commend the hon. Gentleman on his creativity in seeking to reform the mechanism through which to nominate a First Minister and a Deputy First Minister, but it is not something that I can support because it has not been agreed by the parties.
Of course, I know that the hon. Gentleman’s party may be looking at the polls and at the possibility of making gains in the next election, but it would not be appropriate for the UK Government to alter unilaterally the principles of power sharing so carefully negotiated as part of the Belfast/Good Friday agreement and later by the St Andrews agreement.
The new clause could have an adverse impact on the make-up of the Executive should the First and Deputy First Ministers arise from the same designation. If both the largest and the second largest parties were from the same designation, the Executive could not command cross-community support within the Assembly, which would lead to the instability of the political institutions in Northern Ireland. That is precisely what the Bill aims to avoid. I recognise that the hon. Gentleman might wish the issue to be addressed at another time. As our previous Speaker used to say regularly, that is a bridge that we might have to cross when we come to it, but we do not have any mandate to address it in this particular piece of legislation.
The hon. Member for Belfast South is looking to return the situation to how it stood before the St Andrews agreement. Her party has championed that position consistently. It is worthwhile for her to consider what power sharing should look like in the future, in particular as the political landscape in Northern Ireland evolves. That conversation might need to be had, but it would not be right for this Parliament to reverse unilaterally the approach agreed at St Andrews.
To reiterate a point that I have made previously, the purpose of the Bill is to legislate for commitments made under the NDNA deal. The Belfast/Good Friday agreement has continued to be built on since its historic agreement in 1998 through periods of political difficulty, resulting in the deal that we legislate for today—itself built on agreements such as St Andrews, which the hon. Lady is looking to reverse with her new clause.
The history of devolution in Northern Ireland has shown that the communities and politics are changing continually. Shortly after the Good Friday agreement was reached, there was a prolonged suspension of the institutions between 2002 and 2007. The period of suspension was longer than the institutions had been functioning following the Belfast/Good Friday agreement.
Devolution was restored in 2007, following the St Andrews agreement, which the hon. Lady wishes to reverse. That historic agreement led to a 10-year period of political continuity, between 2007 and 2017. As I stated, it would not be right for this Parliament to reverse unilaterally the approach agreed at St Andrews. I therefore urge that both the motions be withdrawn.
Stephen Farry
We may return to the matter on Report. For now, I beg to ask leave to withdraw the motion.
Clause, by leave, withdrawn.
New Clause 3
Appointment of First Ministers
‘(1) The Northern Ireland Act 1998 is amended as follows.
(2) In subsection 16A (appointment of Ministers following Assembly election), leave out subsections (4) to (7) and subsection (9), and insert after subsection (3)—
“(3ZA) Each candidate for the office of First Minister or deputy First Minister, or jointly First Ministers, must stand for election jointly with a candidate for the other office.
(3ZB) Two candidates standing jointly shall not be elected to the two offices without one or more of the following measures of representational support—
(a) the support of a majority of members, a majority of designated Nationalists and a majority of Unionists; or
(b) the support of 60 per cent of members, 40 per cent of designated Nationalists and 40 per cent of designated Unionists; or
(c) the support of two thirds of members.
(3ZC) The First Minister and the deputy First Minister—
(a) shall not take up office until each of them has affirmed the terms of the pledge of office; and
(b) subject to the provisions of this Part, shall hold office until the conclusion of the next election for First Ministers.”.
(3) In subsection (3)(a) the reference to “subsections (4) to (7)” shall be replaced by a reference to “subsections (3ZA) to (3ZC)”.’—(Claire Hanna.)
This new clause would restore the Good Friday Agreement provision for joint election by the Assembly of the joint First Ministers.
Brought up, and read the First time.
Question put, That the clause be read a Second time.
Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill (First sitting)
Tuesday 6th July 2021
(2 years, 9 months ago)
Public Bill CommitteesRead Full debate Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 View all Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 6 July 2021 - (6 Jul 2021)
The Chair
We are now sitting in public and the proceedings are being broadcast. Before we begin, I have a few preliminary announcements. Members will understand the need to respect social distancing guidance. In line with the Commission’s decision, face coverings should be worn in Committee unless Members are speaking or they are medically exempt. Hansard colleagues would be grateful if Members could email their speaking notes to hansardnotes@parliament.uk. Please switch electronic devices to silent. Tea and coffee are not allowed during sittings. Date Time Witness Tuesday 6 July Until no later than 10.30 am UK Finance Tuesday 6 July Until no later than 11:00 am The Chartered Institute of Credit Management Tuesday 6 July Until no later than 11:25 am Dr John Tribe, University of Liverpool Tuesday 6 July Until no later than 2:45 pm The Chartered Institute of Public Finance and Accountancy; The Institute of Revenues Rating and Valuation Tuesday 6 July Until no later than 3:15 pm Local Government Association Tuesday 6 July Until no later than 4:00 pm The Transparency Task Force Tuesday 6 July Until no later than 4:45 pm UKHospitality Tuesday 6 July Until no later than 5:15 pm R3
We will first consider the programme motion on the amendment paper. We will then consider a motion to enable the reporting of written evidence for publication and a motion to allow us to deliberate in private about our questions before the oral evidence session. In view of the time available, I really hope that we can take those matters forward without debate. I call the Minister to move the programme motion standing in his name, which was discussed yesterday by the programming sub-committee for the Bill.
Ordered,
That—
1. the Committee shall (in addition to its first meeting at 9.25 am on Tuesday 6 July)
meet—
(a) at 2.00 pm on Tuesday 6 July;
(b) at 11.30 am and 2.00 pm on Thursday 8 July.
2. the Committee shall hear oral evidence in accordance with the following Table:
3. the proceedings shall (so far as not previously concluded) be brought to a conclusion at 5.00 pm on Thursday 8 July.—(Luke Hall.)
Resolved,
That, subject to the discretion of the Chair, any written evidence received by the Committee shall be reported to the House for publication.—(Luke Hall.)
Resolved,
That, at this and any subsequent meeting at which oral evidence is to be heard, the Committee shall sit in private until the witnesses are admitted.—(Luke Hall.)
The Chair
We are now sitting in public again, and the proceedings are being broadcast. Before we start hearing from the witnesses, do any Members wish to make any declaration of interest in connection with the Bill?
Peter Grant (Glenrothes) (SNP)
One of the witnesses this afternoon is from the Chartered Institute of Public Finance and Accountancy. I am a member of that institute.
The Chair
Q
Stephen Pegge: Good morning, and thank you for the opportunity to come along today. My name is Stephen Pegge. I am managing director, commercial finance, at UK Finance. UK Finance is the trade association for finance and banking. We have around 300 members, many of whom provide services to companies, and we are involved more widely in supporting small and medium-sized enterprise policy.
The Chair
Q
Stephen Pegge: Yes. This is an important Bill, and one that certainly has the support of many in the business community, including lenders. I know that the consultation had widespread support. It does appear that closing this loophole should be beneficial in terms of the enforcement of good practice, the prevention of abuse and a certain degree of deterrence of the misuse of an important and useful facility that allows companies to be dissolved quickly and cheaply, where that is appropriate and justified, as an alternative to liquidation.
There have been instances over the years where companies have been dissolved with outstanding liabilities, as a result of creditors or those who are owed money. I should stress that it is not just a question of banks, but others who may be owed money and indeed consumers who have perhaps paid deposits on work that has not been done or who are unable to recover those funds, because there has been a deliberate attempt to avoid debts by seeking dissolution.
It is possible in current circumstances for action to be taken, but it can be time consuming and costly, and would usually involve restoring a company to the register if it has already been dissolved. The particular arrangements here will make it possible for the Insolvency Service to investigate directors where there is evidence of abuse, even in circumstances where the business is not insolvent, but instead has been dissolved. That is the loophole that the Bill is looking to close and one, as I say, that we would very much support being open.
The Chair
Thank you, Mr Pegge. We will now take questions from members of the Committee, if you would be so kind as to answer. The Opposition traditionally go first, so I call Jeff Smith.
Jeff Smith (Manchester, Withington) (Lab)
Q
Stephen Pegge: To put it in context, the Insolvency Service estimates that there is currently evidence of misconduct or misuse of dissolution process in only 1% of cases. Given that there are something like 500,000 dissolutions a year, that might amount to only about 5,000 cases. There is some evidence that it is a rising problem and, given that the average company that is dissolved might have a loan of say £200,000, even 5,000 cases could amount to a risk to creditors of up to £1 billion. It is significant in scale because of the large number of companies, even if it is not currently a high level of risk in proportionate terms. I would emphasise that the vast majority of businesses are honest and straightforward and are not abusing this scheme.
The other factor that members of the Committee may be interested in is that quite clearly over the last year, during the covid crisis, there have been a significant number of companies that have taken finance. Given that the Government, through the British Business Bank, have provided guarantees, there would be an impact on the taxpayer if those loans were not repaid and a claim for repayment were made. Again, that is relevant to consideration.
Seema Malhotra (Feltham and Heston) (Lab/Co-op)
Q
Stephen Pegge: Yes, we have seen instances of this practice being used to try and avoid liability under bounce back loans. Back in May 2020, UK Finance with the British Business Bank established the bounce bank loan fraud collaboration group. It involves attendees from the Cabinet Office; CIFAS, the UK fraud prevention service; the Treasury; BEIS; and the National Investigation Service—NATIS. The aim is for intelligence to be shared, good practice to be developed and a threat log to be maintained and fed into the National Crime Agency and the National Economic Crime Centre. In fact, this was one of the practices which had been identified through that and has led to some efforts more recently to try to intervene and intercept these cases of dissolved companies involving Companies House and BEIS.
In the meantime, it is always possible that these cases may well have got through and there is some evidence—again, reported by the Insolvency Service—that there could be around 2,000 such cases which are dissolved and where currently the powers to investigate do not exist, so it is a real problem. If it were to become a more popular route for fraud, while there are mechanisms to deal with it and creditors can object when they get notice through alerts when these situations are gazetted, unscrupulous individuals can still get through and it is important that it is closed as a loophole.
As regards the resources of the Insolvency Service, we have all been conscious that, while the number of insolvencies has been low during a period of suspension and the generous support that has been provided to businesses through public agencies and the finance industry, we would expect that to rise significantly in this next period. There is already some evidence that it will do so. It is important that the Insolvency Service is resourced sufficiently to be able to deal with this. The evidence at the moment is that they have been involved in disqualification of directors in something like 1,000 or so cases across the last year, so it is quite possible that there might be a rise in the amount of work that they will need to do. We would certainly support any investigation into what additional resources might be necessary.
Peter Grant
Q
Stephen Pegge: I think the practice you are describing is sometimes called phoenixing—setting up a company in the same location with the same assets purporting to be the same business with the same directors. It has certainly been a matter of concern for some time. Putting in place these measures should help to discourage and mitigate the risks of phoenixing: I do not think it entirely removes it. As you say, it is possible, even without these additional powers of investigation, for that to take place, but certainly where there is evidence of abuse, the fact that the Insolvency Service will have powers under the discretion delegated by the Secretary of State to investigate the directors, take action against them in terms of disqualification more generally, and seek compensation from them personally for losses suffered will discourage the practice of phoenixing, which I know is a concern. As I say, I do not think that it entirely removes it, but it certainly will discourage it, and to some extent remove some of the possibilities of it taking place.
Mick Whitley (Birkenhead) (Lab)
Q
Stephen Pegge: This is certainly a very important contribution to addressing major issues, and it is the one that we have been most concerned about recently. We have seen, as I mentioned, real evidence of dissolution being used as an attempt to avoid liability, but I stress that in many cases dissolution is an efficient and appropriate way for companies to be removed from the register where there is no money owing and that business is ceasing, without going through the time and cost of liquidation, which obviously is available as an alternative—for solvent businesses through members’ voluntary liquidation, or in insolvent situations through creditors’ voluntary or compulsory liquidation. I am not aware of significant other means by which we need to deal with abuse of dissolution. This is the one that has been most to the fore in the evidence that we have seen of abuse, certainly through the fraud group.
Jeff Smith
Q
Stephen Pegge: I am not close enough to its work and resource. One thing that I would say is that the Insolvency Service has very good experience in these sorts of investigations. I would also say that the other element of work, if it has found problems that meet the threshold of evidence and it takes action to disqualify a director, does not necessarily need to involve a court process. In most cases, the Insolvency Service will be successful in getting an undertaking from the director involved to be disqualified. It then has the powers to put that into effect, but certainly people may want to consider whether the resources are sufficient to deal with the case.
The other point is that these are situations where dissolution has been successful. We are also looking to these measures to act, to a certain extent, as a deterrent, in order to make it less attractive for those looking to abuse the system to try it on, as it were. So it may be that this event becomes less frequent in due course.
In fact, one of the processes that is clearly available is for creditors to object to an application for dissolution—and, indeed, the Insolvency Service at the moment is also able to object—on the basis of complaints at that earlier stage, where they have evidence of doing so. And because of evidence of significant numbers of attempts here, those objections have been done on a mass basis.
Ms Marie Rimmer (St Helens South and Whiston) (Lab)
Q
“have effect in relation to conduct…occurring, and in relation to companies dissolved, at any time before, as well as after, the passing of this Act.”
Do you support making these provisions retrospective and, if so, how should the Insolvency Service make use of these retrospective powers?
Stephen Pegge: As I understand it, the support for this measure was confirmed as early as 2018 and it has really been a lack of parliamentary time that has made it difficult for it to be put in place. Given that we are aware of abuse that has happened in the meantime, I support this measure being retrospective. I appreciate that that retrospectivity is not often applied to such Bills, but we are talking about a fairly high evidence threshold and about situations where natural justice would support this measure being made with retrospective effect.
The Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy (Paul Scully)
Q
Stephen Pegge: Clearly, when lenders are undertaking a credit assessment, they will consider both the willingness to repay and the ability to repay, the probability of default and the loss in the event of default. All those could potentially be, and I would say probably at the margin, factors that could be influenced by the use of dissolution as a means of avoiding liability.
Quite clearly, it is very difficult for a company that has been struck off the register to make payments under a loan, so there will be the avoidance of debt in those circumstances. Given that currently there is time and cost involved in restoring a company to the register, the ability then to take this action against directors after the event both to deter and, if the activity should still carry on, to investigate and take action against directors in a more timely and cost-effective way should reduce the ultimate losses to creditors. I think there has been an estimate that creditors could be saved around £1 billion as a result of this measure, which would be significant in terms of credit assessments.
The net effect is the ability to provide more finance with less time having to be spent on assessment up front, on better terms, and in circumstances that should help the recovery. However, I will emphasise, Minister, that this is only one factor and it is all operating at the margin. Nevertheless, it is certainly something that during the past year has become a matter of concern, especially in relation to bounce back loans.
Paul Scully
Q
Stephen Pegge: Yes, exactly. It will, therefore, be possible to focus more time and support on those who deserve the finance, without the distraction of those who are abusing the process.
Paul Scully
Q
Stephen Pegge: As you say, it is a matter of a chilling effect. It is one other factor that would weigh on finance providers’ minds when making lending decisions. This is a crucial time for lenders to provide finance. If you look at the latest Bank of England figures, for May, which were published last week, some £7 billion of new lending was provided to SMEs.
Latest surveys suggest that high proportions of loan applications are being sanctioned—something like 85%—and we want that to continue. The expectation that this sort of loophole is being closed should build confidence. It will ensure that there is discouragement of bad actors, so that it does not grow out of proportion, which we fear might otherwise be the case.
Peter Grant
Q
Clearly, we are not creating a new offence that was not illegal at the time. We are considering legislation to make it easier for the authorities to act against people who may have committed offences, which I think is an important distinction. Even given that, is there an argument that the retrospective power should apply only to the date when the Government first published their proposals to legislate? Would you still support the Insolvency Service if it wanted to take action in relation to things that had happened in, say, 2015 or 2016? Would you have any concerns about that?
Stephen Pegge: As you say, this is essentially a technical loophole, which the Bill seeks to close. All it does is confer powers of investigation, with significant and rigorous practices in terms of investigation. The risk of miscarriage of justice is relatively limited. I do not have a particular date in mind. The point I was trying to emphasise was that this has widespread support and has had for some time.
The Chair
Thank you for joining us today, Mr Pegge, and taking the time to give evidence to the Committee. We are grateful.
We should be moving on to the next panel now but apparently the next witness is not ready. I will adjourn the Committee for a short time. We will reconvene when we have the next witness online. Thank you.
The Chair
Q
David Kerr: Good morning, and thank you for the invitation to join the proceedings today. My name is David Kerr. I am a fellow of the Chartered Institute of Credit Management, the largest such body for credit managers. It was formed approximately 80 years ago and provides professional support, training and representation for credit managers and the creditor community.
The CICM contributed to the 2018 consultation and broadly supported the proposed measure in relation to director disqualification. Creditors have often raised concerns about directors leaving behind unpaid debts; whereas in a formal insolvency process, there will be some inquiry by an insolvency practitioner, when a company is dissolved ordinarily there is not. As we have heard, at present, the Insolvency Service will rarely look at those cases because it would potentially involve the cost of restoring a company to the register. The Bill therefore plugs an important gap, as others have commented.
It is probably important to make the point that this was first considered as a suitable measure and had support back in 2018, and while the urgency to bring it in now is understood, this measure is not solely for the purposes of chasing after directors and recouping funds in relation to covid debts but potentially has wider implications as well. There has been reference to the fact that 2,000 or 2,500 companies with unpaid bounce back loans may have been dissolved over the last year or so. I do not think there is any suggestion that every one of those will be investigated, but presumably the Insolvency Service will apply the same public interest criteria as it has hitherto in relation to insolvent companies. That would certainly give it the power to investigate those companies where directors have left behind debts, whether they are bank or Government debts or any other. That should act as a deterrent, one would hope, to directors using this route to avoid liabilities, and will perhaps also restore some confidence in the creditor community, provided that the action taken is publicised and therefore serves its purpose, both in the compensation orders that might be made and the deterrent factor. Broadly, the CICM supports the Bill. With that, I will be happy to take any questions that Committee members may have.
Seema Malhotra
Q
David Kerr: In relation to confidence, I would not go as far as to say that there is a lack of confidence in the system, but in order to enhance confidence this is a suitable measure. It removes one source of frustration among creditors, which is where they can see directors who are not taking steps to put their companies through a formal insolvency process and instead are seeking to avoid debts by using the dissolution route.
In terms of numbers, I have not made any inquiry into the 2,000 to 2,500 companies that have been mentioned, but there has to be a sense of realism about the extent to which any Government agency can inquire into their circumstances. A percentage of them, based on creditor inquiries, complaints or other information that may come into the hands of the Insolvency Service, would trigger some investigation.
In relation to insolvent companies, although perhaps insolvency practitioners and creditors may be frustrated from time to time about the number of cases that result in disqualification proceedings, again there needs to be a sense of realism around the extent to which that can be done. That will happen in cases where, despite all the information, there is also a public interest test that is passed to pursue those actions.
Seema Malhotra
Q
David Kerr: In terms of resources and the ability to pursue all the cases that the Insolvency Service might wish to pursue, I guess that is probably a question for the Department. Not all the cases that are investigated will pass the public interest threshold. To the extent that there are cases that pass the test but cannot be pursued for resource reasons, I am sure the Insolvency Service would welcome any additional resources that can be made available to it. From the point of view of creditors, if actions are pursued in relation to covid-related debts and not others, perhaps the measure works against them a bit.
That comes to the second part of your question. There are two elements to this. First, there is the potential disqualification of individuals who are proven to have acted inappropriately. Secondly, and on the back of that to some extent, there is the possibility of compensation orders against those individuals, with a view to putting money back into the hands of creditors. Again, I am sure CICM creditors would wish that to be as effective for its members as for any Government debt.
Jeff Smith
Q
David Kerr: I think the point has been made about resource. I have heard comments from others on Second Reading and elsewhere about that. It would be unfortunate if the emphasis were entirely on dealing with bounce back loan fraud and if that took resources away from other directors’ conduct investigation cases. That point is not, I suppose, directly relevant to the provisions in the Bill; it is more a question of how it is implemented and taken forward. There have also been some comments about the retrospective element; the previous witness touched on that. I think these cases have to be taken within three years of the relevant date—the date of insolvency or the date of dissolution. I do not think the Department would be able to go back before 2018 in any event, and that was the date on which the consultation was conducted, so I suppose one could argue that directors have had notice of the intended provisions for the relevant period.
Those were probably the only points where there might be concerns to a limited extent, but generally I think the provision is a sensible one that gives the service powers that it does not have currently and which can only be helpful, I would have thought, to trust and confidence in the insolvency regime.
Jeff Smith
Q
David Kerr: I was referring partly to the point that had been made by the Committee to the previous witness about whether there would be any issues around natural justice if the retrospective provisions pre-dated the consultation. I do not think that, in practice, that would happen. Going forward, the compensation laws that might be sought can be obtained after the disqualification order or undertaking, so there may be more than three years available to the service from the date of dissolution. There has to be a cut-off. I do not think there is any suggestion that the provisions of the disqualification have to be changed in that respect, merely that they would be applied to these circumstances. They have proved to be satisfactory since 1986 in relation to director disqualification in the insolvency proceedings, so I have no reason to believe that, going forward, those time limits will not be effective in relation to dissolved companies.
Seema Malhotra
Q
David Kerr: None that I can think of immediately.
Peter Grant
Q
David Kerr: That is a fair point. I suppose the statute of limitations could be considered a relevant backstop, but I will come back to my previous point that we have a three-year limit in relation to investigations into directors’ conduct in insolvent situations, and that has been with us for 35 years. I have not heard any suggestion from the Insolvency Service that that has proved to be inadequate. This is effectively an extension of the same power into dissolved company circumstances. I have not seen or heard any evidence to suggest that it is an inadequate period.
Peter Grant
Q
David Kerr: Perhaps some in the creditor community would like it to be a six-year period, but I do not think they have argued strongly for it, and I do not think there is a necessarily a case made for that. From a creditor perspective, in an ideal world, perhaps it would be open ended. That may be unrealistic.
Paul Scully
Q
David Kerr: The current disqualification provisions act as a deterrent to some extent, because directors know that, in respect of every company that goes into an insolvent liquidation or administration, there will be some inquiry. There is an obligation on the insolvency practitioner to carry out a certain amount of inquiry into the conduct of the directors of those companies and make a report in each of those cases to the Insolvency Service on their conduct. The provisions do not provide for the same report. It will have to be triggered by something else, whether that is a creditor complaint or other information, but it will provide the opportunity for the service to make the same inquiry.
Paul Scully
Q
David Kerr: Do you mean the work of the Insolvency Service?
Paul Scully
Yes. We are talking about Insolvency Service resources. We would have expected the Insolvency Service to prioritise the work that it does on the most egregious cases, and that would indeed be how we would anticipate it moving forward. Have you seen that first hand?
David Kerr: This may not be a direct answer to your question, but the concern of the creditor community might be that, if this provision were used almost exclusively for the purposes of pursuing bounce back loan fraud, perhaps it would not have the wider benefit that could come from it. Perhaps that has to be the emphasis in the short term, but in the long run—it is a provision that was considered worthy of introducing back in 2018, before covid came along—one would hope that it will be of broader use.
Quite how the service will prioritise its limited resources and decide which cases to look at is a matter for it to work out once it gets the powers. One would hope that the cases that come to its attention through the insolvency practitioners’ reports will receive equal attention and that it will not be to the detriment of those cases that these other cases are being pursued.
Paul Scully
Q
David Kerr: That can happen, whether it is through an insolvency process or a dissolution. To the extent that it has happened through dissolution, the measure plugs that gap, because it is gives the same investigative powers to the Insolvency Service. It comes back to the deterrent point that you made previously. If the service is seen to be taking action in these cases and publicising the fact that it has done so, that will, one would have thought, have a deterrent effect.
Paul Scully
Q
David Kerr: Generally, if the system is seen to be working well and those who abuse it are brought to account, then it helps enhance the confidence of those engaged in providing credit, whether it is through loans, trade credit or anything else. In that sense, it is a welcome provision that, if resourced and used as intended, should have the desired effect.
Seema Malhotra
Q
David Kerr: I think the cost issue is the bigger disincentive for creditors that previously might have wanted to take steps to try and get somebody appointed to investigate. The service itself has made the point that there are legal costs and other costs associated with that process, and it would not be practical for creditors to mount that kind of action alone or, in many case, at all, given the amounts of their own debts.
The bigger disincentive is probably the cost and this avoids that. You are right in the sense that if there is a lengthy time process and if it takes several months, that eats into the three-year time limit that we have talked about, so that could be a problem. I think here, with this measure, we avoid that because the Department can have the ability to make appropriate inquiries and take action, without the need to go through that process.
Seema Malhotra
Q
David Kerr: I do not have those figures in front of me but I have seen the fees involved. They amount to a few hundred pounds, but that does not include the cost of a solicitor to spend the time doing the necessary work. I would imagine that it would be a few hundred running into a thousand or more pounds to get a company restored, but I could not give you any exact figures.
Seema Malhotra
Q
David Kerr: We might have touched on this slightly previously. First, there is no suggestion, as far as I am aware, that the whole of the 2,500 companies that have been mentioned would be the subject of an investigation. We are talking about dissolutions in the last 15 months or thereabouts. The time limit is relevant, obviously, because the service has to work to that, but the previous witness made the point, which we should bear in mind, that the majority of the cases that it takes do not necessarily involve court proceedings. In a lot of cases, having presented the evidence to the directors and with the threat of court proceedings available to the service if necessary, many are resolved by the director giving an undertaking, which has the same effect as an order, so a lot of them will not involve court proceedings and that helps the service to achieve what it is seeking to do within that timeframe. Many of the cases in these instances of dissolved companies, I imagine, would result similarly in a relatively high proportion of those being concluded by undertaking.
Simon Baynes (Clwyd South) (Con)
Q
Secondly, clause 2 allows “easier investigation”. Can you give us some idea of the way in which the Bill improves that process of investigation?
David Kerr: I will deal with the second point first. We know that this provision means that we do not have to go through the process of restoring a company and instead the Department can commence an investigation in circumstances where it deems it appropriate without any barriers to doing that. In that sense it makes the process easier to commence the work it needs to do.
Many companies are dissolved every year, but I do not think there is any suggestion that all those, or even the majority, involve any misconduct by directors and by those who have opposed or supported the measure. I do not think there is any suggestion among those who proposed or supported the measure that that process should be removed as an option for companies in appropriate circumstances. The question is really how many of those represent some form of misconduct or where misconduct might be hidden, or where there is some abuse. I have not seen any statistics on that and do not know if anybody would know for certain. Again, it comes back to the point that the service would have the power to investigate in circumstances where something was brought to its attention, suggesting a need for investigation. In that sense, it is a welcome provision.
The Chair
Thank you for giving evidence, Mr Kerr. If there are no further questions, we will move on to the next panel.
Examination of witness
Dr John Tribe gave evidence.
The Chair
Q
Dr Tribe: Thank you very much for the invitation and opportunity to address the Committee on this important Bill. I will address the second half of the Bill and the clauses on directors disqualification. Like all the contributions on Second Reading in the House of Commons, I welcome and support the changes that the Bill introduces to the Company Directors Disqualification Act 1986 and the extension of the public protection provisions in that Act to unfit directors of dissolved companies.
The measures are a welcome addition to the insolvency framework and system that work effectively and are well managed by the Insolvency Service and its diligent and hard-working staff. This new statutory addition to their armoury is a necessary power to maintain public confidence, to protect the public from unfit directors, and to maintain the integrity of the limited liability company form.
My contributions to this Committee come from an academic viewpoint, as a senior lecturer in law at the University of Liverpool. For 20 years, I have been researching and writing about insolvency law, both corporate and personal. For much of that time, I have been interested in the role and accountability of office holders, including company directors. I have been editor of the Mithani: Directors’ Disqualification newsletter, and continue to sit on the editorial board of that publication. More recently, I have written about the disqualification proceedings in Kids Company and Carillion. I have five brief points or observations to make on the Bill: if the Chair allows, I can run through those. They are brief, if you want me to address them at this point.
The Chair
Yes, of course.
Dr Tribe: The first is on limited liability and corporate form abuse. I view the corporate form as a statutory privilege—a concession of the legislature that should be managed properly and should be used by individuals adhering to the highest standards of commercial morality and probity. Put simply, directors should know their duties and live up to them. They should be held to account if they do not, and certainly if they stray further into the realm of the unfit.
My second point is on phoenixing. Contributions from across the House of Commons on Second Reading of the Bill, the explanatory notes to the Bill, and the Parliament Library document on the Bill have all mentioned the phenomenon of phoenixing, and comments suggest that the misuse of limited liability companies and of the bounce back loan scheme is the latest example of this sort of undesirable behaviour, or “unfit” behaviour, to use the language of section 6 of the Company Directors Disqualification Act 1986. I agree with the comments that have been made: phoenixing has been a perennial problem with the limited liability form because of the damage that misuse of that form can do to creditors, and it is right that it is troubling us now in the context of the bounce back loan system as part of the Government’s package of support during the pandemic. The taxpayer stepped up and provided these bounce back loans; the taxpayer should be protected now at this point, and the Insolvency Service needs the tools and, most importantly, the funding to do that work.
My third point is on directors disqualification and public protection. Through the history of our corporate insolvency laws, we have grappled with the balance between entrepreneurialism on the one hand and the kind of behaviour we are discussing today—unfit behaviour and malpractice—on the other. Indeed, directors disqualification provisions were first introduced in the Companies Act 1928, and there have been several reforms and updates over time since then—and hopefully, in my view, also with this 2021 Bill, if it is passed.
Over the past 20 years or so, we have also gradually increased the number of entities that are subject to the disqualification regime, and dissolved companies are the latest vehicle in a long-running trend, because there will always be some misuse. We need to ensure that the relevant regulator has the powers and funding to combat that unfit behaviour when it does arise, because public protection is, in my view, the main driver of the directors disqualification regime. As we know, the limited liability form is the basis of our credit system: if it is not protected properly, the whole system could ultimately be damaged.
My fourth and penultimate point is on the dissolution statistics. We know that dissolution is an important part of keeping the Companies House register in order. Dissolution is part of the normal life cycle of the company; dissolution keeps the register tidy and up to date. It happens regularly, and it is necessary. As you perhaps already know, there were approximately half a million dissolutions per year over the past six years, and the explanatory notes to the Bill explain that in the first quarter of 2021, we saw some 170,000 dissolutions. It is appropriate that these take place, for the reasons I have outlined—namely, keeping the register in good order—but unfortunately, among those dissolutions, there could be some of the unscrupulous activities that we have been mulling over, namely the dissolution of a company that has taken out a bounce back loan and has been dissolved before the loan has been paid back to what is ultimately the taxpayer-creditor. This is a loophole, and it should be closed so that directors of live companies, directors of insolvent companies and directors of dissolved companies are all treated the same way for the purposes of section 6 of the Company Directors Disqualification Act 1986.
In late June 2021—I think it was the 21st—the Public Accounts Committee projected a loss of between £16 billion and £27 billion of bounce back loans, from a total of approximately £90 billion that was lent by the British Business Bank via the banks. As you know, PricewaterhouseCoopers is due to report on the extent of fraud and credit failure within that £27 billion. There could be a huge loss to the taxpayer, unfortunately. Any loopholes that may have helped facilitate those losses, which, in turn, help evade responsibility for those losses, should be closed.
My final point is on funding. The Insolvency Service needs to be properly funded to ensure that this additional disqualification work can happen. Until appropriate funding is hammered out, the provisions in the Bill still provide a deterrent to those who seek to use limited liability forms in an unfit manner. The Bill’s clauses, and any compensation orders which may follow directors disqualifications, go some way to ensuring that limited liability corporate forms are protected, and that delinquent directors have an immediate, powerful deterrent against abuse of conduct, so that trust in our system is maintained. In short, the bigger the stick, the better the deterrent. That is my introductory statement.
Jeff Smith
Q
Dr Tribe: It is my impression that this new work to deal with directors of dissolved companies who have potentially behaved in an unfit manner would be subsumed into the general run of business of the disqualification unit at the Insolvency Service. They prioritise the most egregious cases, or those that help send out a public protection signal to the public. In the interim, I think this kind of work would fall into that part of their function. My point about hammering out or ensuring funding is in place is partly in response to some comments on funding made on Second Reading of the Bill. Since the Companies Act 1928, and perhaps most famously in the Cork report of 1982, this question of whether the disqualification regime is properly funded has always existed. Its lack of efficacy between 1928 and 1982 was put down to a lack of resourcing.
That point is very important, because in essence this is the system that protects the limited liability form, the engine of capitalism that drives through our commercial activities. Unless the Insolvency Service is able to properly resource and ensure that this work is undertaken, we have a problem when we try to pursue those who are responsible for the loss of between £16 billion and £27 billion. This potentially unknown—we will find out when the PwC report comes in—and potentially large gap will need to be addressed in terms of where the money went and who was responsible for causing that money to be dissipated.
Jeff Smith
Q
Dr Tribe: Not necessarily. Going back to my prioritisation point, the Insolvency Service obviously has finite resources that it needs to deploy in the best way possible—I suppose that is a problem for many public bodies— if other types of abuse manifest over time. The most obvious and recent problem is the bounce back loan phoenixism problem, but in due course other things might come about that require us to tinker with our corporate and insolvency law so that we have an effective system that maintains trust and confidence in it. What the Insolvency Service wants to do in terms of prioritising threats to the system will depend on its internal guidance.
Seema Malhotra
Q
Secondly, are there any other more general problems with the dissolution of companies that are important to discuss at this time while changes are being made? Should changes be made to the eligibility criteria on dissolutions? What steps need to be taken prior to dissolution?
Dr Tribe: I will take the first question first. I think you are drawing attention to the compensation order regime, and you did so on Second Reading, too. There is some interesting research by Dr Williams at Cambridge in 2014, who looked—he sort of future-gazed—at how successful the compensation system might be. In that research, he highlighted that some of the directors in small closely held companies, which he argues the regime mainly targets, might end up being adjudicated bankrupt—they might go through the bankruptcy process, I should say—in due course. That would mean, of course, that any pursuit of those individuals would run into another layer of difficulty in trying to get to the value that might be there for the insolvent estate of the company or dissolved company that we are dealing with. His work future-gazed in that way at some of these issues.
It is true to say that, on the compensation regime, we saw one case in 2019, the Noble Vintners case, where insolvency and companies court Judge Prentis made a 15-year disqualification order. That is right at the top of what we call the Sevenoaks scale, after the case in which Lord Justice Dillon set out the various types of malpractice and where they fall on the scale, from two years up to 15. In the Noble Vintners case, it was the most unfit behaviour on the facts of that case that you could have —up at the 15-year period. Then, of course, that was followed by a compensation order that recouped for creditors just over half a million pounds—£559,000.
There has been some success with the compensation scheme. It is in its early days, in a certain sense. Although the reforms came in in 2015, there was a delay in implementation. You are right to say that we should pause for thought and mull over how effective that is. That takes us back to the resourcing and funding point, for one thing. Secondly, it takes us to the idea of that prioritisation agenda and how fruitful a claim that you are going to bring might be to get compensation. It is a power that exists and should exist. It goes some way—as you can see from the case of Noble Vintners—to getting value back into the insolvent estate for the creditors. It is a positive thing for creditors, and something that the disqualification regime did not do until that reform in 2015. Of course, it provided a protection mechanism, but in terms of getting value back into the estate, that is a good reform. That is your first question.
Your second question was on dissolution problems. I think you might be driving at the process of dissolution and how the registrar at Companies House deals with dissolution. After the directors have signed their form, made their declaration, paid the £10 and noted that there is going to be a striking off and that is published in the London Gazette, there is a period of two months where all the parties that should be informed—shareholders, creditors, employees and pension managers, for example—might know of this potential dissolution and should then, therefore, perhaps act on it as creditors. Some of the witnesses who have gone before me may have addressed this, particularly those from the credit community. In due course, as part of a wider analysis of what Companies House and its function is, that step in dissolution may be looked at.
As I said earlier, there are approximately half a million dissolutions per year, and many of those are for very good reasons in terms of, as I have said, maintaining the integrity of the register and getting rid of companies that have been through the insolvency processes but then get dissolved as well. The guidance for the Bill and some other sources note that among those half a million dissolutions, there could be about 5,000 that are potentially problematic that we would want the Insolvency Service to be able to investigate. Obviously, 5,000 is a lot more than the current levels of disqualification under the current provisions. Over the past decade or so, there have been about 1,200 a year, so you can see there is quite a significant upshift in the work that the Insolvency Service might have to do.
A Companies House review perhaps in due course mulling on what its function is—is it a regulator, is it a repository of information?—might look to dissolution, but in the short term I think you have this £17 billion to £26 billion problem, and there seems to be a loophole that needs to be closed.
Peter Grant
Q
Dr Tribe: I think you are right to point out that there are different avenues that could be visited on the directors that we are talking about. We are not necessarily talking about directors in the general run of business; we are talking about people, as perhaps you suggest, who engage in criminal behaviour. For example, with the bounce back loan scheme, a form of fraud could lead to a prosecution.
What we are dealing with today, though, particularly with this amendment to the Company Directors Disqualification Act 1986, is a regulatory function, so we are dealing with a lower burden of proof than we would if it was a criminal sanction for any subsequent prosecution for fraud. In that sense, on the Insolvency Service’s work on what is known as a jury question in the context of directors’ disqualification, with each case being looked at on its facts, the determination whether whatever has occurred has been deemed to be unfit does have that lower evidential burden than any subsequent criminal activity that the prosecuting authorities might address. In that sense, the disqualification regime is perhaps better able to get deterrent-type results than mounting subsequent criminal prosecutions. We know, of course, that the criminal justice regime is also having some problems with funding. If the disqualification regime is able to achieve any public policy outcomes in terms of deterrent, in a regulatory manner, that is perhaps quite effective.
Peter Grant
Q
Dr Tribe: That is an interesting question because it highlights the long history of English and Welsh and Scottish company provisions when we are thinking about the nature of groups of companies and then single entities, and how structures and groups are used and how we move value between one entity and another.
There is the quite interesting case of Creasey v. Breachwood Motors Ltd where, because of an employment claim, value was moved into a new entity, and of course the claim was left with the original company, meaning that that employee had an empty shell through which to pursue their claim, which was problematic. The judge at first instance was able to say, “No, in the interests of justice, you can switch your claim to that new entity.” That judgment was overruled subsequently, but it does raise an important point. Indeed, in the case that overruled it, the group reconstruction that occurred was held to be legitimate for tax reasons. There are instances of the kind of behaviour that you are talking about that can perhaps be problematic in the pure phoenixing sense, but then there are legitimate reconstructions that happen where the intentions of the directors were for tax efficiency or some other purpose that is not unfit or nefarious in the way that we are discussing.
In terms of the misuse of the corporate form, one can go right back through our company law history to recite many examples of essentially what we are talking about—phoenixing, or what has been called centrebinding—and some of the critique of pre-packaged administration is around the same point. Is it appropriate that the corporate form is able to be used in this way so that the creditors of company A are left languishing while all the value is moved into company B in the way you have described?
That takes me back to my introductory response point, which is that in English and Welsh and Scottish law, for a very long time we have used the separate juristic person—the company as a thing. It is a really sacrosanct idea that, just like I am not responsible for your debts, and you are not responsible for mine, we have that structure in place for policy reasons, and have done since the 19th century originally, to aggregate wealth and entrepreneurial activity. I suppose you as the legislature expect that, as part of that privilege that you have allowed incorporators to use, over time you will get some form of abuse, and that element, which is hopefully as small as possible, has to be dealt with, like we are trying to do today, or, to some extent, tolerated.
Peter Grant
Q
Dr Tribe: On your first point, which was about retrospective activity, it is much like the Corporate Insolvency and Governance Act 2020 reforms, which have successfully been passed. We have seen lots of new cases on the provisions that were in that Bill; it has been very successful. The reforms in that statute were mooted much earlier, in 2018. It is the same with this suggestion to close the dissolution loophole. Much like with the 2020 CIGA provision, the coronavirus has freed up legislative time to get both sets of provisions—the CIGA activity and the dissolution activity—in front of you to get it on to the statute book. Some of this was discussed by Sarah Olney on Second Reading.
What does it mean in terms of the retrospective nature of what you are doing? We had the idea some time ago, and corona has meant that we have had to address it against the backdrop of the bounce back loan scheme. Unfortunately, the abuse of that scheme seems to be so massive—as we have seen, there is a £16 billion to £27 billion projected shortfall, or loss—that we need to go back in time to look at some behaviour. Of course, we are not generally speaking about breaches of duty in the general sense of directors’ duties. We are talking about what could be seen as the use of the corporate form purposely to avoid the insolvency provisions and the oversight that they can give, with the powers that are currently in the Act that we are dealing with.
That needs to be dealt with, and if it is in a retrospective way—you may have seen in late June that there was a disqualification order for 12 years because of some fraudulent activity that had occurred with a Mr Khan and his Birmingham-based business, where he had forged documents to get a bounce back loan of £50,000. The Insolvency Service successfully brought that action following administration. Some Glasgow-based companies have also been wound up in the public interest because of bounce back loan abuse. To answer your question briefly, it is the bounce back loan fraud that has meant we have had to act retrospectively. No, I do not have any issues on that point.
On your question about three years, I suppose that again goes back to funding and time limits, and whether the Insolvency Service is adequately resourced to deal with the amount of dissolutions—whether it is 5,000 as predicted, or whether the forthcoming PwC report shows that it is much worse. If it is well resourced, the time issues might not be such a problem. If it is not, they perhaps will be.
Paul Scully
Q
Dr Tribe: In some writing on this point in relation to Carillion, I suggested the reason that the Insolvency Service might be looking at a large public limited company to bring these mechanisms to bear is because that is a pretty well known, massive liquidation, which has lots of Government contracts linked to it and taxpayer money bound up in its activities. You can see why it would perhaps be appropriate, much as with previous well-known disqualifications, for the Insolvency Service to bring the action or the proceedings if the relevant public interest tests are met. That is because it helps with the agenda of sending out the appropriate messages to the commercial community that you should use corporate vehicles and corporate forms in an appropriate way, and that you should live up to your duties in an appropriate way generally, as well as facing some of the consequences if you misuse the form and harm creditors and other stakeholders.
On the prioritisation point, you could go for good messaging, in the sense of prioritising cases. I suppose that the problem with the bounce back loan scheme and this dissolution issue that we are dealing with is that, as I think one of the previous questions hinted at, the volume of cases could be so great that with prioritisation you will need to have quite a large group of civil servants working on the issue.
As for the question of how likely it is that we might get a result in a case, and therefore whether we should bring proceedings, we have seen recently that once the Insolvency Service’s tests are met, it is wholly appropriate that it should bring these proceedings, even if in due course the result is not what it thought or what its specialist advisers—the QCs and so on who have advised it—would have predicted. Hopefully, the money will be well spent in bringing proceedings, but sometimes we do not get the result for factual reasons, basically.
Paul Scully
Q
Dr Tribe: Carillion, because it is a large plc, has messaging on the plc side of our regime, thinking about how directors behave in relation to those types of companies. This perhaps goes back to Mr Grant’s question about group structures—do not use group structures in a way that is problematic. That will be interesting to monitor on what is a live case; I do not want to mull on the facts of that case too closely.
Sorry, what was the second part of your question?
Paul Scully
Q
Dr Tribe: Thanks for that clarification. If we can ensure that any vehicle that is used in any form of creditor relationship with different entities has an individual put-off effect by going down this dissolution route that we have identified, it will hopefully increase confidence in the way people use the corporate form. The more loopholes we can close down that have caused us to think the form is being used inappropriately, the better.
Unfortunately, phoenixing, as we have discussed, has been going on for literally decades, and perhaps in the future we might be back here again with some other problem that has arisen because of nefarious activity.
Jeff Smith
Q
“Applying the current controls properly, putting dissolved companies into liquidation and publicising that new policy will be a far more effective deterrent...That requires no new legislation at all.”
Do you have a view on that?
Dr Tribe: The trouble is that to get to that liquidation point, you have to go through the restoration stage. I think that submission might have also talked about the idea of restoring an entity to the register and then going through that insolvency route. I think the Insolvency Service did 33 of those in 2019—pre the bounce back loan issue and pre corona, obviously. Each one of those 33 will have cost it court fees, process fees at Companies House and so on, which means there is this extra layer of procedure that it has to get through before it can ultimately investigate the unfitness activity. I think the dissolution reform in this legislation ensures that that extra layer of bureaucracy—getting the companies back on the register, through restoration, then going through the insolvency processes—is cleared out, and we move straight to the enforcement section.
The other problem with restoration is that you perhaps undermine the integrity of the register itself if you take 33 companies off it, but you then want to put them back on because you need to go through the steps that we want for enforcement and so on. It is an interesting point, but I think you have a quicker public protection mechanism process that you can do now that gets you to a less costly enforcement outcome.
The Chair
If there are no further questions, I thank you, Dr Tribe, for giving evidence this morning. It is much appreciated. I thank all the witnesses for appearing this morning.
Ordered, That further consideration be now adjourned. —(Paul Scully.)