Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) (No. 2) Regulations 2021

Monday 6th September 2021 Grand Committee

Considered in Grand Committee

15:30

Moved by

[Lord Callanan]

That the Grand Committee do consider the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) (No. 2) Regulations 2021

Relevant document: 8th Report from the Secondary Legislation Scrutiny Committee.

[The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Callanan) (Con)]

My Lords, I beg to move that this Committee approve the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) (No. 2) Regulations 2021, which were laid before the House on 21 June 2021.

The emergence of the Covid-19 virus has posed the greatest threat to our way of life in a generation, and the past 18 months have been a challenge for us all, both as a nation and as individuals. The essential restrictions placed on our day-to-day activity have saved lives and limited the spread of the virus, but they have of course placed unprecedented pressures on many businesses. I am sure all noble Lords will share my optimism that the early signs of a strong recovery signal a return to normality. However, many businesses are not out of the woods just yet.

The four-step road map offered a road back to normal life while our world-class vaccination programme was successfully rolled out. Each step of the road map was implemented to safely reintroduce social contact for businesses, schools, activities and events based on the contemporaneous data. Step 4 was successfully launched on 19 July and led to the removal of all legal limits on social contact and the reopening of many premises. I am delighted to report that as of today, 6 September, more than 60% of the UK population are now fully vaccinated, and 71% have received their first dose.

Since the start of the pandemic, the Government have put in place an economic support package totalling £352 billion through the furlough scheme and the Self-employment Income Support Scheme, support for businesses through grants and loans, and business rates and VAT relief. In March, during the Budget speech, the Chancellor announced a generous extension of economic support for businesses and individuals, with many schemes continuing well beyond the end of the road map to help businesses to bounce back. The Government continue to support businesses by once again extending this key protection to prevent companies being forced into liquidation where their debts are due to the effects of the virus.

It has been widely reported that although many businesses are now open and trading they have continued to feel the effects of the periods of shut-down and limited trading over many months, and it will take some time for them to get back to normal financial health. This instrument will help companies while they get back to more normal activity by extending to 30 September 2021 a measure first introduced by the Corporate Insolvency and Governance Act 2020: specifically, the temporary suspension on issuing statutory demands and the restrictions on company winding-up petitions.

This measure has been extended several times by regulations, most recently from the end of March to 30 June, and this instrument seeks to extend it a further time, giving businesses the chance to trade free from creditor action to liquidate them for debts that arose because of the unique situation that many businesses have been in. This extension will allow them to sort out any financial difficulties that have arisen during the enforced restrictions over the last year or so, while the economy gets back to normal.

Since its introduction in June last year, the measure has protected many viable companies from aggressive creditor enforcement action during really difficult trading times. The temporary restriction on company winding-up petitions means that anyone who wishes to wind up a company that has not paid its debts must satisfy a court that those debts are not Covid-19 related. This extension aims to give many companies much-needed time to get back on their feet as the economy begins to return to normal: time for them to generate income, take advice, reach out to their creditors and, where appropriate, time to restructure.

The Government have helped companies while they had to stay shut, and, now that they are able to open, it is crucial that we do not withdraw that help prematurely before they are given the chance to trade back to financial health. Although this measure is intended to help companies that may be subject to aggressive creditor enforcement, the Government have always been clear that it is not to be seen as a payment holiday. Where companies can pay their debts, they should do so.

I know that many businesses and their business representatives will welcome the continued support that these regulations offer, but of course I also acknowledge that this measure will mean a further period of uncertainty for creditors where their rights to enforce recovery of their debts are temporarily restricted. We do not take this action lightly, and we are very aware of the impact on creditors. However, as I have said, the measure is intended to help those in financial difficulty as a result of the pandemic and must not be used as an excuse to avoid payment. So where a company can pay its debts, of course it is right that it should do so.

We will continue to monitor the situation carefully, consulting with stakeholders and the business community to determine what further action may be necessary when these regulations expire at the end of this month. I commend these regulations to the Committee.

[Lord Leigh of Hurley (Con)]

My Lords, I declare an interest. Since we last debated this subject, I have become a non-executive director and chairman-designate of Manolete Partners plc, an AIM-listed company involved in insolvency litigation. Therefore, I have a vested interest in addition to my other business interests.

I again congratulate the Government on the swift and decisive action taken with the introduction of this legislation in responding to the economic crisis. We did not agree on every aspect of the legislation, particularly some details of the moratorium, but we did agree on the direction of travel and the effect that all this has had. This debate is of course in respect of regulations which, as I understand it, expire at the end of this month, so although necessary, because of the way the regulations are drafted, it is probably the shortest-term effect of any regulation that has gone through this House.

More important is to know and understand what will happen after the end of this month. A number of us would argue that the time has come to relax these regulations and to rely on the market in which this Government have such faith. The market will determine which companies should have more capital allocated to them, which companies are zombie companies and which companies do not have a future. That will be decided partly by creditors and partly by people choosing whether to invest in companies that need such cash to face creditors.

It is interesting to look at the situation regarding creditors’ voluntary liquidation. Creditors’ voluntary liquidation is essentially when directors decide to throw in the towel because the business cannot carry on of its own volition. The figures published by the excellent Insolvency Service just the other day show that the level has returned to pre-pandemic levels, about 2,800 companies in the last quarter, which is roughly where it was pre-pandemic and is constant. So the market is returning to normal where it can. I very much hope that the Minister can give us an indication soon of the Government’s thinking on this extremely important issue.

[Lord Sikka (Lab)]

My Lords, there are many industries that are still not fully on a path to recovery, good examples being hospitality and events management. If we are thinking about terminating this legislation at some stage, surely before we do that the Government will have to present us with some evidence of what the impact of the cliff edge will be on those and other industries.

Clearly a cliff edge is looming, although the can continues to be kicked down the road. What will happen when suddenly, as has been said, you let the market forces rip? What will be the effect of this legislation upon creditors who would perhaps have expected to have some recovery but who now must wait to recover? Clearly there is a knock-on effect, but the Government have not really presented any estimate of that. When the cliff edge comes, what restraints will be exercised by banks, private equity, hedge funds and other secured creditors, or will they all simply be rushing to collect their resources, collect their money, and put businesses into liquidation? That will clearly have a huge negative effect.

The Government need to present us with a plan. What exactly is the value of the debts that are affected? How many businesses? How many creditors? We have heard absolutely no information from the Government. When market forces are allowed to rip, what exactly would be the constraints on the insolvency practitioners who charge mega sums for insolvency fees that actually worsen the crisis? The BHS liquidation began in 2016 and is still not finished. Carillion began in 2018 and is still going. Thomas Cook is still going. Maplin is still going. Monarch Airlines and many others have been going for decades and decades. There seems to be absolutely no check. If the Government are really planning ahead, they need to present a plan about how they are going to constrain the insolvency industry. We have not really heard anything about that. I have asked in PQs for information about the values that unsecured creditors may lose. I am told that the Government have no figures. Again, I ask: what is the Government’s plan to deal with the cliff edge ahead?

[Lord Hodgson of Astley Abbotts (Con)]

My Lords, I declare an interest. I am chairman of the Secondary Legislation Scrutiny Committee, which has reviewed these regulations, but I speak this afternoon not as its chairman, nor indeed for the committee at all; I speak entirely in a personal capacity.

My noble friend the Minister will be aware of my interest in these matters, and it would be right for me to begin by thanking him and his officials, led by Paul Bannister, for the time they have given me and other interested Members of your Lordships’ House over the past few months to look at aspects of the particular problem we are dealing with this afternoon. Indeed, they have given us not just time but action in the sense that we have had some really sensible regulations about pre-packs, which have become a feature of choice and often with connected persons. The regulations which the Government have produced have done much to block that loophole and, judging by my postbag, they seem to be working well so far, although, as the noble Lord, Lord Sikka, has pointed out, the point of maximum strain will of course come when we reach the end of the subsidies, whenever that may be.

I have a couple of points to make this afternoon. The first is about how we judge when “can’t pay, won’t pay” moves to “can pay, won’t pay”. My noble friend the Minister will say that paragraph 7.3 of the Explanatory Memorandum says that that is when the court is satisfied that the company’s inability to pay is not due to coronavirus. That may a possibility for a large and well-resourced company, but it is certainly beyond the resources of a small or medium-sized enterprise to go to court to try to prove this issue, which is pretty hard to prove anyway. I do not think that the Government should think that this offers anything other than the largest companies a proper balance in the argument about “can’t pay” and “can pay, but not bothering to pay”.

Of course, one understands, and has an instructive and instinctive view, that one should be helping people whose lives, efforts and companies have been set back by the pandemic, an issue over which they have no control. Of course you feel sympathy for them. However, we always have to balance that sympathy with the knowledge that this is a zero-sum game. One person’s gain is another person’s loss. I may be a supplier and may therefore be caught up in this; I may be unable to get paid and my business may be affected. It is always tempting to think that one should be trying to help those who are in difficulties and forgetting those who are strong. We need to avoid, or at least to minimise, situations where businesses that are already weak—perhaps for reasons beyond coronavirus, although that has created an additional strain—are kept afloat at the expense of suppliers and landlords.

In summary, we need to avoid taking policy decisions that benefit the weak and weaken the strong. When my noble friend winds up, it would be helpful if he could give us a stream of consciousness that will guide us as to how the Government judge all this. I understand the magic references to constant review in the Explanatory Memorandum; viable but cash poor is in there as well.

15:45

It would be helpful if the Minister could broaden out, in a slightly philosophical way, how his department is considering the matter and how it will make judgments in the future. Please, it must not fall back on saying, “It’s up to the court”, because the court is a court and not always as well able to judge commercial matters as the Government and advisers to them. That is my first point.

My second point concerns the position of landlords. They are always unpopular; nobody likes paying rent, and people always try to avoid it. However, we need to remember that big and small landlords provide the foundations for a huge swathe of our industrial, commercial and residential activity. As before, this is not just an academic exercise. The pensions that many of us enjoy, or hope to enjoy, are underpinned in large measure by real estate values. If we allow this sector to be savaged, the impact will be felt by pensioners up and down the country. Our environment, our neighbourhoods and in particular our high streets will depend for their vitality on a continuing flow of real estate investment. If we allow landlords to become too much the target, we run the risk of damaging those important factors.

My noble friend needs to be aware—I am sure he is already—that the position of landlords under the present regulatory regime, the landlord restructuring plan, is giving cause for concern. At this point, I need to declare a second interest, in that I have a shareholding in a family investment company that rents out commercial property—happily, to date, without any of the problems to which I will refer, but the Committee needs to be aware that I have that conflict.

I will have just a word on the specific challenges, for which I would be grateful for my noble friend’s reaction this afternoon or, if he feels that I have gone too far off-piste and his brief is not ready for this, I am happy to receive a letter, and I am sure other Members of the Committee will be happy to do so too.

Noble Lords interested in the area will be familiar with what are called, in current legislation, cross-class cram-down provisions. These prevent a small group of creditors greenmailing—holding a restructuring plan to ransom. In that sense, they seem reasonable enough and sensible, but they also enable one group of creditors to bully another into accepting unfair terms. There are many constraints on individual classes of creditors, and landlords can have difficulty obtaining appropriate compensation or protection. First, it is very costly. The Virgin Active restructuring cost about £3 million. It has to happen very quickly. A real estate company or landlord has three weeks to get its case together, brief its Silks—its legal advisers—and get to court. Once again, these are sufficiently high hurdles that small and medium-sized companies just cannot go there. Big ones can, but smaller ones are left behind. Secondly, life being what it is, unscrupulous firms facing difficulties can make their financial affairs even more difficult in advance of such an issue, so it is even more problematic, costly and complicated for a landlord seeking to obtain protection to go to court and get it.

There is also the concern that landlord restructuring plans can go much further than what is needed just to save the business, if that business is in danger of going into administration. It is what is known in the legislation as the relevant alternative. A firm in trouble has an incentive to plan its financial performance as part of a restructuring likely to lead to administration and so set landlords in particular, but also other creditors, at a disadvantage.

My last point on this matter, and the Government understand this, is that there are not now the protections against connected parties. In company voluntary arrangements, less than 50% must be connected parties. There is no such provision in this measure. With a landlord restructuring plan, 70% of the connected parties —shareholders, creditors, whatever—could vote in favour, with the landlord unable to obtain redress for it.

Those are just some of the issues bubbling up as part of the situation that we face and which the Government now need to think about. What could be the solution? Without diving too deeply into the detail, I point out that the Government have powers under the Corporate Insolvency and Governance Act to introduce further secondary legislation to address these challenges specifically. First, they can amend the rules governing cross-class cram-down provisions. Secondly, they could introduce the 50% unconnected creditor test for LRPs, which, as I have mentioned, presently applies to CVAs.

When my noble friend responds, he may claim that there has been only a limited number of cases of this abuse so far, but, as the noble Lord, Lord Sikka, and I said earlier, the point of maximum danger will be when the pandemic measures are withdrawn, if we extend beyond 30 September. Acting then will be too late: the horse will have bolted. However, if the Government decide to act now, there is a reasonable prospect that the new regulations could be in place in time to keep the horse in the stable. I look forward to hearing my noble friend’s reaction.

[Lord Bassam of Brighton (Lab)]

My Lords, we are back again debating measures to extend the restrictions on the use of statutory demands and winding-up petitions. I think this is the third time we have debated them, and every time we welcome, as we would from our Benches, the Government extending the safety net for businesses in distress because of the pandemic.

Just as we supported the emergency legislation last year, we welcome any measures to support the businesses that closed to keep us safe. As the Minister knows well by now, we argued then that the protections in the Act should be extended over a long period. As the Government extend them again, we reiterate the point, as we have before, that these short extensions cause real uncertainty and worry for businesses in the run-up to each expiry date, concerned as those businesses are with the cliff edge.

As the economy opens and restrictions end, it is right that these measures are kept under review, but we must also remember how many people are still affected by insolvency. The Government’s recent statistics, from July 2021, showed that there were 1,094 registered insolvencies. This was 13% higher than the number registered in the same month in 2020. Does the Minister expect this yearly increase to continue for the rest of 2021? Before he gets into the stream of consciousness response which the noble Lord, Lord Hodgson, so eagerly anticipated, perhaps he could answer a few other questions as well.

Will this be the last extension of these measures, or will we be back in a couple of weeks, or a month or so, since the current extension is only to the end of September? What has changed since the last SI is that some support was not extended beyond the end of June. This includes the small supplier exemptions from the termination clause provisions and the suspension of viability for wrongful trading provisions. The Government have said that these measures were allowed to lapse to enable a gradual return of the insolvency framework to its normal operation. Can the Minister explain how this decision was made? What evidence was it based on? What impact has it had on businesses since June?

As we return fresh from recess, can we hear from the Minister about any new plans the Government have for wider reform of our insolvency laws, including providing some greater protection and support for key industries and their key workers? As Covid support continues to be pulled away, we must ensure that we do not see a whole wave of insolvencies during the latter end of this year, provoking rises in unemployment and making businesses less certain of the environment in which they will work. We need to get the right support to thrive in the post-pandemic period, whenever we feel that comes.

Having listened to noble Lords around the Committee, I think we are all in need of some reassurance. Some colleagues here want to see market forces let rip, but I do not think that doing so is necessarily the best option here, although of course we all want to return to normal. I look forward to the noble Lord’s reassurances and some answers to those key questions, as well as to those raised by the noble Lord, Lord Hodgson of Astley Abbotts.

[Lord Callanan (Con)]

First, I thank all noble Lords for their interesting and, as always, valuable contributions to this debate.

It is worth reiterating that, since the emergence of Covid-19, businesses have received billions in loans, tax deferrals, business rate relief and grants to support them and, vitally, to help them to preserve jobs. The Government’s road map for the staged lifting of restrictions has in my view been a success in protecting the UK from the spread of Covid-19 while the vaccine programme was rolled out, and we can all begin slowly to return to normality.

However, we must recognise that many businesses and others have suffered from the impact of the pandemic for over a year now, and in many cases it will take time to return to full pre-Covid financial health. The Government will continue to do what it takes to support businesses through this period of economic recovery.

The points raised have highlighted the importance of the measure being extended by these regulations and the necessity of extending it once more so that businesses can continue to benefit from it. These regulations will provide the much-needed continued support for businesses to concentrate their best efforts on continuing to trade, preserve jobs and build the foundations for our economic recovery. I sincerely hope that companies and their creditors will come together in good faith to maintain their future trading relationships and secure the benefits for both themselves and the economy as a whole.

I will answer some of the points that were quite fairly put to me in the debate. The noble Lord, Lord Sikka, and my noble friend Lord Leigh asked a very pertinent and relevant question about what will happen when these measures come to an end in a little over three weeks’ time. The Government recognise that there is potential for what I think both noble Lords referred to as a cliff-edge scenario involving the accumulation of unpaid debts becoming due when these restrictions and government fiscal support expire. I can tell noble Lords that work is ongoing with businesses and key stakeholders to develop solutions to enable a viable exit from these measures. All options are being considered, and I hope to make an announcement on this very shortly.

The noble Lord, Lord Sikka, asked what the Government are doing to support creditors who are unable to recover their debts and who are putting their own businesses at risk. To reiterate, this is a temporary measure that is intended to help struggling businesses during the continuation of the pandemic. It does not, as I said initially, permanently prevent the possibility of a creditor serving a statutory demand and/or presenting a winding-up petition. When the legislation expires, a creditor will be able to pursue their debt. We expect this to encourage businesses to continue, wherever possible, to meet their ongoing liabilities as far as they are able to do so.

There is a range of other legal options available to creditors seeking to recover debts which are unaffected by the changes being made here. If is, for example, possible to bring a civil claim to recover a debt. Also, where a company’s inability to pay is not related to Covid-19, it will still be possible to present a petition for winding it up, notwithstanding the points correctly raised by my noble friend Lord Hodgson. There is evidence to suggest that winding-up petitions are still being presented in appropriate cases.

16:00

My noble friend Lord Hodgson also raised an important point about what the Government are doing to support landlords. We recognise the current challenges facing commercial landlords and the significant impact these are having on their business models. We also recognise that many landlords are demonstrating what we would regard as best practice by working closely with tenants to find solutions that work for both parties, and we are grateful to see many of these discussions continuing to take place.

The Government have extended the commercial rents moratorium to March 2022 and will introduce legislation to support the orderly resolution of commercial rent arrears where tenants are affected by restrictions during the pandemic. The legislation will ring-fence rent debt accrued and set out a process of binding arbitration between landlords and tenants.

My noble friend Lord Hodgson also raised many points regarding landlord restructuring plans and—one of my favourite phrases to emerge from all this—cross-class cram down: I managed to say it. I recognise the concerns about restructuring plans and how the new cross-class cram-down provisions are working, and indeed I have been approached separately by landlords, as have officials, and have recently written to them on this; I can share the correspondence with my noble friend Lord Hodgson if that would be helpful. However, the provisions are still relatively new and there have already been some very successful rescue plans. We will, as always, monitor the situation closely, and I pay tribute to him for all the work that he does on this and for his suggestion for the use of powers under the Act. We are more than happy to work with commercial landlords going forward, as my noble friend has suggested.

The noble Lord, Lord Bassam, asked why some of the temporary measures, such as the exclusion of small businesses from termination clauses and the return of personal liability for wrongful trading, were allowed to lapse at the end of June. The answer is that we use a range of evidence and criteria to make such decisions, and we took the view that returning the regime to its normal operation was of vital importance as the economy reopens and we start to get back to normal. Impact assessments will be published in due course.

I hope that I have answered most of the questions that were put to me, and yet again I thank the small number of specialists in this field from whom this House has once again benefited in their useful contributions to this debate.

Motion agreed.

16:03

Sitting suspended.