Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill
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Baroness Blake of Leeds (Lab)
My Lords, I thank noble Lords for drawing attention to the inadequacies of the situation that we are in. Until February this year, I was leader of Leeds City Council and we had the difficult job of working with businesses, when the complexity of the welcome resource that was available was challenging, to decide who was worthy of getting the relief and who was not. The comments made today just highlight the difficulties that local authorities are still having to face. I speak now as a vice-president of the LGA and am mindful of its input to this debate.
I thank my noble friend Lord Hunt for focusing on one specific sector and area, because that helps us to understand just what particular sectors are going through. We know that language schools are not the only area having problems but the noble Earl, Lord Lytton, referred to the loss of expertise, knowledge and experience. All those things add up to what we hope will be viable businesses as we emerge from this. In line with the comments they made, and continued by the noble Lord, Lord Cormack, we are faced with a situation across business and local authorities where there is now a lack of confidence, and concern at the lack of consistency and certainty. I hope that the Minister will be able to put our minds at rest on this.
We have had a good discussion regarding our concerns about how the figure of £1.5 billion was achieved. My concern here is that while we talk in terms of billions, we actually need to drill it down to the cost for businesses. I think what we are looking for collectively in the answers is a recognition of the urgency and the detail, and to hear when and how this is to be brought forward.
The Minister of State, Home Office and Department for Levelling Up, Housing & Communities (Lord Greenhalgh) (Con)
My Lords, I am grateful to noble Lords for the opportunity to speak to the benefits of Clause 1 of the Bill, which has received broad support throughout its passage. I will shortly come to the particular concerns of the noble Lord, Lord Hunt of Kings Heath, and the noble Earl, Lord Lytton, as well as those of the noble Baroness, Lady Garden of Frognal, so ably put by the noble Baroness, Lady Pinnock. They eloquently set out their objections, wanting to promote a wider debate about the need for clarity around guidance and the urgency of this measure. I will endeavour to respond to those concerns.
Clause 1 provides that coronavirus and the Government’s response to it should not be considered a legitimate basis for a successful material change of circumstance appeal. There are many thousands of these appeals currently in the system; the passage of the Bill will ensure that they do not stand. It is important that we clarify through this legislative measure that the impact of coronavirus will be accounted for at the next revaluation, rather than becoming a legitimate ground for appeal between revaluations. Failing to do so would clog up the courts, undermine local government finances and cause the MCC legislation to be used in a way that was not intended when it was passed. As noble Lords will recall, the provision for MCCs was not intended to reflect market-wide economic effects, which are rightly considered at general revaluations, the next of which will be in 2023.
The Government have received widespread support from parliamentarians in both Houses for this measure. There has been general approval of Clause 1 as a necessary measure to remove a significant source of financial uncertainty from local government, as well as to ensure that the law relating to business rates appeals operates as intended. The noble Lords who tabled this amendment provided by way of explanation that they wish to prompt a wider discussion of the Government’s plans relating to the £1.5 billion of business rates relief that we have promised, on top of the £16 billion of relief already provided to businesses throughout the pandemic.
As the Government have made clear, the £1.5 billion is intended to enable local authorities to provide targeted support to the sectors most affected by the pandemic but which have not benefited from support linked to business rates. Within those sectors, the relief will enable councils to award relief to businesses that they consider the most affected by the pandemic, using their local knowledge and, obviously, having regard to the government guidance. I am confident that it will prove to be a far more effective and faster way of directing support to businesses impacted by the pandemic than the MCC challenge process. That is in part because councils use their local knowledge of their area and ratepayers will ultimately be responsible for decisions on the award of relief. It would not be right for Ministers here to say whether particular ratepayers or types of ratepayers will benefit from the £1.5 billion scheme.
Work is ongoing between my department, the Treasury, the Valuation Office Agency and local authorities to prepare guidance to support the relief process. The shape of the final guidance, and how in practice we will smoothly pass decisions on this relief scheme to local authorities, will need to reflect various factors, including the existing framework of government support, information held by local authorities and their capacity to administer schemes quickly. We will continue to work on the relief fund and prepare the guidance for publication as soon as the Bill receives Royal Assent. We are of course mindful of local authorities’ need for an effective set of parameters within which they can design their local schemes. Local authorities should stand ready to develop and deliver their schemes as soon as they are able.
The noble Earl, Lord Lytton, wanted to know where the £1.5 billion figure came from. It is quite clear that local government made provision, as reported, of almost £1 billion for Covid MCC challenges for 2020-21. That was, in effect, being held in reserve rather than being spent on local public services. This measure enables that £1 billion that is currently provisioned to deal with challenges to go towards the effective delivery of local public services. Of course, it is a matter for local authorities themselves to determine. That certainly gives them the freedom to release that money that is currently tied up if we do not proceed with this piece of legislation.
Baroness Blake of Leeds (Lab)
Thank you for those contributions. There is no doubt among any of us about the real sense of urgency and the importance of the amendments that we are discussing in this group. Again, it is inevitable that the question of the £1.5 billion comes up, but we also need to keep a very close eye on the economic prospects as we go forward. I have to say, the confidence around that is not as great as perhaps we are being led to believe.
Again, I thank the noble Baroness, Lady Pinnock, for putting her name to Amendments 1 and 2, and for the comments of the noble Earl, Lord Lytton; he really got across that sense of urgency. I can confirm that Labour has called for the longer-term abolition of the current system of business rates, to be replaced by a new system that is better balanced between high-street businesses and the out-of-town online giants, as we have been hearing.
On Amendment 2, does the Minister agree with the assessment that we are in a very lumpy situation, and will he be looking at how the playing field can be levelled out? That is a really important question that we need some certainty on. Again, Labour has called for an increase in small business rate relief next year from the current threshold of £15,000 to £25,000. Does the Minister accept that we need an increase in relief to help small businesses cope?
I turn to the amendment in my name. It is important, at every opportunity that we have in this House, to really spell out the dire situation facing local authorities, particularly regarding the financial position that they are in. This is one reason local authorities are asking for clarity and a sense of urgency. They are also asking that, once the criteria are established, the way that this unfolds is kept under review, and for local authority guidance to be published as soon as possible. We made a very strong case for that at Second Reading.
We know that Covid-19 has had a devastating impact on local authority finances, with a combination of income falling and costs rising. The income element for local authorities, I am afraid, is one which the former Secretary of State would not take into account in terms of the losses that local authorities have been facing. This is on top of the fact that Conservative Governments since 2010 have cut £15 billion from central government funding to local authorities.
We are looking at a situation, according to the LGA, where councils in England will face a funding gap of more than £5 billion by 2024 just to maintain services at current levels. It estimates that the Government will need to find an extra £10.1 billion per year in core funding to local authorities by 2023-24 just to plug the existing funding gap. New research by the BBC, I understand, has shown that UK councils have found a £3 billion black hole in their budgets as they emerge from the pandemic. Put in that context, I think we can all understand why there is so much concern from local authorities about how much is going to be available to them to distribute, to enable businesses in their areas to survive and to continue to pay the rates due to them. Again, I ask whether the guidance can be issued to local authorities as a matter of haste and whether it is possible for us to have an understanding of when that will be.
I was actually in the room when the former Secretary of State told local authority leaders that the Government would provide
“whatever funding is needed for councils to get through this and come out the other side”.
Again, I ask: does the Minister believe that this promise has been kept? I do not think we need a list of all the different resources that have been given to local authorities, welcome though they have been. Unfortunately, they do not match the need and we know from the impact of the pandemic that need in our communities, through a whole raft of measures, is really going through the roof.
In that context, I hope that everyone will recognise the urgency required to resolve these matters but also the enormous challenges facing local authorities in the years ahead.
Lord Greenhalgh (Con)
I will start with the new clause proposed by the noble Baroness, Lady Pinnock, and the noble Lord, Lord Fox. This would require the Government to carry out an assessment of whether the business rates measure in the Bill improves the wider system of business rates.
I remind noble Lords that Clause 1 is limited in scope. The Government are making a targeted intervention through the Bill to ensure that the law concerning material changes of circumstances operates as it should do as regards the impact of coronavirus on rateable values. The Government are not, by contrast, offering the Bill as a means of introducing significant reform to the business rates system. Indeed, it would be wrong to do so. The Bill is narrow in its focus precisely so that Parliament can deliver certainty on this issue, with minimal delay, to those that need it, particularly local authorities.
I appreciate that many noble Lords wish to see more substantial changes to the business rates system, as pointed out eloquently by the noble Baroness, Lady Pinnock, and I can provide good news in that regard. Noble Lords will have seen the Chancellor’s Budget Statement and may have read the final report of the Government’s business rates review, published alongside the Budget. The Government have committed to changes to improve the business rates system through delivering more frequent revaluations, starting from the next revaluation in 2023. This answers widespread calls from stakeholders and will help deliver a more timely, and hence fairer, distribution of business rates.
Baroness Blake of Leeds (Lab)
I start by thanking my noble friend Lord Lea for moving his Amendment 3. I know that we will have further discussions on the issues relating to it.
Like the noble Lord, Lord Fox, I do not want to go over the extensive debate that both noble Lords missed at Second Reading. The points made were so pertinent; I think most of us will have received extensive correspondence around the circumstances in which different creditors, in particular, find themselves.
I will limit my comments on my amendment to drawing together all the expressions of concern from the previous discussions about the lack of scrutiny. There is a real sense about a course of action being followed that enables people who should not be practising an opportunity to continue doing so in other ways. Most of all, I ask the Minister to look at whether we could establish an inquiry into unlawful behaviours relating to dissolved companies.
The other question that has come out of these discussions concerns the capacity of the different organisations. Can the Minister confirm what assessment he has made of the Valuation Office Agency’s capacity to deal with non-Covid-related material changes in circumstances? Continuing on the issue of resource, there is real concern about BEIS and the Insolvency Service. We recognise and welcome the requirement for the Secretary of State to report on the resources and powers available to the Secretary of State, BEIS and the Insolvency Service in relation to this Bill.
I understand that support staff at BEIS, represented by the PCS union, recently announced the possibility of strike action. They called for improved working conditions and an end to low pay. Does the Minister expect that further support staff will be required by BEIS in order to undertake the fulfilment of the new responsibilities?
The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Callanan) (Con)
I thank all the speakers on this group. I will take the points made in turn, starting with Amendment 3 in the name of the noble Lord, Lord Lea. I get the impression that his amendment intends to expand the information that the court can consider when it hears an application for the disqualification of a former director of a dissolved company to include that person’s conduct in all other insolvent or dissolved companies. If that is the case, I am happy to assure the noble Lord that the court is already able to consider such evidence, whether through the report supporting the disqualification application or through the evidence submitted either in defence of the application or in mitigation by the defendant. It is also possible for the Secretary of State to introduce information provided by third parties, such as regulators, in support of a disqualification application. I hope that the noble Lord will concede that his amendment is unnecessary.
Lord Lea of Crondall (Non-Afl)
My Lords, I thank the Minister for those responses. Before I withdraw the amendment, I would add that he dismissed a point I made without looking at the context in which I made it. The House of Commons Library briefing, Phoenix Trading and Liability of Directors, covers the starting up of
“a phoenix company following the liquidation of the original company”.
However, the briefing says:
“The Insolvency Service may also investigate a failed company (and the role of its directors) where there are concerns about either the trading practices of the company or the circumstances surrounding the failure of successive companies.”
The ability of the Insolvency Service to investigate
“the failure of successive companies”
in a liquidation scenario should, logically, be extended to investigations into successive dissolved companies. I am not quite sure whether the Minister responded to that point; maybe he would like to respond now.
Lord Callanan (Con)
I am happy to make it clear for the noble Lord again. The misconduct, or otherwise, of directors of previous companies can already be taken into consideration, and is in many ongoing cases. It can be considered by the court and the Secretary of State can submit further evidence, as can creditors themselves. I assure the noble Lord that evidence of previous misconduct or previous companies can always be taken into consideration.
Lord Lea of Crondall (Non-Afl)
On this problem of serial offending, as it were, and the limitation of the courts to look into it, I will take time to clarify exactly what issue has been reported. This will ensure there can be no misunderstanding on Report, where it will come out, as to where there is a problem at the moment, so that we are not talking at cross purposes.
This has been a useful opportunity to drill down into some of these matters. We will return to them on Report. I thank my noble friend for agreeing with me; we will both need to composite some of this material into a shorter amendment on Report. At the moment, I trust that the Minister and the department will reflect on the merits of what has been said. I beg leave to withdraw the amendment.
Lord Leigh of Hurley (Con)
I rise to support Amendment 8, to which I have added my name, and thank the noble Lord, Lord Fox, and the noble Baroness, Lady Pinnock, for doing the hard work on the drafting. It is much appreciated. I am happy to support the amendment.
First, I disclose my interests as set out in the register, not least that I am a shareholder and chairman of Manolete Partners plc, which is an AIM-listed insolvency litigation firm. It does not exactly touch the Bill, but it is worth drawing your Lordships’ attention to it. Over many years, I have been a director of a large number of companies and other relevant organisations, one or two of which have become dormant and subsequently been dissolved—although, I hasten to add, with no loss of anyone else’s money.
I, too, thank R3 for its briefing and its perennial helpful guidance and advice. I apologise for not being present at Second Reading. As this Committee now knows, that was due to a last-minute change of date; I associate myself with the remarks made by the noble Lord, Lord Hunt of Kings Heath.
The Bill is sorely needed, and the Government’s proposals in respect of dissolved companies are very welcome. However, there has been much debate on the effectiveness of the measures proposed in Clause 2(6), which is what we are here to discuss this afternoon. I note that there was much debate on this subject in the other place. At that point, proposals were put down for new clauses that are broadly in line with this amendment, which is slightly different in its purpose from the amendment in the name of the noble Baroness, Lady Blake.
I think we all agree that the route proposed in the Bill is better than a criminal sanction because there is a lower burden of proof. On resources, which have been mentioned by a number of noble Lords, it is difficult to know what the numbers might be. It is worth noting that there are some 500,000 company dissolutions a year in the UK, of which some 5,000 might need investigation by the Insolvency Service. That figure of 5,000 has been out there for some time. The reason it has been quoted is that it is the number of companies that have been struck off and where a process has been started to put them back on the register, so we know that there are at least 5,000 companies a year that have gone back on the register. To do that costs a few thousand pounds, so many people are deterred from bothering to go to court to get companies put back on the register, with all that entails. There might in fact be many more cases worthy of investigation under the proposed new, simpler system, which we all welcome. This will be a big increase from the 1,200 cases a year, I think, that are currently investigated, hence the concern that this clause seeks to address.
In the other place, the Minister, Luke Hall, is not a BEIS Minister. That goes back to the poignant points made by my noble friend Lord Cormack that a hybrid Bill sometimes suffers from one Minister addressing parts of the Bill that do not centre on his or her expertise. We are extremely fortunate to be blessed with the great knowledge and experience of the BEIS Minister in front of us this afternoon. Mr Hall assured the other place in Committee that the Insolvency Service produces reports on its own activities, which is correct. However, these amendments would ensure that specific questions we would want answered are addressed in those reports, and with a degree of independence. I am not sure that a report by the Insolvency Service would be able to determine the points we made, as it is bound to be accused of a conflict of interest in opining on whether sufficient powers and resources are available to it. It would be nice to see an independent report laid before Parliament.
As the noble Lord, Lord Fox, said, the acid point we really need to be told is how much money is recovered from directors through this route for creditors other than HM Government. We would all be delighted to see them, through HMRC or any other agency, recoup all the proceeds they are owed, but will the Secretary of State continue to look with quite the same zeal as we know he or she will for government money when it comes to acting for other creditors? Perhaps the Minister will be able to set out—this afternoon or later—exactly how the Government intend to prosecute culpable directors and recoup the funds.
The Minister mentioned compensation orders as the route to recoup funds but, as I understand it, compensation orders can be used to benefit only one creditor, so can the Minister comment on how they will be widened to benefit other creditors? In addition to explaining how the compensation orders will be used, will the Minister set out whether dissolved companies with culpable directors will then be put through an insolvency process?
I hope this might be addressed on Report and a commitment made to look at how Companies House operates—particularly to consider some of the ideas raised during the passage of this Bill, such as not letting Companies House strike off a company until the Insolvency Service has had a good opportunity to look at the exact circumstances of it being struck off.
Finally—and I hope the Minister will allow me to raise this matter in this debate—I wonder whether he feels moved to comment at some point in Committee or later on some of the interesting issues raised by the noble Lord, Lord Sikka, at Second Reading. They were not addressed in our previous sitting, and I think there should be some opportunity, at the very least for a right of reply for the insolvency profession and others on some of the very serious accusations made at Second Reading. It would also be helpful if the Government could commit to set out their view on the insolvency profession and its regulation at some point.
Lord Callanan (Con)
I thank all noble Lords who contributed to what was a good short debate on Amendments 4, 5 and 8. I completely agree that it is very important that we closely monitor the effectiveness of the new legislation and make sure that our departments are adequately resourced to do the work asked of them.
I start with the amendment of the noble Baroness, Lady Blake, on the reporting of enforcement outcomes. I hope that she will be reassured to hear that there is a wealth of insolvency enforcement statistics. They are published regularly by the Insolvency Service and are readily available on this internet thing.
The published data includes figures for company insolvencies across the UK and personal insolvencies in England and Wales, as well as some of the data behind those figures, which the noble Baroness might be interested in, such as regional variations. Those statistical releases are made every three months, but, since the Covid pandemic started, experimental releases of monthly data concerning numbers of insolvencies have been provisionally added by the Insolvency Service. This additional information has been extremely valuable as an indicator of the impact of Covid on insolvencies. From my point of view, the number has been lower than I expected, which is good news.
Specifically regarding the Insolvency Service’s enforcement activities, information on numbers of disqualification orders is published and updated monthly. Those figures include the number of companies that are wound up in the public interest and a breakdown of disqualification orders and undertakings obtained under the relevant section of the Company Directors Disqualification Act under which they were sought. Those monthly figures also include lengths of periods of disqualification and, furthermore, there is an annual report on the nature of misconduct in disqualification allegations.
Perhaps the noble Baroness could have a look at all that published information and check that it is adequate for her requirements. I hope that this reassures her that, when she does the online search, she will find all the information she requires. There is a copious amount of excellent, helpful data. If the Bill is subsequently passed, future reports will include disqualification numbers made against former directors of dissolved companies.
The noble Lord, Lord Fox, made the very good point that it is important to see evidence of returns to creditors, but I make the important distinction that the disqualification mechanism is for deterring misconduct and protecting the public. It is not, in fact, intended primarily to be a method of recovering funds to creditors. However, he will be pleased to hear that compensation orders can be issued in respect of disqualified directors, who may be required to make good financially on the damage that they have caused, which I suspect is the outcome that we all looking for.
Both the noble Lord, Lord Fox, and the noble Baroness, Lady Blake, asked a good question about the numbers of additional staff. I assure them both that the point I made earlier applies: resources are not limitless, the Insolvency Service already has a team set up for this precise purpose, and a complaints portal is waiting to go live, although of course we will not activate it until the Bill is passed and given Royal Assent.
My noble friend Lord Leigh asked about the number of cases that have been referred to. If I may respectfully correct him, the number of cases investigated that he cited was actually the number of successful disqualifications. There will be many more cases investigated where it will have been determined that there was no public interest in proceeding. That is a difficult judgment that officials in the Insolvency Service and, ultimately, the Secretary of State will take.
My noble friend also asked about the regulation of insolvency practitioners. As I think he is aware, we are reviewing the regulatory framework that governs them to ensure that the best possible outcomes are achieved for creditors. He will be delighted to hear that we will publish the proposed reforms to the insolvency profession shortly, which I hope will go some way to assuaging his concerns.
I move on to the figures that we will publish and the impact assessment in terms of a post-disqualification review. Did the noble Lord want to intervene?
Lord Fox (LD)
I intervene given that the Minister is moving on. I specifically asked what tools would be available to deliver compensation. The Minister referred only to compensation orders; the noble Lord, Lord Leigh, made it clear that there are extreme limitations to those and if you talk to the professionals, they have a great deal of doubt about how effective they can be overall. Will the Minister either address that now or come back to us in letter form to explain how these compensation orders can be used to compensate people more widely or, if they cannot, what other options there are?
Lord Callanan (Con)
I outlined the issue of enforcement orders, but I am very happy to clarify any additional tools available to the Insolvency Service and to other agencies directly—though not connected to this Bill—to help recover funds both for public authorities and individual creditors. I will write to him about that.
As I said, we have already committed in the legislation to conduct a review into how it is working in practice. That will be done within five years of commencement of the legislation, in line with our better regulation requirement. It is too soon to determine exactly how that review will look, but it will likely be informed by overall case numbers and will include an assessment of whether the new powers are being used as intended.