Insolvency Law and Director Disqualifications

(Limited Text - Ministerial Extracts only)

Wednesday 14th June 2023 Westminster Hall

[The Parliamentary Under-Secretary of State for Business and Trade (Kevin Hollinrake)]

It is a pleasure to serve under your chairmanship, Ms Fovargue. I add my grateful thanks to the hon. Member for Salford and Eccles (Rebecca Long Bailey) for bringing forward this important debate. Members may know that I spoke out on this subject a lot from the Back Benches, and my appetite for change in this area—when parliamentary time allows—remains the same.

There is no doubt that the Government absolutely believe in strong corporate governance and an effective insolvency regime. The hon. Lady rightly referred to the demise of Carillion. Years have passed since that happened, but it is very important that we do not forget the lesson learned from the impact that had on all stakeholders, including employees and small and medium-sized enterprises in the supply chain.

I have great sympathy for those affected when companies declare themselves insolvent or go through insolvency in any circumstances, including the SMEs in those companies’ supply chain. The hon. Lady referred to the case in her constituency of Orchard House Foods; the redundancy protection service stepped in rapidly after the insolvency to make sure that people were properly compensated. Nevertheless, it was a worrying time for many people. Clearly, it would not be appropriate to talk about any ongoing investigations, but it is important that the Insolvency Service follows through on these matters and ensures that proper procedure is followed.

Given the comments made in the debate, it is important to say that most directors and businesses are bona fide and do the right thing. Of course we are concerned when companies go into insolvency, for all the reasons that have been outlined in the debate. The hon. Member for Strangford (Jim Shannon), who is no longer in his place, commented on cases in his constituency. Such cases have immense knock-on effects for stakeholders in our constituencies. Indeed, this is one of the issues on which I get the most letters from colleagues.

We must consider any changes we make to the regime in the light of the fact that most directors and businesses do the right thing. It is important to recognise that our economic system is not a zero-failure system. Failure is part of the process, and unfortunately many bona fide businesses that seek to do the right thing and invest their hard-earned money enter insolvency—in many cases through no fault of their own. We need a regime that reflects that context.

I think that most people accept that the FRC has significantly improved its oversight of the sector in recent years, particularly under the stewardship of Jon Thompson. There have been significant improvements. The right hon. Member for Hayes and Harlington (John McDonnell) referred to the regulator as being asleep at the wheel. That may have been a fair accusation years ago, but it is probably inappropriate now. However, when parliamentary time allows, it is right to replace the regulator with a new one—the audit, reporting and governance authority.

The hon. Member for Salford and Eccles referred to the US’s Sarbanes-Oxley system. Should we adopt that kind of system? We believe that there is a balance to be struck. We do not want anything that would be counter-productive to our economic system, in which competition is ultimately the best outcome for consumers. High competition drives down prices for consumers and drives up service. It is therefore important that we do not move to a system of a new generation of professional directors. It is important that our system is entrepreneurial, encourages investment, and encourages people to start up and expand businesses. We are, however, planning new corporate governance rules, which I will talk about in a second.

A number of hon. Members asked whether we will reform the Companies Act 2006 duties. The Act already requires all company directors to have regard to employee, consumer, environmental and other interests while pursuing the success of the company. Since 2019, large companies have been required to report annually on how those wider interests have been taken into account in boardroom decision making. I think the hon. Member for Feltham and Heston (Seema Malhotra) made a point about reform of those duties. It is important that we parliamentarians are cognisant of the burden on businesses; I applaud her for referring to that. Many businesses are under significant pressure right now from a number of angles, and it is important that we do not add to the burdens on them.

The right hon. Member for Hayes and Harlington raised the issue highlighted by Baron Sikka. I have worked very closely with Baron Sikka on economic crime and money laundering, and on the fact that there are 41 regulators in the financial system. It is important that we have straightforward corporate governance reform, so that we can hold people to account on their duties under the Companies Act 2006 and other requirements.

The Government response in May 2022 to our consultation on the “Restoring trust in audit and governance” White Paper confirmed plans to require very large companies to provide targeted new annual reporting on their management of risk and certain other matters. The new reporting will apply to UK-listed and private companies with more than 750 employees and an annual turnover of more than £750 million. Crucially, it will consist of four new statements in those companies’ annual reports: a resilience statement setting out how the company is managing significant risks over the short, medium and long term; confirmation that the company has sufficient realised profits to pay out any proposed dividends, and a statement about the company’s approach to profit distribution; a statement on the directors’ actions to prevent or detect material fraud; and an audit and assurance policy setting out how the company is assuring the quality of non-financial information that largely lies outside the statutory audit.

The new reporting requirement responds to concerns identified followed the sudden collapse of Carillion and other very large companies. Shareholders and other stakeholders need more information to understand the steps being taken by directors to ensure the future prospects of the company. We are developing secondary legislation, which we hope to lay before Parliament soon, to implement those new measures.

I often spoke about insolvency reform from the Back Benches; indeed, I co-authored a report called “Resolving Insolvency” on behalf of the all-party group on fair business banking. That relates to a point raised by the hon. Members for Feltham, and for Strangford, about insolvency reform. The Insolvency Service primarily investigates company directors and corporate misbehaviour. That includes investigating trading companies, and taking court action to wind them up when they have been acting against the public interest—for example, when there is evidence of fraud or corporate abuse. About 150 companies are investigated each year for that reason. The Insolvency Service also works collaboratively with other enforcement agencies to ensure the public are protected.

The bulk of the Insolvency Service’s enforcement work relates to investigating the conduct of directors of companies that are subject to formal insolvency, such as liquidation or administration. If an investigation finds evidence of misconduct by a company’s directors, the Insolvency Service may bring disqualification proceedings where that is in the public interest. Disqualification can be for a period of up to 15 years, and breach of a disqualification order is a criminal offence. Disqualification is therefore a significant interference with a person’s rights, and the courts take it very seriously. High standards of evidence are required. If a disqualification order is made, in certain circumstances there is the option to seek a compensation order against the disqualified director, who is personally required to pay back the losses they caused.

Having said that, we can go further on insolvency reform. It is the Government’s intention, when parliamentary time allows, to move towards a system of regulation with a single independent regulator, and away from the recognised professional bodies that we see today. I am very keen to take that forward when parliamentary time allows.

The hon. Member for Gordon (Richard Thomson) spoke about money laundering, the number of supervisors who act in that space, and the need to streamline that regime. His Majesty’s Treasury is looking at that, and is due to report on how we do that more effectively. I do not recognise his comments about the changes we are making as a consequence of the Economic Crime and Corporate Transparency Bill. That is the most significant change to Companies House in 170 years, and I look forward to the Scottish Government introducing a legislative consent motion so that Bill is fully effected in Scotland. Some of the hon. Gentleman’s comments, such as those on verification , were about the situation today, rather than the situation as it will be. We are all on the same page on the need to replace the dumb register with a database with integrity. That is one of the registrar’s four main objectives.

On fees, we are keen to make sure that it is quick, easy and affordable to start up a company in this country, but we recognise that fees need to increase to make sure that Companies House, and potentially the Insolvency Service, have the resources to do their work. We will therefore bring forward plans to make sure that those resources are there, through increases to the incorporation fee and the annual fees for registration.

On the hon. Member for Gordon’s points about directors’ limits, we do not feel that is a key issue. Setting an arbitrary limit on the number of directorships would not be the right way forward. I was the Minister responsible for taking the Economic Crime and Corporate Transparency Bill through the House, and if I remember rightly, the SNP suggested a limit of 20 directorships. I had more than 20 directorships at any one time in my past business life, so that limit would have restricted me from making some investments in the economy that created jobs and raised taxes. I do not think those kinds of arbitrary limits are right; instead, we see the regime working on the basis of red flags. If a high number of directorships is connected with other potential issues, we expect the registrar to investigate.

The hon. Member for Gordon raised an important point about phoenixing. That has certainly been of concern to many hon. Members, and we are keen to act on it. We have made significant changes around phoenixing. Individuals who have acted as a director of an insolvent company at any time in the preceding 12 months are prevented from forming, managing or promoting any business, including a company with the same name as, or a similar name to, the liquidated company for a period of five years from the date of insolvency. There are both criminal and civil penalties for a breach of that restriction, including director disqualification proceedings.

The Government strengthened the law in that area in 2021 by introducing changes to the disqualification regime to make sure that directors cannot avoid investigations by simply dissolving their companies. That point was also made by the hon. Member for Feltham and Heston. Twenty-five directors have been disqualified under that legislation. None of those disqualifications would have happened without the Government’s legislation in that area. We want to make sure that legislation goes further, and more investigations are ongoing. I will not specify the numbers, but it is fair to say that when the IS looks for cases of phoenixing, that is not the only misconduct identified. Often, those cases are dealt with as more serious offences that it is more important to prosecute. The hon. Lady gave a figure of 25, but that does not reflect some of the detriment and misconduct that we have identified.

We absolutely think there is a case for reform, and we are determined to take reforms forward quickly, as soon as parliamentary time allows. We also want to make sure that the UK is the best place in the world to do business, and that we do not interfere with people’s ability to start up and scale their business; however, we also want to maintain proper fiduciary responsibilities and have a system that properly oversees the conduct of directors. We will bring forward the legislation that strikes that balance as soon as parliamentary time allows.