Corporate Insolvency and Governance Bill

Baroness Garden of Frognal Excerpts

Committee stage & Committee: 1st sitting (Hansard) & Committee: 1st sitting (Hansard): House of Lords
Tuesday 16th June 2020 Lords Chamber

[The Deputy Chairman of Committees (Baroness Garden of Frognal) (LD)]

We now come to the group beginning with Amendment 23. I remind noble Lords that anyone wishing to speak after the Minister should email the clerk during the debate, and that any Member wishing to press this or any other amendment in this group to a Division should make that clear in debate.

Amendment 23

Moved by

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[Baroness Neville-Rolfe [V]]

My Lords, as time is short, I will focus on my Amendment 60. A court of administration normally involves pre-packs, and that is why, with the support of my noble friend Lady Altmann, I want to provide a quick and easy way of ensuring that the power we gave HMG in the Small Business, Enterprise and Employment Act 2015 can be restored. This power was the victim of a sunset clause and a delay in making the necessary regulations. There are later amendments that we may reach today on pre-packs and the encouragement of the pre-pack pool. All of them reflect the fact that a group of us across the House who spoke at Second Reading, including the noble Lords, Lord Vaux and Lord Mendelsohn, think that we need early action on pre-packs. I imagine that we are all rather disappointed—although the usual opportunity for a discussion in the Bishops’ Bar is not available—by the Minister’s response at Second Reading. His suggestion was that strengthening professional standards and existing regulation would be adequate, and if not, there could be legislation at a future date —a sort of mañana.

My amendment is very simple: it would give the Government back the power to make the necessary regulation on pre-packs but it would sunset that power after a year, both to provide the incentive for speedy resolution of this issue and to avoid any unwelcome use of the delegated power for other purposes down the line. I would obviously be delighted if the simple sunset clause I have used in Clause 62 might also help us to consider and find a path to resolving some of the important delegated powers issues we were discussing earlier; I am very hopeful that the Government will be listening in that regard.

I hope that my noble friend the Minister and his department will listen to those of us who have concerns and agree to amend the Bill to deal with the pre-pack issue, perhaps in the way that I have proposed.

[The Deputy Chairman of Committees]

The noble Lord, Lord Adonis, does not seem to be in his place in the Chamber, so we will go to the noble Baroness, Lady Altmann.

[Baroness Altmann [V]]

My Lords, I will be brief. I support the amendments in this group. Amendment 23 from the noble Baroness, Lady Bowles, and the noble Lord, Lord Fox—which the noble Baroness, Lady Bowles, explained very well—helps to explain the importance of increasing the protection for unsecured creditors being pushed further down the list of priority by the measures in this Bill. Following on from some of the remarks by the noble Baroness, Lady Bowles, I suggest to my noble friend the Minister that the Government could even consider offering super-priority for less than a Section 75 debt but still recognise the debts owed to the pension scheme, if it has a deficit. That could be in the form of Section 179 debt, which would at least cover the PPF level of benefit, or even for technical provisions, so that at least that has some extra security, especially in light of the current level of annuity rates following extensive quantitative easing and the extra cost of Section 75 debt.

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As far as my noble friend Lady Neville-Rolfe’s Amendment 60 is concerned, I merely add my support to the wise words she has already laid before the Committee.

[The Deputy Chairman of Committees]

The noble Lord, Lord Hain, has had to withdraw, so I call the noble Lord, Lord Palmer of Childs Hill.

[Lord Palmer of Childs Hill [V]]

I did not realise someone was withdrawing. I asked to speak mainly to support Amendment 60, but also to inquire whether this will achieve what the movers want to achieve. With sale to connected persons, there is always a worry in any liquidation or moratorium as to whether those connected persons are getting a benefit, to the detriment of other creditors. It is also a fact that very often a sale or arrangement with connected persons is a way of saving a company by connected persons taking some of the business out of the company. If there is a situation in which that company can survive enough to pay all its creditors, sales to connected persons could be a valuable tool. I just want to ensure that the Minister says this is an open book and can help in some ways and police in others.

[Lord Fox]

My Lords, we have heard descriptions of a series of power imbalances. There are two large, powerful entities on the scene; one is covered by this Bill and the other is not. One is the banks and financial institutions, and the other is of course HMRC, which is covered in the Finance Bill but not in this. My noble friend Lord Palmer referred to that as the elephant in the room. Those two wield the power, and then we hear the tale of small creditors, small businesses, pensioners and workers eking out a return.

In proposing this Bill, the Government have destabilised what had been a static relationship. Things are moving, and we need to understand in detail how the Government see all this movement shaking out. The Bill, letters and now assurances from the Minister have moved everything around. It is still not clear to me—perhaps it is clear to others—where the power has moved in the end. At the moment, it still looks as if the financial institutions will get increased power as a result of this Bill and HMRC will get increased power as a result of the Finance Bill. If that is not the case, I am happy to be surprised by the Government.

I will say just one other thing. I welcome the suggestion from the noble Baroness, Lady Altmann, to perhaps look at different levels of pension fund debt below that of the Section 75 debt. That could be one way of alleviating some of the concerns. I hope the Minister is able to catch up on what the noble Baroness, Lady Altmann, had to say just now, because there was some wise suggestion there.

[The Deputy Chairman of Committees]

I call the noble Lord, Lord Stevenson of Balmacara. Is he there? No? I call the Minister, the noble Baroness, Lady Bloomfield of Hinton Waldrist.

[Baroness Bloomfield of Hinton Waldrist (Con)]

I thank noble Lords for their amendments on these important issues and their comments in this short debate. The amendments include making additional changes to insolvency legislation in the provisions regarding the prescribed part, which is the amount of a company’s net property that must be reserved for the benefit of unsecured creditors when a company enters insolvency. There is what I take to be a probing amendment, which will provide the opportunity to discuss the effect of priority on creditors, such as pension fund deficit, as flagged by the noble Baroness, Lady Bowles. There is also an amendment in this group from my noble friend Lady Neville-Rolfe to enable the regulation of pre-packs and connected sales in administration. As this matter is being dealt with in group 10, I hope my noble friend will not mind if her amendment is spoken to in full in that group.

The measures in the Bill are intended to help companies maximise their chances of survival during the Covid-19 emergency, to protect jobs and to support the recovery of the economy. That is why other measures that would not alleviate the impact of the current emergency have not been included in the Bill.

I shall first deal with the probing amendment from the noble Baroness, Lady Bowles, and the noble Lord, Lord Fox. It is correct that the priority rules, which apply to some debts when a company enters insolvency following the end of a moratorium, change the way in which a company’s assets are allocated among different types of creditor, but the Government consider there to be compelling reasons why the moratorium provisions should give priority to certain types of creditor. These relate to rent and goods and services supplied during the moratorium, which will enable the company to pull through as a going concern.

For example, they include amounts owed to employees —which, as I am sure noble Lords agree, should rightly be considered a special category—and liabilities involving financial services, where default could result in the company facing a demand to repay a much larger amount, which would prevent the rescue of the company as a going concern. For the moratorium measure to operate successfully, it is essential that providers supplying these types of goods and services during the moratorium have some level of assurance that they will receive payment for those supplies.

The amendments from the noble Lords, Lord Hendy, Lord Hain, Lord Monks and Lord Stevenson, would change the value of the prescribed part and alter the way in which an insolvent company’s property is distributed between different categories of creditor. The rules for calculating the prescribed part were recently amended by statutory instrument in April this year. The noble Lord, Lord Hendy, asked how this was calculated: the proportion set aside for payment to unsecured is calculated at 50% of the first £10,000 of assets plus 20% of the rest up to—he was correct—a current cap of £800,000. This amendment was as a result of a consultation that ran between March and June 2018. As a result of these changes, the maximum amount of the prescribed part was increased from £600,000 to £800,000.

When this issue was consulted on, respondents expressed concern that further alterations to the rules for calculating the prescribed part were likely to have an adverse effect on lending, as floating charge holders may not be able to accurately assess their level of risk and anticipated recovery in the event of the debtor’s insolvency.

The noble Lord, Lord Mendelsohn, asked why the Government have not introduced measures to support the provision of debtor-in-possession rescue finance for distressed companies, in line with other jurisdictions, such as the Chapter 11 arrangements in the US. While the current UK restructuring framework does not provide explicit debtor-in-possession finance provisions, it allows rescue finance to be used to help rescue a financially distressed company. The Government previously consulted on various ways in which rescue finance could form a more prominent part of the restructuring package but, at that time, feedback from stakeholders was that the new measures would still allow for rescue finance with all the features found in other jurisdictions. I hope that answers the noble Lord’s question.

Lastly, the noble Lord, Lord Fox, mentioned the Finance Bill and HMRC taking precedence. I am not sure that he is aware that its precedence relates only to moneys it holds on behalf of employees, such as national insurance. For the reasons I have set out, the Government are not able to accept these amendments. I hope the noble Lords will therefore withdraw their amendments.

[The Deputy Chairman of Committees]

I have received a request to speak after the Minister from the noble Lord, Lord Stevenson of Balmacara. We were unable to hear him earlier due to a technical error.

[Lord Stevenson of Balmacara [V]]

My Lords, I want to make a brief point. The Minister’s response was interesting but very much couched in the existing paradigm. We seem to be in a situation where, as somebody said, the Government have lifted the lid on the debate over how we work out what goes into the insolvency waterfall, as it were, and how to compensate those who lose out as a result of that compression. Pensions should be part of wages and salary; they should not be where they are. Small businesses always seem to suffer. Thirty per cent is just a figure; it is beneficial but it does not go to the heart of the problem of how we deal with creditors and who comprises the neediest in terms of the analysis of what must be paid back and how that should be organised.

As the Minister was trying to argue, I think, there may be a short-term fix to get this thing back on the road, but these reforms will not be sufficient to resolve the inadequacies of the present arrangement. Does she agree that the time has come—but perhaps it is already too late—to review this area critically, with particular reference to issues such as debtor-in-possession financing? Obviously, there is a crisis because of Covid-19; that crisis provides an opportunity to say that we need to look at this issue again. This would be a good time to do so.

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Amendments 24 and 25 not moved.

[The Deputy Chairman of Committees]

We now come to the group beginning with Amendment 26. I remind noble Lords that anyone wishing to speak after the Minister’s reply should email the clerk during the debate. The Minister should allow me to call these Members before seeking a decision on Amendment 26, and anyone wishing to press this or any other amendment in this group to a Division should make that clear in the debate.

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[The Deputy Chairman of Committees]

I call the noble Baroness, Lady Neville-Rolfe. She is not there, so I shall call the noble Lord, Lord Stevenson of Balmacara.