Corporate Insolvency and Governance Bill

Lord Hope of Craighead Excerpts

2nd reading & 2nd reading (Hansard) & 2nd reading (Hansard): House of Lords
Tuesday 9th June 2020 Lords Chamber

[Lord Hope of Craighead (CB) [V]]

My Lords, this is a formidable Bill. Some years ago, I edited the chapters on companies and insolvency law in a practitioners’ textbook and I used to practise in this field myself, so I have some insight into how extensive and complex these subjects are. I pay tribute to those responsible for putting the Bill together. At first sight they appear to have covered the ground very well, but their product has been a challenge for us in this House as we try to master this emergency Bill in such a short period of time.

I have no problem, in principle, with the temporary provisions about meetings of companies and other bodies, or the extension of the periods for filing accounts and providing information for the registration of changes in corporate governance. These are sensible measures in a situation where deadlines of that kind are incapable of being met. The wrongful trading provisions and the provisions about corporate insolvency, however, need to be looked at more carefully. Concern has been expressed about the phrase,

“the court is to assume that the person is not responsible”,

in Clause 10, which is about the suspension of liability for wrongful trading. Can the Minister tell the House whether this assumption is intended to be irrebuttable? If it can be rebutted, the protection the clause offers will be less certain than the word “suspension” in the clause suggests. Directors, who, as has been pointed out, may be subject to action for other breaches of duty, will need to know where they stand in this respect.

As for the moratoriums, it is not difficult to see the value of these for companies in financial difficulty, but giving protection to debtor companies that delays the taking of remedies against them by their creditors is bound to have implications for the creditors too as time goes on. It is important to get the balance right between these two competing positions. My impression is that the banks are content, for the time being, not to press too hard on companies that are in difficulties, and the property market is in such an uncertain state in present circumstances that there is little incentive for the holders of fixed securities to call them in. However, in the longer term, as creditors become less relaxed about the situation, challenges will arise that will need to be faced up to. That may be a further reason for keeping the provisions of the Bill under careful review.

I have one or two particular points to make. Further thought needs to be given to limiting debts that are eligible for priority as moratorium debts in order to avoid abuse of that privileged position and, as has already been suggested, damage to the position of HMRC as a preferential creditor, given the immense harm that situation may create, particularly for other creditors. On the notification requirements in Chapter 3(A), should the company not be required to provide a list of its creditors when making the application, to assist the monitor? As for Chapter 3(A9), should there not be a limit on the number of extensions, and an overall limit on them without the creditors’ consent? As for Chapter 5(A35), to avoid the abuse of the process should there not be an express duty on the monitor to ensure that the company does not undermine rescuing it as a going concern? I hope to come back to these and other details in Committee.

Corporate Insolvency and Governance Bill

Lord Hope of Craighead Excerpts

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

[Lord Mendelsohn (Lab) [V]]

My Lords, I will speak to Amendment 3 and make some general observations.

Amendment 3 relates to the recognition of the appropriate debts of creditors. In particular, one must be concerned about smaller businesses, which may well suffer as creditors and unsecured creditors from such a transaction. While these may be smaller crumbs of comfort than the overall Bill, it is absolutely right that businesses that fall into this process properly recognise the full extent of the debts that they owe so that statutory interest is recognised as a cost and a consequence for them. It is right that these debts should be appreciated and recognised in the statements that the monitors have to put forward. I hope that the Minister will consider the Government introducing this measure, not just to make sure of the full amount that is owed to a company because of late payment and late settlement of their debts but also because it sends an important cultural message.

I support some of the measures introduced by other Members of this House. In particular, it is very important that we probe the Minister for much more detail about the role of the monitor. We must look at the qualifications, skills and independence of the people who will occupy those posts, as well as the costs.

Here I am concerned that the impact assessment itself shows that very little work has been done on the likely operating mechanisms of the Bill. The figures that it uses are from a study in 2010, and I hasten to add that in the last decade we have seen a significant increase in the rise of professional service costs, and the costs in the impact assessment do not fully recognise those.

We do not have a full appreciation of what skills are required for this, and I strongly support the notions expressed by my noble friend Lord Stevenson that there are many others who we might want to introduce into this area who have appropriate skills that are recognised by professional accountancy bodies. Many people who have been involved in the turnaround industry would do very well at this task—much better than qualified insolvency practitioners. I would be interested to hear the Minister’s comments as to how the Government will look at the appropriate skills that are required for someone to successfully be able to carry out the role of a monitor, including the measures to try to ensure the proper independence of the monitor, that they have a real view for the potential future success of the business and that they are not beholden to any particular class, but particularly those who are connected parties.

However, I strongly support the amendment, which addresses the difficult question about the time for a monitor. This process should be given an extended period, and it would be worth while in the first instance extending the first period to ensure that we do not go through a quick cycle to make sure that it is there.

On the amendment in the name of the noble Lord, Lord Leigh, while many people will consider this to be a difference without a distinction, he will be able to express the nature of his interpretation.

It is important also to probe the Minister on the fact that we have seen that many businesses, particularly at latter stages, like to structure themselves in such a way that they can move a variety of the different connected parts of the business through different processes, and will disaggregate the overall enterprise and take individual companies to be able to crush suppliers or deal with the dispensing of staff during that period. It is important that the application of a company’s business helps us ensure that companies do not act inappropriately and section off parts of their businesses, as we saw just a couple of days after Second Reading, with one of the most disgraceful pre-packs of all time. A connected part of a business was crushed in order to eliminate the full suppliers, and it isolated a particular business rather than the whole enterprise. It will be important for the Minister to give us some reassurance that the definition of a company does not allow businesses to game the system, or allow some form of recourse or interpretation that makes that possible.

[Lord Hope of Craighead (CB) [V]]

My Lords, I will speak to Amendment 4 on the Marshalled List, which is in my name.

The context for what I propose is to be found in new Section A8, which requires the monitor, as soon as reasonably practicable after the moratorium comes into force, to notify every creditor of the company of whose claim he is aware, giving notice of when the moratorium came into force and when it will come to an end. The importance of this duty is highlighted by the fact that the monitor commits an offence if he fails without a reasonable excuse to comply with it. That is as it should be, as the creditors need to know about the moratorium as soon as possible, because it has such an obvious effect on them and their interests. Their right to recover the debt is effectively frozen for the duration of the moratorium. That may have significant adverse effects, which may need to be provided for urgently to avoid the creditors’ financial embarrassment. But the monitor’s duty to notify the creditors extends only to those of whose claims he is aware. There is no suggestion anywhere in the Bill, so far as I can see, that the monitor is under a duty to make inquiries. Therefore, the provision, as it stands, is a rather weak protection for the creditors, whose interests will inevitably be disadvantaged by the moratorium, against which they are being given no right to object.

In that context, I am proposing an addition to the list of relevant documents in new Section A6. These are the documents that must accompany the directors’ application for a moratorium. The amendment seeks to add to the definition of “the relevant documents” in Section A6(1) a list by the directors of all known creditors of the company. The aim of the amendment is to ensure that the monitor has access to this information as soon as possible. That is because he really does need it, if the performance of his duty to notify is to be effective for the protection of the creditors. The directors are, of course, in a much better position to say who the creditors are than the monitor, who is a newcomer to its affairs. Adding this list to the definition will greatly strengthen the effectiveness of the duty to notify in new Section A8. It will enable the performance by the monitor of his duty to notify to be much more effectively scrutinised, and enforced, if necessary, than it would be if all that can be done is to rely on what he happens to be “aware” of.

I should explain that the need for a provision of this kind was drawn to my attention by the Law Society of England and Wales. The wording of it has its support, and I invite the Minister to look at it very carefully. I appreciate, of course, the pressure the Minister is under to get the Bill through as soon as possible, and that the time he may need to get clearance for any amendments to it is also very limited. I would therefore be content if the Minister would give an assurance that he will indeed look at this matter and at the gap in the creditors’ protection that it exposes, perhaps with a view to an amendment by regulation under the power provided by Clause 18(1)(a), as R3 suggests, once the way these measures are working out in practice has been tested in the marketplace.

[The Deputy Chairman of Committees]

I understand that the noble Lord, Lord Lennie, does not wish to speak, so I call the noble Lord, Lord Hodgson of Astley Abbotts.

Corporate Insolvency and Governance Bill

Lord Hope of Craighead Excerpts

Report stage & Report stage (Hansard) & Report stage (Hansard): House of Lords
Tuesday 23rd June 2020 Lords Chamber

Moved by

[Lord Hope of Craighead]

1: Clause 1, page 3, line 26, at end insert—
“(ca) a list by the directors of all known creditors of the company,”Member’s explanatory statement
This amendment is to assist the monitor in their duty to notify every creditor of the company of whose claim he or she is aware.

[Lord Hope of Craighead (CB) [V]]

My Lords, Amendment 1 in my name is the first of 32 in this group, but it has no connection with the others. Fortunately, I need to speak to my amendment only briefly and do not intend to press it, for reasons I will explain.

The amendment, which is in the same terms as one I moved in Committee, proposes an addition to the list of relevant documents that must accompany the director’s application for a moratorium. My concern has been that the system that the Bill lays down for informing creditors that a moratorium is in force, and when it will come to an end, is too weak, because the monitor’s duty is to notify only those creditors of whose claims he is aware. There is no suggestion in the Bill that he is under a duty to make inquiries. I proposed that, at the outset, the directors should provide a list of all known creditors of the company when making the application.

When the Minister replied, he gave reasons for not accepting the amendment that suggested that he had not understood my point. He said that it had never been the Government’s intention that the moratorium should be used to

“‘line up the ducks’ for a pre-pack administration”.—[Official Report, 16/6/20; col. 2092.]

He added that, as with all administrations, the likelihood of a substantial return to unsecured creditors was small. I, however, had made no mention of going into administration.

The purpose of the moratorium, as I understand it, is to keep the company alive as a going concern. However, freezing the debts for the period of the moratorium is bound to have consequences for the creditors. They might have to take urgent steps to avoid financial embarrassment until their bills are paid, such as adjusting their cash flow or seeking to extend their overdraft. They need to know what is going on. That is especially the case for creditors—many of them SMEs—whose debts are not secured. Unlike the banks and HMRC, they are likely to have nothing to fall back on if the moratorium does not succeed in rescuing the company.

The issue was too important to be overlooked, so I decided to raise it again on Report, and I wrote to the Minister to explain why. Happily, I have received his reply, which is most useful, and for which I am very grateful. The essence of it, which I want to put on the record, is that the Minister agrees that

“the monitor needs to have contact details for the company’s creditors at a very early stage … to enable the monitor to comply with their duty to notify creditors … In order that the proposed monitor can make the statements … that it is likely that a moratorium would result in the rescue of the company as a going concern, they will need to undertake enquiries into the financial position … of the company. … It is envisaged that the proposed monitor would … obtain a list of the company’s creditors”

and their relevant details as part of these inquiries.

“Guidance to this effect will be provided to insolvency practitioners … the monitor … will have to evaluate whether the information provided is of a nature they can rely upon, or whether they need to undertake further enquiries … to ensure they have a list of all creditors.”

They can also take further measures during the moratorium to obtain any information they require, and this could include information about creditors. Information and feedback on the effectiveness of the measures in the Bill will be monitored, and use could be made, if necessary, of the power in Section A6(4) to add to the list of relevant documents.

In the light of the information that the Minister has given me, I am satisfied that it would place an unnecessary burden on the directors to submit a list of the creditors when applying for a moratorium, as I was proposing. I would, however, ask the Minister to confirm two things: first, that my understanding of the position, as I have narrated it, is correct; and, secondly, that a copy of his letter to me has been placed in the Library. I beg to move.

[Lord Leigh of Hurley (Con)]

My Lords, there are seven amendments in my name and that of my noble friend Lord Trenchard: Amendments 2, 6, 7, 9, 10, 16 and 17. All seven, however, address pretty much the same point, which is to allow the directors of a company, or its monitors—both those in the UK and those overseas—to enter into a moratorium, extend its life or end it, if they believe that, even if there is no hope for the company itself, the business operating within that company is likely to be saved.

I appreciate that the Government have never seen the moratorium as part of the administration legislation —they argue that the rules on administration are adequately covered elsewhere—but it is the job of this House to help the Government by explaining how events actually evolve in the world of business and fervently hope that the Government listen to us.

I am very sorry that so many amendments from Committee did not make it to Report, in particular those from the noble Lord, Lord Stevenson of Balmacara, the noble Baroness, Lady Bowles, the noble Lord, Lord Hodgson, the noble Lord, Lord Palmer, and others. Wonderful real-world experiences were offered during Committee, primarily around the role, conduct and independence of the monitor, all of which have been lost, after being discussed in this House and the other place. That is a shame.

The issues raised in my amendment attracted quite some comment and, if I may so, approval from all sides of the Committee, I think I am right in saying. I remain very grateful to noble Lords from all sides of the House who spoke in support in the Chamber and to me directly subsequently. I am grateful to the Minister and his officials, with whom I have had some very open and helpful conversations in the past few days. I was not graced with a letter as the noble and learned Lord, Lord Hope, was; none the less, we have had a discussion.

There seems to be a fixation with rescuing the company. The company is no more than a vehicle. I think all this stems from the Enterprise Act, where there was confusion in the debate, but I hope there is no confusion now and that we can all agree that we want to arrange matters as best we can so that businesses and jobs, not necessarily companies, survive a liquidity crisis and stay alive. It may well be that sometimes an administration is helpful and a sensible outcome, but the current drafting puts pressure on the monitor to try to save a company where, frankly, there may be no point.

Likewise, the desire to avoid pre-packs is misguided. Yes, there have been some abuses, which have been public and well-documented, but they are small and typically relate to small insolvencies, and the Small Business, Enterprise and Employment Act created the excellent pre-pack pool, which is now in real danger of collapse as a result of this Bill. I welcome Amendment 45, in a later group, which addresses this point.

There is concern that pre-packs favour one particular purchaser, the existing owners, as they have the advantages of knowing the business and speed, so a moratorium in those circumstances is perfect. The time extension allows the monitor to ensure fair play on information access and for new buyers to be sourced and approached. However, it will be very difficult for a monitor to tell the court that administration is not likely. In fact, it will be the reverse. I spoke to an insolvency practitioner only last week who is working on a particularly troubled business right now, with some 10,000 employees and more than 30 different companies. Not all of them will be saved; at least some will go. However, the rest could be saved and the entire business could be saved, but under these proposals he will not get a moratorium, despite being certain that a solution can be found. He cannot take a group approach because under English law each company is a separate entity. He is beside himself in despair at this proposed legislation. Very few real-world rescues are ever done with existing entities. It is not always a bad result that a business is bought through administrators. If creditors lose out, at least there is a chance to recoup some of those losses through future trade.

I am a little worried by the withdrawal of the Henry VIII powers in government Amendments 3, 8 and 11 in this group, as their removal may restrict the Government from making helpful changes. The Government are clearly more swayed by the appeal of the noble Lord, Lord Stevenson, than by mine. I ask the Minister to think again about whether those amendments achieve what he seeks. I hope he will listen to petitioners, some of whom he has now met with me, and commit at the Dispatch Box to consider a change, as sought in these amendments, if it is clear that business recovery will be impeded without the proposals that my noble friend Lord Trenchard and I seek. If the Bill does not give sufficient time for directors and monitors to find a sensible way out for businesses, there will simply be closures and asset realisations. I look forward to hearing what the Minister will say and very much hope that he will give me some assurances that the Government will find a way to keep an open mind, because I believe that if there were a Division, the House would support these amendments.

--- Later in debate ---

[Lord Callanan]

I do not think that I used the word “leaking”. We want the moratorium to be a light-touch procedure with the minimum level of bureaucracy. Of course, it goes without saying that any information being disclosed from whatever source of a company’s intention to go into this procedure could have serious adverse consequences if certain creditors seek to pre-empt the operation of the moratorium. However, we have built concessions into this part of the Bill. I hope noble Lords will be able to accept them. I take on board the noble Lord’s points, although I did not use those words.

[Lord Hope of Craighead [V]]

I am very grateful to those noble Lords who spoke in support of my Amendment 1. I am grateful to the Minister as well for giving me the two assurances which I sought when I introduced the amendment.

I feel that there was a note of some disappoint from some noble Lords that I would not press the amendment, so I will explain very shortly why I took that decision. The letter that was circulated—I am grateful to those responsible for doing that—sets out in some considerable detail the various points which one needs to bear in mind as background to the wording of the Bill. It does, of course, require one to give rather more weight to the guidance than what one finds in the Bill’s wording, which I said was somewhat weak, but I am prepared to accept that guidance and test the matter against the point which the Minister made in Committee that adding a burden on to the directors of the company when a company needs to enter into the procedure as quickly as possible would be undesirable if to do so would be unnecessary.

That really is the essence of the point I asked myself: am I satisfied, in view of what the Minister said in his letter, that the burden would indeed be unnecessary? In the end, the answer to that question was yes. For these reasons—and I express my gratitude again to the Minister for his helpful letter—I beg leave to withdraw the amendment.

Amendment 1 withdrawn.