Insolvency Law and Director Disqualifications

Debate between Rebecca Long Bailey and Yvonne Fovargue

Wednesday 14th June 2023 Westminster Hall

[Rebecca Long Bailey]

I thank the hon. Member for his comments and I agree completely. There are huge issues surrounding the area of pre-pack administrations and the issue of phoenix companies, whereby directors are allowed to reappear in another form with the same kind of company structure with complete impunity. This certainly needs to be addressed by the Government.

Other mechanisms exist to sound the alarm on poor corporate governance. That is usually when the role of auditors should be key, but in recent years the unhealthy structure of the industry has been widely criticised, as well as the market dominance and conflicts of interest of the big accountancy firms. In this dysfunctional culture, firms must win and retain engagements from companies in order to generate revenue, but simultaneously they must objectively scrutinise the company reports of the very people they are trying to win business from. Indeed, the symptoms of this flawed culture are clear. The Financial Reporting Council has stated that 29% of the audits delivered by the seven biggest accounting firms fail to meet UK standards. It is abundantly clear that the UK corporate governance regime is in urgent need of reform

What actions have the Government taken so far? In his response to the debate, the Minster will no doubt refer to the Government’s White Paper on reforms to the UK corporate governance code, which the FRC is consulting upon as we speak. However, it is important to note that although the code is underpinned by listing rules that require premium-listed companies to “comply or explain” if they have not complied with a code provision, there is no strict legal requirement to comply with the code at all. It is merely a guidebook, and the lack of legal enforceability is clear. The Financial Times reported only last month that the FRC has reported falling levels of compliance since 2020, suggesting that boards are willing to risk avoiding the “comply or explain” requirements, particularly as the ultimate threat is simply to register dissatisfaction in a non-binding shareholder vote, or one that historically the company has a vanishingly small chance of losing.

Secondly, what is glaringly absent from the Government’s White Paper proposals so far is a statutory and enforceable Sarbanes-Oxley equivalent, which would make directors legally responsible for financial reporting governance. Instead, the White Paper opts for the fluffier “encouragement” of boards to include in their annual reports declarations about whether internal risk management and internal controls are effective or not. Similarly, the provisions that recommend that certain minimum clawback conditions or “trigger points” are included in directors’ remuneration arrangements are welcome in principle, but the reality is that these employment contracts are not publicly available so as to enable enforcement, and annual financial reports rarely provide comprehensive information.

Sadly, even the chief executive of the Institute of Chartered Accountants in England and Wales believes that the Government’s White Paper proposals on reform of the audit industry do not go far enough, stating:

“Taking these measures as a package with the draft audit reform Bill outlined, the government's approach has a half-hearted and lopsided feel to it… Lessons from Carillion and other recent company failures have been ignored, with little emphasis now on tightening internal controls and modernising corporate governance.”

A further five years on from Carillion, we are no closer to the creation of the Government’s long-promised audit, reporting and governance authority, or the passing of the Government’s promised audit reform Bill. When we can expect legislation on audit reform and the creation of ARGA?

Given these glaring deficiencies in the law, I will be grateful if the Minister considers some simple legislative changes that would provide much-needed clarity and protect workers, creditors, and the long-term health of companies. First, will he widen the scope of directors’ duties in section 172 of the Companies Act 2006, so that a duty is not owed solely to shareholders, as at present, but is owed to workers and other stakeholders as well? That must sit alongside a clear duty to prioritise the long-term welfare of a company, rather than simply the short-term maximisation of shareholder dividends.

Secondly, with regard to the duties of directors prior to insolvency, will the Government legislate to set clear definitions and parameters for when insolvency is deemed to be a “probable” event? That would provide much-needed clarity on when a duty to consult on redundancies is triggered, and when payments to workers and creditors need to be prioritised over shareholder dividend extraction.

Thirdly, will the Minister comment on why the Government proposals made in recent years to introduce workers on boards have been shelved? Will he commit to examine and develop policy in the light of the experience of other European jurisdictions, where direct representations of employees on both unitary and two-tier boards has actually helped to improve corporate performance and success, for the benefit of all stakeholders? Last, will he introduce clear Sarbanes-Oxley-equivalent legislation that would finally make directors legally responsible for financial reporting governance? If not, can he explain clearly the Government’s reasons for avoiding that in favour of more diluted and legally unenforceable guidance?

It is clear that the current UK corporate governance regime has become dysfunctional, ambiguous and unenforceable. Despite numerous scandals, it still has no room for the protection of employees and other stakeholders. I hope the Minister can reassure me today that things will change. Thank you for the opportunity to hold this debate, Ms Fovargue.

[Yvonne Fovargue (in the Chair)]

I call John McDonnell.

Legal Aid: North-West

Debate between Rebecca Long Bailey and Yvonne Fovargue

Tuesday 22nd February 2022 Westminster Hall

[Yvonne Fovargue (in the Chair)]

Before we begin, I remind Members to observe social distancing and wear masks.

[Rebecca Long Bailey (Salford and Eccles) (Lab)]

I beg to move,

That this House has considered the provision of legal aid in the north-west.

It is a pleasure to serve under your chairmanship, Ms Fovargue.

“If we are to keep our democracy, there must be one commandment: ‘Thou shalt not ration justice.’”

Those are wise words, I am sure we all agree, from the ancient philosopher Sophocles, but universal access to justice is far from a reality here in the UK. Justice is being rationed. On criminal legal aid, as the Law Society states:

“Cuts and the lack of a significant rise in criminal legal aid rates in 25 years has meant the work is financially unviable and solicitors are being forced from legal aid work. Since April 2012, the number of criminal legal aid firms has dropped by 585 (over a third).”

And in the north-west, it shows. There are over 47,000 cases outstanding in the north-west’s courts. Since 2020, there have been over 5,000 ineffective trials in the north-west, and staggeringly, in some areas of the north-west there are not enough duty solicitors to cover days of the week, let alone the number of people who need representation. The Southport criminal duty solicitor scheme has only two solicitors, and Knowsley has only six.

On civil legal aid, the situation is no less acute. The Law Society has mapped “legal deserts”, areas that show the devastating gaps forming around the country in the provision of housing, community care, education, welfare benefits, and immigration and asylum legal aid. In the north-west, 49% of residents live in local authorities with no housing legal aid providers, compared with just 3% in London, and 61% in local authorities with no community care legal aid providers, compared with 25% in London.

I applaud the work of the Greater Manchester Law Centre, which grew out of protests against cuts to legal aid. I also place on record my huge thanks to the Salford Unemployed and Community Resource Centre, known locally as the fourth emergency service. Both organisations try to fill the gaps in the legal aid advice drought that Salford faces, and their staff and volunteers are a lifeline for so many people. However, the reality is that legal representation based largely on charity and volunteerism should not need to exist. Access to justice, just like access to the NHS, should be a universal service available to all.

So what happened? On criminal legal aid, much of the crisis is the result of cuts to legal aid across a range of serious offences, including murder and rape, and a failure to pay for the extra hours a week undertaken by criminal barristers to meet the demands of trials in courts. Since the Conservatives have been in power, criminal advocates have suffered a 40% real-terms drop in earnings from prosecuting and defending.

On civil legal aid, from 2010 the austerity agenda forced through a wide range of cuts. Legal representation on many issues was deemed a luxury by the Government. Those changes were enshrined in legislation through the Legal Aid, Sentencing and Punishment of Offenders Act 2012. LASPO ended the right to legal representation in huge areas of the law: divorce, child custody, clinical negligence, welfare, employment, immigration, housing, debt, benefits and education. People in desperate need of representation were essentially priced out of the legal system. As a result, many people no longer even try to launch legal challenges. The number of civil legal aid matters initiated reduced by 84% between 2009-10 and 2016-17, and it remained relatively stable at the lower rate from 2017 to 2020. Alongside a fall in the number of cases, there was around a 35% cut in the budget for civil legal aid, from £1.2 billion in 2010-11 to £786 million in 2019-20. Where legal aid remains, it is very tightly means-tested, making it out of reach for many.

There are three major causes of the legal aid crisis that the Government need to address today. The first is the impact of austerity and the resulting cost of providing a legal service. The Legal Aid Practitioners Group shows that in 2010, £1.153 billion was spent on criminal legal aid and £925 million on civil legal aid, with a grand total of £2.156 billion spent on legal aid in England and Wales. If we fast forward 11 years to 2020-21, the most recent figures show £563 million spent on criminal legal aid and £724 million on civil, with a total of £1.319 billion. That is nearly a 40% cut in legal aid funding.

One of the most impactful areas has been funding provided for early legal advice. The Legal Aid Practitioners Group says that this has dramatically changed the case mix that providers can run and the stage in the development of a legal problem at which a client can seek advice and a provider can intervene. This is bad not only because that cut in early advice funding undermines the ability of the legal aid providers to continue to sustain a legal aid business model, but because those people facing housing problems and other early stage assistance are unable to seek help in the early stages, thus worsening their situation to the point of possession proceedings, for example, which could have been avoided.

The Government’s early legal advice pilot scheme is to be welcomed, but honestly, we know that early legal advice works. We do not need a pilot scheme—we need proper funding for early advice right across the UK.

It must also be noted that the current legal aid tendering process locks providers out of the system until a legal aid agency opens a formal tender round. Providers cannot apply for contracts on an ad hoc basis, and with large-scale tender processes four to five years apart, the number of providers is generally always in decline.

Secondly, legal aid rates have suffered decades of cuts and freezes, and, quite simply, legal aid lawyers are voting with their feet. The number of civil legal aid providers has reduced dramatically—from 3,555 in 2012-13 to 2,342 in 2020—while the number of criminal legal aid providers has reduced from 1,733 to 1,174. Those figures are likely to have fallen further following the pandemic.

Locally, the Greater Manchester Law Centre is aware of two large legal aid housing providers in Greater Manchester that are moving out of legal aid work, particularly housing advice, in the next six months. In the north-west, we have been made aware of a large not-for-profit in north Lancashire that has just given notice on its legal aid housing and debt contracts, meaning there will be limited provision in northern Lancashire, including Preston, Morecambe and Lancaster.

In addition, recruitment is a massive issue. Low pay and long hours mean that legal aid lawyers are getting older and are not being replaced. It has taken initiatives such as the Justice First Fellowship programme funded by the Legal Education Foundation—a charity, not the Government—to support the next generation of legal aid lawyers.

Finally, legal aid just does not cover the issues faced by many people. Employment law is no longer covered, except regarding discrimination issues, so unless someone is a member of a trade union, which often offers free legal advice to its members, they are not likely to qualify for legal representation. Indeed, no win, no fee lawyers are not really interested in lower level, low income work, and ACAS, great as it is, does not provide legal advice.

The same is true in many cases for debt, immigration and domestic violence. On welfare rights, only a tiny percentage of cases fulfil the criteria for legal aid, despite clients being on low incomes. The staggering fact, however—as I know from the work of the Salford Unemployed Resource Centre, which provides advocacy support at tribunals—is that the majority of benefit sanctions cases that are brought to a tribunal get overturned. That gives rise to the question: how many people across the UK have suffered through these inhumane sanctions and benefits decisions because they cannot access an advocate? As we know, many have tragically taken their own life.

It is clear that urgent action is required. The Law Society calls on the Government immediately to raise civil legal aid rates in line with inflation since 2020 to secure firms’ financial liability. Will the Minister confirm that today? In addition, the Government should review civil legal aid, carry out a cost benefit analysis of the value of civil aid, and broaden its scope significantly. They must also reform how it is administered in order to make the system more efficient and less burdensome on practitioners. What action will the Minister take on those issues today? Furthermore, to begin to reverse the decline of criminal legal aid, the Government must start by implementing the recommendations of the independent review of criminal legal aid, especially its recommendation to increase by 15% the criminal legal aid rates, as soon as possible. Will the Minister commit to that today? If not, why not?

Ultimately, the Government must accept that the right to legal aid must be enshrined as a fundamental universal right. Following the early legal advice pilot, the Government might offer small exemptions to LASPO, but that will not be good enough. We need to see significant reforms. We need to see the right for individuals to receive reasonable legal assistance on a broad range of issues that affect their liberty and quality of life, without facing costs that they cannot afford. Justice is the cornerstone of democracy, and a society that rations justice in the way that the UK is currently doing is not a democracy but, frankly, on a dangerous path towards barbarism.