Charitable Incorporated Organisations (Insolvency and Dissolution) (Amendment) (No.2) Regulations 2020

Baroness Barran Excerpts

Friday 9th October 2020 Lords Chamber

Moved by

[Baroness Barran]

That the Regulations laid before the House on 13 August be approved.

Relevant documents: 23rd Report from the Joint Committee on Statutory Instruments (special attention drawn to the instrument)

[The Parliamentary Under-Secretary of State, Department for Digital, Culture, Media and Sport (Baroness Barran) (Con)]

My Lords, I am pleased to introduce a statutory instrument laid before the House on 13 August. The Joint Committee on Statutory Instruments reported the regulations for unexpected use of the enabling powers due to an issue regarding inconsistency with regulations made by the Department for Work and Pensions. I shall discuss this in detail later in my speech. The Secondary Legislation Scrutiny Committee has not drawn the House’s attention to this instrument.

Before moving on to the detail of the instrument, I just take this opportunity to pay tribute to the role that charities all around our four nations have been playing in the national fight against coronavirus. They have been crucial in supporting communities, delivering food, combating loneliness and many other aspects, and we recognise that contribution.

The regulations we are discussing today make minor and technical modifications to the way that the Insolvency Act 1986 applies to charitable incorporated organisations, via the Charitable Incorporated Organisations (Insolvency and Dissolution) Regulations 2012. They are necessary due to amendments to the Insolvency Act 1986 by the Corporate Insolvency and Governance Act 2020, which received Royal Assent on 25 June 2020.

The Corporate Insolvency and Governance Act 2020 delivered a package of measures, including an amendment to insolvency law allowing corporate bodies, including charitable incorporated organisations, to continue trading while exploring options for rescue and restructure to avoid insolvency; and to provide them with temporary flexibility to hold their annual general meetings online or postpone them. This is to ensure that such meetings are held safely, and in line with the restrictions on movement and gatherings.

A key measure in the Act is the introduction of a new, free-standing moratorium procedure intended to give corporate bodies, including charitable incorporated organisations, regulated breathing space to explore restructure options, free from creditor action. The new moratorium provisions were applied by adding a new Part A1 to the Insolvency Act 1986. The amendments to the Insolvency Act 1986 apply to charitable incorporated organisations. However, this instrument disapplies provisions of the moratorium procedure that are not applicable or relevant to CIOs. These ensure the effective application of the moratorium provisions to CIOs and avoid unnecessary complexity for those relying on them.

The regulations also contain a slightly more substantive provision, which is to ensure that a CIO cannot apply to the Charity Commission for solvent voluntary dissolution during a moratorium period during which it is protected from creditor action. The voluntary dissolution procedure is unique to CIOs. It allows a solvent CIO to apply to the commission for it to be wound up, subject to its remaining assets—after settling all liabilities—being passed to another charity with the same or similar purposes. We would expect a CIO to exit a moratorium before making an application for solvent, voluntary dissolution, and the regulations reflect this.

As I mentioned at the start of my speech, the Joint Committee on Statutory Instruments reported the regulations for unexpected use of the enabling powers. Our approach in applying the new moratorium procedure to CIOs was to simplify the moratorium regime. Therefore we disapplied provisions considered unnecessary or extremely unlikely to have any practical application to such organisations. This included disapplying Section A51 of the Insolvency Act 1986, which provides power to make provision in regulations in connection with pension schemes. However, on 6 July 2020, the DWP used this provision to enact secondary legislation to extend its Pension Protection Fund moratorium provisions to CIOs. DCMS considers the likelihood of the Pension Protection Fund needing to intervene in a moratorium of a CIO as extremely low. However, to ensure that all relevant corporate forms are covered by the provision, DCMS will bring forward legislation, when parliamentary time allows, to enable these provisions to apply to CIOs. In the meantime, we do not anticipate there being any practical impacts on stakeholders whatever.

The JCSI report asks what communication took place between DCMS and the Department for Work and Pensions before either this SI or the DWP SI were made. Due to the urgency with which both sets of regulations were being made, unfortunately only limited communication took place but we have already taken steps to ensure better co-ordination in the future.

I bring one further issue to the attention of the House. DCMS made an initial set of regulations on 6 July but, due to an administrative error, the draft submitted was not the final draft of the instrument and therefore it included inaccuracies. Once this error was identified, DCMS made correcting regulations—the ones we are discussing today—as quickly as possible on 12 August. The department does not believe that stakeholders suffered or were inconvenienced in any way due to this error as the amendments are minor and technical and it is extremely unlikely they will have been relied on within the relevant period. However, DCMS wrote to the Joint Committee on Statutory Instruments to apologise. Having corrected this error, these regulations will be of great benefit to CIOs that wish to use the moratorium procedure, and I commend them to the House. I beg to move.

--- Later in debate ---

[Baroness Barran (Con)]

My Lords, debating these regulations this afternoon has been a pleasure, and I appreciate the constructive tone brought to the debate very much. I will try to answer the points raised by your Lordships in the next few minutes. I think all noble Lords recognised the great and important impact of the voluntary sector, particularly during the Covid-19 pandemic.

Reference was made to the amount of funding needed by the sector. I remind your Lordships that the first sector-specific package announced by this Government was for the voluntary sector, to the tune of £750 million. Because I meet the sector very regularly, I know that there were a lot of concerns at the outset about the applicability of the coronavirus job retention scheme but, actually, billions of pounds have gone into the sector through the use of that scheme. We are delighted that we have been able to improve the resilience of the sector in that way.

The noble Lord, Lord Foulkes, asked about some creditors being prevented from taking enforcement action. Some of the restrictions that we have looked at are in relation to financial services and claims where proceedings are brought before an employment tribunal. He also asked whether 20 days was long enough. There is a mechanism whereby that can be extended once for the same amount of time without the involvement of the courts, and it can then be extended further with their approval.

The noble Baroness, Lady Bowles, and the noble Lord, Lord Stevenson of Balmacara, raised important points and I commend them both on their persistence in going through the SI in so much detail. It certainly was not the most user-friendly that I have ever tried to work my way through. She asked for some examples of the “minor and technical modifications”. For example, modifications were made to the instrument to remove references to Scotland, Northern Ireland and overseas companies, none of which is relevant to CIOs as, unlike companies, they can exist only in England and Wales.

Another example, which the noble Baroness referred to and was also explained in the Explanatory Memorandum, was the transitional provision to ensure that any moratorium period entered prior to the commencement of the Corporate Insolvency and Governance Act continues under the Charitable Incorporated Organisations (Insolvency and Dissolution) Regulations, as they were made prior to the amendment of the Act. I hope that those are satisfactory examples.

The noble Baroness also asked about special tailoring for CIOs. Our aim in bringing forward these regulations is to create a level playing field with charities for CIOs. Many charities are registered with Companies House, and this will put both governance structures on a level footing.

The noble Lord, Lord Stevenson, asked, as did the noble Baroness, Lady Bowles, about the Pension Protection Fund provisions and the likelihood of those being needed. We genuinely believe that the likelihood is extremely low, but perhaps I may run through the situation where they might be. The CIO would need to be in a position of severe financial distress, but with the realistic prospect of financial rescue, in order to enter a moratorium in the first place. The CIO would also need to employ staff who are participating in a defined benefit pension scheme, and since CIOs have been in existence only since 2012, we believe that very few would offer staff participation in a DB scheme. Once those two hurdles had been cleared, we would naturally expect trustees of a CIO in a moratorium to act reasonably and responsibly, and not in such a way as to undermine the rights of members of their pension scheme or impact on the Pension Protection Fund. I hope noble Lords agree that those are significant gates which they would have to pass through. This remains a theoretical possibility, so to ensure a level playing field, we will bring forward legislation when parliamentary time allows to reapply Section 51A to CIOs.

My noble friend Lord Kirkhope asked about the status of insolvency practitioners. My understanding is that they have to be qualified practitioners and that the details of the workings are set out in the Corporate Insolvency and Governance Act.

The noble Baroness, Lady Scott of Needham Market, asked about the delay in writing to the Speakers. I can assure her that we have made every effort to get those letters out as quickly as possible, and I can only apologise for the delay. I share her recognition of the importance of the accuracy of the legislation that we bring forward.

These regulations will help CIOs that need a protective breathing space to consider their options or to pursue a restructuring plan and, as such, I commend them to the House.

Motion agreed.