Corporate Insolvency and Governance Bill

Baroness Bowles of Berkhamsted Excerpts

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

[Baroness Meacher (CB) [V]]

My Lords, I thank the noble Lord, Lord Vaux, for his detailed amendment to Clause 12, and support it most strongly. I apologise to the Committee; I must be responsible for the fact that I am listed ahead of the noble Lord, Lord Vaux, who will move his amendment, but I hope that my brief comments will nevertheless make sense. As it stands, Clause 12 interferes in an unacceptable way in the commercial activities between companies. By restricting the ability of suppliers of goods and services to terminate contracts with a company that has entered a relevant insolvency procedure, the clause puts the viability of supplier companies in jeopardy, particularly if they are small, as other noble Lords have mentioned, or if their client company represents a substantial percentage of their sales.

Along with the noble Lord, Lord Vaux, I am particularly concerned about the provision in Clause 12 to allow the Secretary of State to remove exclusions in Schedule 4ZZA using subordinate legislation. As the Bill stands, small companies are excluded from the restrictions on supplier companies, so they can, at the moment, terminate their contract to supply goods and services to a client company when it enters relevant insolvency procedures. This is surely absolutely essential if we are to encourage new entrants to the supply sector and if we are not to threaten the future of small companies. As I understand it, the amendment in the name of the noble Lord, Lord Vaux, would permanently protect small companies from the effects of Clause 12.

Another control over supplier companies is the restriction preventing them from requiring payment of outstanding charges as a condition of continued supply. Such a restriction surely also risks the financial viability of the supplier. I question the morality of a Government interfering in the marketplace to protect one company, apparently at the expense of others. Will the Minister explain how the Government justify the different treatment of companies involved in insolvency proceedings and their suppliers? Why do the Government appear unconcerned about the future of supplier companies? I agree with the noble Lord, Lord Hodgson, that a major problem with the Bill is that it combines understandable emergency measures to deal with the Covid crisis with permanent Henry VIII powers. This has been the matter of most concern to the Delegated Powers Committee, of which I am a member.

In conclusion, I hope that the Minister will accept the amendment in the name of the noble Lord, Lord Vaux. If not, I hope that the noble Lord will bring it back on Report.

[Baroness Bowles of Berkhamsted (LD) [V]]

My Lords, I declare my interests in the register as a company director. There are many good amendments in this group that I support, but I will limit my speech to the ones in my name, relating to creditor priorities and to review, and to a couple related to them. The background to Amendments 25 and 40 is the same as that already raised by the noble Lord, Lord Hodgson, and the noble Baroness, Lady Kramer. The position of financial institutions is uniquely privileged in that they will inevitably continue to be involved but they are not bound by the same conditions of moratorium as others who must continue to supply. They are not bound to normal supply terms or the ipso facto clause, and are free to accelerate and increase their demands, achieving elevation to both the amount and priority of their lending.

As well as the issue of priority, enhanced charges and advancement extract funds from the company, which is counterproductive to the very rescue that is the purpose of the moratorium. The effect of both those possibilities would be to leave unsecured creditors and, notably, pension deficits in a worse position in a subsequent insolvency. Put together, the two effects make the price of the moratorium too high, and the financial institution behaviour pattern is compelled to happen.

I do not need to remind the Committee that the operation of banks is not geared towards benevolence. I wish they had that in their articles but they do not; they are geared towards maintaining their own capital and their own profit, which is encouraged by bonuses and regulation. There have been some appalling examples of banks squeezing SMEs, for example as elaborated in the FCA’s report on RBS’s Global Restructuring Group, which this House debated last June. It is clear from that FCA report that there is no desire to interfere in contractual terms.

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[Lord Thomas of Cwmgiedd [V]]

I put my name down to speak on these amendments because of the very wide terms in which they were drafted. From the perspective of legal certainty and the importance of the London financial markets, it seemed that the Government’s overall policy of excluding financial service contracts was completely the right one, and the suggestion of these amendments was to remove part or all of that protection. However, from what has been said in this debate, it is clear—at least, I hope it is clear—that what gives rise to the concern really relates to the position of pension funds. It seems to me that this is a much narrower subject and it turns on the question of the priorities that will need to be clearly spelt out in the event of an insolvency.

Earlier, I raised the rather difficult issues that relate to priorities. This debate seems to underline the importance of that. I hope the Minister will have the opportunity to clarify precisely the way in which the priorities as between financial service contracts and a pension fund are to be resolved in the event of an insolvency.

[Baroness Bowles of Berkhamsted [V]]

My Lords, it is a pleasure to follow many speakers with great experience in the pensions world. As the Minister said in speaking to the first group of amendments, the objective of moratoriums in this legislation is that they will succeed and that companies with a hope of surviving will do so. But that will not always be the case. Insolvencies or other arrangements may follow. The moratorium structure rewards those who continue to supply, with an enhanced priority in a subsequent insolvency. It rewards financial institutions in a particular way that is identified as giving priority to creditors, including those who would have just ranked alongside pensions as unsecured creditors but are promoted above them.

As has already been mentioned, the Minister said in responding to the first group of amendments that some change will be made to exclude accelerated debt from super-protection. That does not sound like even as much as was covered in the group 1 amendment of the noble Lord, Lord Hodgson, which I signed, but it is a start. Nevertheless, I am still concerned that it elevates all financial debt above pensions, as explained by the noble Baroness, Lady Drake. If I heard the Minister correctly, he implied that without being given priority, in return for none of the things that bind other companies, banks would not play ball—I paraphrase what was actually said. The reason why the banks will play ball is to get benefits. That still means that they will make greater demands and ask for bigger fees. They will still accelerate payments even if they do not get priority, but that will still suck funds out, because banks do not have a payment holiday.

I am attracted somewhat to what the noble Lord, Lord Balfe, said on whether the PPF will survive. I note that having to stand behind pensions actually comes from European legislation. I believe the UK was taken to court on this subject. Do the Government still stand behind legislation protecting pension benefits, or is that a piece of EU legislation headed for the dustbin of broken promises?

Like other noble Lords, I think that the Government need to think further about the legislation’s effects on pensioners, the Pension Protection Fund, the Pensions Regulator, pension trustees, companies contributing to the PPF, which will face elevated contributions, and those self-same companies facing deficit repayment schedules that will need to be greater to compensate for the actions in this legislation, as well as the fact that many schemes are much further in deficit because of the current crisis situation that we are in.

Also, what does this blackmail change—I call it “blackmail” because that is what it sounded like when the Minister explained it—to the insolvency waterfall say about the stability of legal agreements and contracts in the UK, if securities that have been pledged to pension funds can be sold from under them through a retrospective law change made without any warning or notice? That is what this priority change is. “Moratorium” might have been trailed, but “moratorium” means delay, not a change of priorities and the inclusion of financial institutions in special arrangements for no consideration—for that is what it is: no consideration. It is more than simply consequential to the running of a moratorium.

Various amendments in the group aim to prevent harm to pensions, and my probing Amendment 118 suggests that the PPF should be consulted in any compromise arrangement. It could or probably should be made stronger and require consent, but then I do not really need to speak to it because the noble Baronesses, Lady Drake and Lady Altmann, have come up with extremely sound, detailed amendments. I support them and commend them to the Government.

I realise that the Minister indicated in his email last night that some movement in this direction will happen. He has also said that the Government will give creditor rights, which is the issue covered by Amendments 63 and 64 in the name of the noble Baroness, Lady Drake, but the extent and effect of those rights is important. I therefore remain concerned. Changing the ranking of creditors also opens up questions about, “Why just that change?” There are arguments, with which I have a lot of sympathy, that say pension deficits should have a higher ranking in insolvency anyway, given their origin as deferred pay. We will come to other provisions on that in the next group.

I am now quite glad that we have not finished the pensions Bill because, if these new priorities are enacted, they will take a wrecking ball to the difficult consensus that was being reached on the speed of paying down deficits, and other provisions coming from the regulator regarding its powers and what it would do to make sure that deficits were paid down. We will certainly have to take into account these new circumstances in this Bill and seek follow-on protections if it proceeds largely in the format it is in at the moment.

In summary, this group has four sensible proposals, independently made from across the House, that have significant overlap: scrap the financial institution priority, which weakens the position of pensions; ensure that pledged securities are not sold without the consent of the PPF; amend the Pensions Act 2004 so that a moratorium is an insolvency event and triggers a PPF assessment period; and have the PPF involved, with vetoes, in restructuring arrangements. I commend a composite of those arrangements to the Minister and I hope that productive discussions can follow because, welcome though the moves already flagged are on the PPF having creditor rights, we need to make sure that they fit the bill and that pension deficits do not still face significant losses.

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Moved by

[Baroness Bowles of Berkhamsted]

23: Clause 1, page 11, line 22, at end insert—
“( ) the prescribed part of a company’s net property available for the satisfaction of unsecured debts under section 176A of the Insolvency Act 1986”Member’s explanatory statement
This is a probing amendment to discuss the effect of priority advancing on unsecured creditors and in particular pension fund deficit, notwithstanding the power for rules to rank the order in inserted section A18.

[Baroness Bowles of Berkhamsted [V]]

My Lords, I will also speak to the other amendments in this group. In some ways, I see this group as a continuation of the previous debate concerning the effect of the moratorium on pension funds and small companies. Amendment 23 inserts the prescribed part for unsecured creditors into the A18 priority. It should in fact have had an extra condition to it that said “when there is a pension scheme” but, in the amendment rush, that somehow got left off. Noble Lords will see that in the explanatory statement I did reference pensions as being of particular relevance.

This was an idea I had as part of the continuing story of the adjusted insolvency waterfall and the damage that can be done to pensions. My objective was to probe how else the prescribed part could not be diminished or how there could be some form of compensating balance. Another way could be by putting an extra or reserved part into the higher priority, designated as a first tranche reserved towards pension deficit, with any remaining pension deficit still sharing in the later general pool of the prescribed part. For example, if the prescribed part is raised to 30% so that there is more available in general for pension deficits, as other noble Lords have suggested, could the extra 10% be moved to be given a higher exclusive priority reserved for pension debt alone?

As I said before in the group on pensions, the Government have lifted the lid on changing priorities, and what has to date been accepted as an uncomfortable compromise regarding the position of pension deficit is now open to challenge. Why should there not now be some extra reserved part or special preference in the mix, especially given the point made more than once already that pensions really belong with wages and salaries? They should never have been demoted to unsecured creditors.

As a generality, I see the raising to 30% as beneficial, not just for making more available for pension deficits but also for SMEs. Irrespective of whether there is any changed priority as part of the compensating measures that one will have to start looking at, the rise to 30% —which has been proposed before—is given more impetus in the light of what is happening in the Bill. I beg to move.

[Lord Hendy [V]]

My Lords, my contribution dovetails with that of the noble Baroness, Lady Bowles, whose remarks I support. I speak to Amendment 56, the purpose of which is to preserve for the unsecured creditors a larger share of the assets available for distribution than the legislation currently provides. The legislation recognises that something must be preserved for them, but the question is: how much?

The first part of our amendment seeks 30% of the “prescribed part” of the company’s property. This is an arbitrary figure, intended to be reasonably fair. The problem is that the “prescribed part” is fixed by a formula and is capped. I understand it to be £800,000, or thereabouts, but I confess that I am no expert on this. Consequently, 30% may be a very small sum and spread very thin. The second part of the amendment therefore proposes that, in any event, if assets are being sold to pay debt, as is usual, at least 30% of the proceeds should be reserved for the unsecured creditors, leaving 70% for the secured and other creditors.

I add a word about unsecured creditors. Included in this, for reasons I touched on earlier, will be much of the debt owed to employees of the company, which falls outside that preserved for preferred creditors. The unsecured creditors also include all the workers for the company who are not classed in law as employees but who are nominally self-employed or engaged through a personal company. This is a significant sector of the workforce—over 5 million people in total.

As I mentioned earlier, it is right that workers should have priority because, unlike secured creditors, they cannot diversify the risk of the company becoming insolvent, and their stock of labour is ever-diminishing. There is another reason that they should be given preference: they spend their remuneration; they do not put it in hidden bank accounts in the Cayman Islands. They spend it because they and their families have to live on it. This creates demand and is good for the economy and for business.

Also included among the unsecured creditors are the many SMEs in the company’s supply chain. This may involve dozens of suppliers who have supplied materials, items or labour on credit, but cannot recover them. In turn, they may employ hundreds or thousands of workers. It is right that, in a complex and interconnected economy, unsecured creditors and their workers should be guaranteed an appropriate slice of the cake.

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[Baroness Bloomfield of Hinton Waldrist]

I take the noble Lord’s point. The point of the Bill is to provide emergency relief in the current crisis. The restructuring planned provisions that we have tabled and are taking forward in the Bill are flexible and will permit complex funding arrangements to be used in a company rescue. This will bring our regime more in line with other jurisdictions where debtor in possession rescue finance is well established. These measures will add to the UK’s existing first-class restructuring and insolvency framework and ensure that it keeps pace with developments in other highly regarded international jurisdictions.

[Baroness Bowles of Berkhamsted [V]]

My Lords, I thank everybody who spoke in this wide-ranging debate. We have explored further how the Bill has been a catalyst for looking at some long-standing issues with the fairness of the insolvency waterfall in general. I hear what the Minister says about the April update but that is still broadly based on the original tenets.

As the noble Lord, Lord Hendy, explained so well, the situation is different in modern times, with many more what would have been employees and other workers falling to the unsecured creditors. It is also they who are squeezed in the robbing of Peter to pay Paul that goes on in the adjustments to provide the impetus for a moratorium. We heard an interesting suggestion from the noble Baroness, Lady Altmann—one she has made before, perhaps in connection with the Pensions Bill—that, instead of looking at Section 75 debt, which tends to make you throw up your hands in horror and run away, we should look at technical provisions or the amount that would go to the PPF; that is another part that could be preserved.

I thank noble Lords. We have more food for thought. I accept that new Clause A18 is perhaps not the place to introduce new priority protection—that probably belongs more in Schedule 3—but these matters are serious enough that they must be brought back at a later date. For now, I beg leave to withdraw the amendment.

Amendment 23 withdrawn.

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[Lord Palmer of Childs Hill [V]]

I will not speak for long, bearing in mind the time constraints. I am concerned by Amendment 75 and the mention of the Small Business Commissioner. I wonder whether, perhaps separate from this debate, the Minister could say what successes the Small Business Commissioner has had. I have made previous speeches in your Lordships’ House on his ineffectiveness.

The amendment before us now sounds sensible but it does not use the normal term “small and medium-sized enterprises”; it mentions “small business” and “larger businesses”. From my professional life, I know that many firms that consider themselves small I would consider large, and that many firms that are large would consider themselves small. The vagueness that this amendment would introduce to the legislation, if it ever got in, would not be useful.

The Small Business Commissioner was really set up to deal with late payments, which of course affect small companies. Here, the amendment is trying to give the Small Business Commissioner a much wider remit, but I have never seen great success in the small remit it has.

While I am on my feet—in a theoretical sense— I want to mention that another Minister speaking from the Front Bench took issue with my comment on HMRC and VAT. She said that VAT was not being given special priority in the Finance Bill 2019-21. I advise her to look at Clause 95. Perhaps the noble Lord the Minister will write to me on this matter.

[Baroness Bowles of Berkhamsted [V]]

My Lords, this group deals with a range of issues which I broadly support, but I shall keep to those amendments with my name on.

I am not quite sure what my Amendment 73 is doing in this group, but its purpose was to ensure that the interests of SMEs are specifically taken into account when reviewing amendments to legislation made under Clause 18, the Henry VIII clause. Clause 21, governing the time-limited effect of Clause 18 amendments, states that regulations made under Clause 18 must be held under review, and revoked or amended if they are no longer expedient or proportionate. My amendment adds a third option if they cause harm to SMEs, as I fear that SMEs could fall between the two stools of expedience and proportionality.

I signed Amendment 78, concerning the FRC, because its replacement is long overdue and it is hard to understand why this top recommendation from the Kingman report has not yet come about. I know that there has already been one consultation on it because I replied to it over a year ago, so what happened to that and why is there prevarication? There is still so much more about the unsatisfactory past of the FRC that could come out—it is constantly dribbling out. It will taint ARGA if it is perceived as just the FRC by a new name, which is what the delay is doing.

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[Lord Hodgson of Astley Abbotts]

My Lords, I have Amendment 129 in this group. It seeks to equalise the different levels of protection afforded to firms in trouble under this legislation. It has been brought to my attention by a firm of solicitors that specialises in insolvency. The two critical dates in the legislation are 27 April, after which general protection is available; and 1 March, just under two months earlier, after which protection is afforded, but only if a statutory demand for payment has been made.

However, a statutory demand is not the only way that a company can be caused to fail. It is possible to go for a default judgment in a county court or a liability order in the magistrates’ court and proceed directly to a winding-up. Firms that are subject to either of these other two procedures do not benefit from protection from 1 March, but from 27 April only.

Firms are able to object and to fight these proceedings but, from 23 March, the country was in lockdown. Understandably, courts have found it more difficult to inform defendants about cases brought against them and, in many cases, smaller companies—where the proprietor is running the business almost on their own —may have been involved in self-isolation. They are therefore unable to access proper legal advice to protect their position. My amendment seeks merely to extend protection for these cases, particularly those affecting small companies, from 27 April to 23 March—the date on which lockdown began and the inequality of legal arms may have commenced.

[Baroness Bowles of Berkhamsted [V]]

My Lords, I can be brief because my amendment in this group contains a separated half of the GB-Northern Ireland pair of amendments relating to small businesses that I spoke about in the previous group, so I do not need to explain those again, and in the interests of time I will forgo speaking on anything else.

[Lord Wallace of Tankerness [V]]

My Lords, I will seek to be brief. The point I will make relates to retrospection, which Amendment 129 from the noble Lord, Lord Hodgson of Astley Abbotts, perhaps illuminates; he is trying to make some of the provisions even more retrospective. I will not work through all the detail; suffice it to say that in Schedule 10 we are asked to enact a provision that would retrospectively void a court order that had been legally pursued and granted. In the words of the Government’s Explanatory Notes, this

“may lead to the petitioner becoming liable for the cost of doing so.”

I do not doubt that there are important business and commercial reasons underpinning these provisions. I ask simply that the Committee proceeds with the utmost caution when making retrospective provision. I quote from the Constitution Committee’s seventh report:

“We recognise that the COVID-19 pandemic presents companies with considerable challenges and that the Government is rightly seeking to protect businesses and the economy as a whole … However, measures with retrospective effect are exceptional and undesirable in principle, requiring the strongest possible justification. We do not think the Government has yet made the case for them in this Bill.”


I simply invite the Minister, when he comes to reply, to try to make a justification and, if he is unable to do so in the time remaining in these foreshortened proceedings today, to undertake to make a response to the Constitution Committee’s report before the House meets for Report.

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[Lord Fox]

My Lords, I associate myself with some of the comments of the noble Lord, Lord Hain, around works councils. In my past life, working with works councils, particularly in the Netherlands and in Germany, I found them to be a positive, long-term force within companies. An earlier speaker mentioned that in private sector businesses, unions have low representation, which is why works councils should be important in this country, but on departing the European Union I understand that the Government are going to reduce or negate the need for companies to have works councils, which is something to be regretted. What is also to be regretted is that we cannot have a proper debate on these amendments, which means that Report will inevitably have to go on longer.

[Baroness Bowles of Berkhamsted [V]]

My Lords, I support the two amendments in the name of the noble Lord, Lord Vaux, that include changes to the definitions of the smallest businesses and a new definition to help first-year businesses. These both seem sensible. We have had a lot of instances in the various coronavirus reliefs where help is not extended to everywhere that might reasonably have been covered; therefore, examination of definitions in the light of that and other experiences seems worth while.