Enterprise and Regulatory Reform Bill

Baroness Hayter of Kentish Town Excerpts

Monday 10th December 2012 Grand Committee

Moved by

[Baroness Hayter of Kentish Town]

20L: Clause 14, page 10, line 14, at end insert—
“(1A) Subsection (1) does not apply where an insolvency office holder has been appointed to the employer company in any of the capacities specified in section 388(1)(a), (2)(a), (2A)(a) and (2A)(b) of the Insolvency Act 1986.”

[Baroness Hayter of Kentish Town]

My Lords, Clause 14 gives tribunals powers to impose a financial penalty on an employer who is in breach of their employment responsibilities where there have been aggravating features over and above any award. The intention is to provide a deterrent to employers from neglecting their responsibility towards employees and to discourage them from repeating the breach that has been identified by the tribunal. However, we wonder whether the impact of penalties against an insolvent company has been properly considered.

In most formal insolvencies the management of a company is no longer in place having been replaced by an insolvency officeholder, so any financial penalty would simply represent an additional claim on the assets of the already insolvent company. Needless to say, this would reduce the amount available for creditors, including the HMRC as well as employees. With a maximum penalty of £5,000 per worker, the impact could be significant where there is a large workforce. For example, in the recent insolvency of a retail company, tribunals made awards to 24,000 employees. Should penalties then be added to those awards, substantial amounts would be lost from the money available for distribution to staff or creditors.

Penalties on companies in formal insolvencies where the management is no longer in place would clearly have no deterrent effect as those responsible would no longer be around and not themselves liable for such penalties. Any penalty would therefore deliver no benefit to employees but would simply reduce returns to creditors. It is for this reason that Amendment 20L calls for an exemption from penalties for companies in formal insolvencies.

I am aware that R3 has been in contact with the Bill team on this and so I am sure that the Minister will be well briefed on the issue and on the intention behind the amendment. However, I hope he will not say that the amendment is not proportionate to the size of the issue. At a time of slow growth, which we all acknowledge is going to continue for some time, there will, sadly, be many insolvencies yet to come, and very often in the retail and other employee-rich sectors. I also hope that the Minister will not tell us that there is some magical alternative non-statutory solution, such as guidance to tribunal chairs or enforcement officers. That would be rather silly with a new Bill. It may often be sensible where something unplanned has happened after Royal Assent or when a new Act is bedding down and unforeseen problems occur, but here we could make the provision in the Bill right from its inception.

Furthermore, having this provision in the Bill would give clarity to insolvency practitioners and others dealing with insolvent estates and would remove the threat of such additional costs and all the extra time that is taken in arguing against them, which in itself adds even more to the costs of the insolvency procedure and has to be met out of funds that would otherwise go to creditors. We all know that once a power has been granted in legislation, any amount of non-statutory guidance often fails to prevent its exercise.

Even if enforcement officers are advised that the penalty should not be collected, that would not deal with the problem because the penalty will still exist as a claim against the estate. Also, an insolvency practitioner might have a legal duty to pay regardless of whether such payments are being pursued by the enforcement officer.

Perhaps the biggest disadvantage of relying on non-statutory means is the uncertainty that that creates. Whether or not financial penalties are actually awarded or collected in a formal insolvency does not change the fact that they could be under the Bill as it is currently worded. That uncertainty is particularly damaging in the case of a potential business rescue, where the insolvency practitioner has to be able to predict the liabilities and outgoings of a company that is in administration when deciding whether it is possible to trade it. Obviously, trading such administrations can increase the returns to creditors as well as reducing job losses. Therefore, the addition of potential liability could mean that fewer companies are saved from liquidation.

Our amendment, granting specific exemption for companies in formal insolvency—ie, where the management is no longer in place—would remove such uncertainty. It would not harm employees, who may still have an award made in their favour, and it would merely prevent the creditors of insolvent business having to pay a fine to the Secretary of State for a transgression for which they bore no responsibility.

It seems silly to send this Bill into the world unfit for purpose. The clause was meant to fine those who had transgressed and deter them from becoming repeat offenders, but an IP running an insolvent company is not the transgressor and any such fine would only be paid by blameless creditors.

To ensure that we can find a route to those who have transgressed, we have a second amendment in this group—Amendment 20PA. Because the present Clause 14 would fail to act as a deterrent to directors of companies in insolvency, as any penalty does not fall on them, there may be merit in meeting the Government’s quite correct desire to increase deterrence by introducing a different deterrent for these particular people via an amendment to the Company Directors Disqualification Act 1986. This would ensure that where a breach has occurred that has, or would have, attracted a financial penalty were the company not in formal insolvency this matter is taken into account when considering directors’ conduct.

In a formal insolvency, the insolvency practitioner, who is acting as the liquidator, administrator or administrative receiver, has a duty to report on any director whose conduct makes them unfit to be involved in the management of a company. The matters that IPs have to consider when deciding whether to make such a report are listed in Schedule 1 to the Company Directors Disqualification Act 1986. This amendment would add to that list the issues covered in Clause 14 of this Bill, so that the IP could still consider these matters when deciding whether to report on those whose behaviour has been found wanting but who would currently escape any penalty because they are no longer running the company. I beg to move.

[Baroness Brinton]

My Lords, I welcome Clause 14, which inserts new Section 12A, but would like to assert the importance of Amendment 20L. New Section 12A(1) allows an employment tribunal, having found that an employer has committed an aggravated breach of workers’ rights, to order penalty payments to the Secretary of State regardless of any previously established financial awards. While this is a just measure, we must not neglect the legal rights and needs of those who find themselves unemployed and faced with their former employer’s insolvency while still owed back pay, expenses or other reimbursements. Under subsection (1) as it stands, employees whose rights have been breached by their former employer would not necessarily receive compensation until after the Treasury, which as primary creditor would receive the penalty for the employer’s infringement before the employees got their redundancy pay. Thus the compensation of workers wronged by their former employers would be secondary to and potentially diminished or even eliminated by the amount paid to the Secretary of State when a company is insolvent and funding is finite. This would obviously be unfair to the former employees of an insolvent company who faced jarring transitions in their finances and everyday lives.

Amendment 20L would cancel subsection (1) where an insolvency officeholder had been appointed. This sensible measure would ensure that employees, as creditors, had primacy in receiving financial redress from an insolvent company. This is an important step to protect workers’ rights. When a company becomes insolvent, tens of thousands of people may become unemployed through no fault of their own, and these people are legally owed compensation, which could also provide much needed fiscal support. If we are genuinely to protect workers’ rights, we should support this Bill with Amendment 20L.

I also support the principles of Amendment 20PA, for the reasons that the noble Baroness, Lady Hayter of Kentish Town, has set out.

--- Later in debate ---

[Lord Marland]

We will pick that up in another part of the Bill, on the award, where the penalty is 50% of the award per employee. We have tabled amendments on that point. We can debate the point then, if the noble Baroness is satisfied with that.

[Baroness Hayter of Kentish Town]

I thank the noble Baroness, Lady Brinton, for her support. I find it hard to thank the Minister because I do not think that he has really quite got the point. These companies are already in insolvency, so the question of whether to take into account whether they will continue to trade is not the point; the point there is whether they will be sold on.

What is the purpose of a penalty against the directors who are no longer running the company? I cannot see the point of that, and I do not think that the Minister answered the question. We are talking about penalties, not awards to employees. Although the Minister is correct that they will rate on holiday pay, redundancy and, I think, sick pay—I need help from an expert on that—if money is due into the pension scheme, that would not rate higher than a penalty due to the Secretary of State. There will be other employee interests that could be damaged by this.

I am slightly surprised that the Government feel any need to put a penalty against a company for a transgression when the people concerned are no longer there. We will bring this back in due course, but, for the moment, I beg leave to withdraw the amendment.

Amendment 20L withdrawn.