Insolvency Law and Director Disqualifications

John McDonnell Excerpts

Wednesday 14th June 2023 Westminster Hall

[John McDonnell (Hayes and Harlington) (Lab)]

Thank you, Ms Fovargue—I always find the pronunciation difficult. That is my fault, not that of the spelling. I do not have a lot to say, other than to compliment my hon. Friend the Member for Salford and Eccles (Rebecca Long Bailey) on her speech. To be frank, I am here to listen to the Minister’s report on progress to date.

I believe that in 2018-19, my hon. Friend was involved in work with Lord Prem Sikka on the development of a report on regulatory structures and standards overall. Having identified that my hon. Friend had obtained this debate, I looked back to her work with Prem Sikka on that regulatory regime. To be frank, I am looking forward to the Minister’s response, because it seems not an awful lot has moved on.

That report came out of Carillion and a number of other cases. The hon. Member for Strangford (Jim Shannon) made the point that a number of companies went into insolvency and left behind large-scale debts, large numbers of workers laid off and contracts not fulfilled. In Liverpool, the collapse of Carillion meant that a hospital would not be built in the required timescale, causing considerable distress at the time.

Prem Sikka produced a comprehensive report. So that people are aware of Prem Sikka’s background, he is a professor of accountancy. He became an adviser to Select Committees and Government about 30 years ago and went on to advise on the appalling Bank of Credit and Commerce International banking scandal. He demonstrated his expertise and as a result was regularly called to advise Select Committees when different issues arose. He then set up a group of lawyers and accountants to examine and explore corporate abuse. They published a book about 10 years ago, if I remember rightly, and I brought together his group to take advice on where we went from here. That is how the connection was made. When Carillion happened and we desperately needed someone to advise us—he was already advising Select Committees—he came on to advise us.

What was startling about Prem Sikka’s report was his description of a maze of regulatory bodies—the chaos of the regulatory bodies. They all had a particular role to play, but none of them played the role effectively, and those who had committed what I think were economic and financial crimes during that period walked away without any loss to themselves. The report identified extraordinary and bizarre issues. Among the financial sector regulators, he identified 41—I think he gave up after No. 41—different agencies involved in financial regulation, which bizarrely included the Faculty Office of the Archbishop of Canterbury, which had a notarial professional role.

All of those bodies failed to address the real issue, which was inadequate supervision and accountability in the operation of the individual companies, particularly with regard to insolvency, where the audit companies seemed to be asleep at the wheel, particularly with regard to Carillion. The audit companies consistently produced audits that could be described as not just inaccurate, but almost deceptive in the way that they portrayed the state of the company, which allowed it to keep operating and employing contractors and so on while knowing that there was an issue. Prem Sikka went on to look at the role of the audit companies in advising companies and selling them products on tax avoidance as well. That is why he argued that there needed to be a reform of audit, possibly introducing a form of public audit into the sector.

On the insolvency role, Prem Sikka has consistently argued that there are no supervisory committees for the companies, as there are in the German economic system, where representatives supervise the decision making of companies. There are representatives in the workforce, as well as the recipients of particular services, or the consumers. Because we had no supervisory committees, companies became reckless in their endeavours. We had almost a moral hazard developing because a large number of the companies were often able to walk away from the liabilities that they had incurred.

One issue that Prem Sikka raised in his report was the offloading of pensions. We saw that with Carillion and elsewhere, when pensions were offloaded on to the public and the taxpayer had to step in to protect the rights of the workers who held pensions with those companies. Yet again, no one seemed to be held liable for the way in which they had either deliberately or recklessly put the companies into a situation where they were offloading their responsibilities.

I am particularly critical of the Financial Conduct Authority. I have said this publicly in debates before. I was critical of the FCA during the period in which Andrew Bailey was its chief executive. Before he was appointed Governor of the Bank of England, I urged the Chancellor of the Exchequer to delay his appointment because we were awaiting a number of reports of scandals with regard to investment bodies that should have been properly investigated by the FCA. What was generally identified, by not just me but other commentators, was that the FCA under his directorship was consistently asleep at the wheel on a number of individual instances.

Going back to Prem’s report, what he was identifying was a huge panoply of regulators, all of which seemed to be failing. Secondly, a large number of them were subject to corporate capture by the very sectors that they were meant to be regulating. As the hon. Member for Strangford said, the small people lost out badly as a result of that. They always lost out, and the people responsible often gained. As yet, I have not seen radical proposals from the Government to address that.

Prem Sikka did two reports. One was on the regulatory architecture of the financial sector overall, and the other was on audit. He put forward the establishment of an overall business commission, which brought together the various regulatory bodies under one structure. That included supervisory committees that would enable all stakeholders to be involved in the development of regulatory rules and the implementation of regulation much more effectively. That would at least be more open and transparent than the existing system.

I hope that the Minister will tell us, but I cannot see what has changed between now and back in 2018-19 when Carillion and other scandals were happening. I fear that those vulnerabilities still exist because we have not seen the radical reform that is needed. We need to integrate the whole process of regulation and to make it more independent, open and transparent. I hope the Minister will tell us that is the direction of Government.

We have had reports on this particular issue for a long time; I think the Cooke report was in the 1960s. It brought forward proposals but never really established independent regulation and handed it back to the industry itself. There has been a long history of corporate capture when it comes to financial regulation over successive Governments; I am not particularly blaming this one. The basic questions asked by my hon. Friend the Member for Salford and Eccles could provide us with more clarity on the Government’s sense of direction on some of these issues.

I feel there needs to be a sense of urgency about action. I understand why the Government want to consult thoroughly, but consultation is beginning to result in delay as far as I can see. Vulnerabilities still exist; we will be back here again, maybe in six or 12 months’ time, with yet another scandal, asking why action was not taken and why redress was not available to people who suffered as a result.

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[Richard Thomson]

The hon. Member makes an extremely powerful point, which gets to the heart of the issue: those responsible for the waves of financial chaos that result from a corporate failure are not the ones who pay the price. Often, those who can afford to lose the least end up losing the most, whether that is their homes or their livelihoods. In 2020, two years on from the collapse, the assistant general secretary of the trade union Unite said that the UK’s accounting and audit system was clearly “not fit for purpose” and accused the Government of failing, even then, to demand reforms, because of their “many friends” among the major accountancy firms.

While the recent launch of the Financial Reporting Council consultation on its proposed changes to the UK corporate governance code was welcome, serious questions need to be asked about why that has taken so long so far. Frankly, the Government must get a move on with the reforms to ensure that they lead to a prompt, substantive and enforceable change of the landscape, so that the culture of corporate backscratching —if I may put it that way—that led to the Carillion collapse is left as a dim, distant and not-too-pleasant memory.

Robust deterrents are also required to ensure that where criminality is involved, those responsible—whether they are company owners or directors—and enablers are caught and receive proportionate sanctions for their actions. Culpable directors, senior managers and other enablers of economic crime need to face proportionate sanction, and the rules on anti-money laundering supervision need to be applied consistently.

[John McDonnell]

The hon. Member mentions criminality. I am flicking through Prem Sikka’s report, and I forgot to mention the section on Companies House. Previously, in the exposure of Magnolia Fundaction UK, an Italian fraudster who was one of the directors had registered himself—hardly fraudulently—as the “chicken thief”, with his occupation as “fraudster”, while another officer gave his address as the “Street of the 40 Thieves” in the town of “Ali Babba”. The issues at Companies House need to be addressed. I am interested to hear how much that will be addressed by the Minister.

[Richard Thomson]

I thank the right hon. Member for highlighting a particularly egregious example of hiding in plain sight. I will come on to mention some of the reforms that need to take place at Companies House.

To go back to the anti-money laundering supervision, there are clearly some significant holes in the AML framework, as well as a pretty patchwork approach to supervision, which varies significantly across companies and sectors. The non-governmental organisation Spotlight on Corruption noted that some 22 industry bodies oversee anti-money laundering compliance across the legal and accountancy sectors, which seems far too many to be doing the job effectively. With 22 supervisory organisations, a few gaps are bound to creep in somewhere.

In 2021, the Office for Professional Body Anti-Money Laundering Supervision, or OPBAS, found that only 15% of supervisors were effective in using predictable and proportionate supervisory action. OPBAS also found that only 19% had implemented an effective, risk-based approach to supervision, so the system is clearly not working. In the UK, an estimated £88 billion of dirty money is cleaned by criminals every year, compared with £54.5 billion in France and £51.3 billion in Germany. I know money launderers are consistently evolving their practice and that pace needs to be kept, but trying to supervise it across 22 bodies with those low levels of effective frameworks in place does not seem to be making the best impact possible on that trade and the other criminal activities that it promotes. Putting adequate resources into tackling economic crime not only pays for itself, it provides additional resources for public spending and reduces criminality across a broad spectrum of activities.

On Companies House specifically, Transparency International recently found that 14% of all LLPs incorporated show money laundering red flags. The Economic Crime and Corporate Transparency Bill had the opportunity to be a strong first line of defence in tackling that at the earliest opportunity, but unfortunately it did not provide the scale of reforms needed to ensure that the registrar could effectively tackle economic crime. Low registration fees in the UK and the quick turnaround clearly do not lend themselves to robust scrutiny by the registrar, as we heard in the example given by the right hon. Member for Hayes and Harlington (John McDonnell). It is exemplified by the inclusion of a warning at the top of the Companies House website that states that it does not

“verify the accuracy of the information”

filed. Well, it seems to me that that is something it very much should be doing.

The SNP tabled amendments to the Economic Crime and Corporate Transparency Bill that would have introduced more stringent requirements for company directors, including one to limit the number of directorships that an individual could hold. We put forward amendments for directors in breach of duties, which would prevent directors who failed to comply with their tax obligations from being able to receive public funds, except for the purpose of paying staff. We were vocal on the issue of phoenixing, where directors of companies that go insolvent then open up a new company that is effectively the same as the one that went under.

We are used to amendments to Bills falling flat on their face. That seems to be the fate of Opposition parties who table amendments, whether they are the third party or the official Opposition, but it was particularly disappointing that nothing to pick those ideas up was reflected in what came through in the Bill, because ensuring that information is correct at that early point would ultimately help to prevent companies from engaging in money laundering, other forms of economic crime and other dubious activities or from evading their corporate governance responsibilities, which causes the damage we have heard about. With adequate resourcing, that is a task that Companies House is more than capable of fulfilling.

To draw my remarks to a close, we need robust supervision of directors and proper deterrents in place against negligence and malfeasance. We need further reform and increased resourcing for Companies House. Above all, we need to create a culture of honesty, transparency and compliance, which in good times and especially in bad is as fair and beneficial to all as it is possible to be. I very much look forward to what the Minister has to say about those points when he takes to his feet.

[Seema Malhotra (Feltham and Heston) (Lab/Co-op)]

It is a pleasure to serve under your chairship, Ms Fovargue. I also congratulate my hon. Friend the Member for Salford and Eccles (Rebecca Long Bailey) on securing the debate and on her excellent opening speech. I thank my right hon. Friend the Member for Hayes and Harlington (John McDonnell) and the hon. Member for Gordon (Richard Thomson) for their important contributions on the chaos of regulatory bodies, and what really came through was the ongoing lack of a culture of challenge, and the links to the Economic Crime and Corporate Transparency Bill, which—I will speak to this later—we were keen for the Government to move much further on to tackle some of the weak areas, particularly phoenixing.

It is worth referencing that rising insolvencies, if we are talking about insolvency law and director disqualifications, also show an environment in which businesses are being hit hard. Many businesses are under strain due to the way in which they have been hit by the cost of doing business crisis, the supply chain crisis, the cost of living crisis, late payments and rising inflation and interest rates, with a Government that many businesses tell me is not on their side.

Monthly insolvencies hit record levels earlier this year in February and March. In March, there were almost 2,500 insolvencies, setting new records. However, alongside companies and directors who find themselves subject to insolvency despite their best efforts to survive, we know that there are business owners who abuse the process around administration and insolvency, with poor governance and stripping of assets. They incur high levels of debt and then dissolve the company, leaving workers and creditors in the lurch, and even denying workers the value of their outstanding pay and redundancy.

I thank the Bakers, Food and Allied Workers Union for its briefing and the caterers of Dawnfresh Foods and Orchard House Foods, which my hon. Friend the Member for Salford and Eccles also spoke about.

[John McDonnell]

We have had several representations from the bakers union over a period of time. It looks as though it is a sector where the strategy of insolvency has been used consistently. I wonder whether there could be a specific examination by the Government of this particular sector, because over the past eight or nine years we have had a pattern of behaviour, and it is one that is becoming almost endemic in the baking industry.

[Seema Malhotra]

I thank my right hon. Friend for his contribution. I agree with putting that question to the Minister and asking for a specific response.

The other issue is that rogue directors are able to walk away with seeming impunity. Some Government steps have been brought forward, and they have been important, but clearly they have not been enough—certainly not for the scale of the challenge. Recent public cases have highlighted the need for urgent action, but where steps have been taken by the Government there seems to be a lack of will to really grasp the challenges. I make reference to insolvency powers and audit and corporate governance reform here.

As one example, in 2021, clauses 2 and 3 of the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 introduced powers to enable the Insolvency Service to investigate directors of dissolved companies—measures that were first proposed in 2018. The Government’s main policy objectives were, first, to ensure that public concerns that rogue directors who abuse a company and insolvency law can be investigated and held accountable and, secondly, to provide a deterrent for company directors who may use the dissolution of the company to evade their responsibility to repay bounce back loans. Since the Bill became an Act, data showed to the Insolvency Service has focused mainly on the second policy objective, a point made effectively by my right hon. Friend the Member for Hayes and Harlington. In December ’21, the Insolvency Service gained powers to disqualify directors of dissolved companies, and, since 2022-23, just 25 directors of dissolved companies have been disqualified.

Many of the issues being talked about today were laid bare for all to see during the Carillion collapse in early 2018. Carillion had ostensibly been financially healthy. Its collapse saw more than 3,000 jobs lost, 450 public sector projects, including hospitals, schools and prisons, plunged into crisis and a company in billions of pounds of debt. In Hounslow, our leisure services were affected, and saved only by the council stepping in. Approximately 11,000 employees lost their jobs at British Home Stores, with a pension deficit of £571 million. These issues not only affect those close to the cases but cost the taxpayer, too. The National Audit Office reported that the Carillion affair cost the taxpayer at least £148 million, including £65 million in redundancy payments. Since the Government promised action on reforming corporate governance in the wake of the Carillion collapse, it took until May 2022 for a White Paper to emerge, and only in the past few weeks has the Financial Reporting Council issued its own consultation in response to the White Paper.

Let me say a few words on audit and corporate governance reform. This is an important policy space, in which reforms need to be robust for red flags to be seen early. An annual audit is a statutory requirement for listed and large companies. The purpose is to provide assurance to shareholders that financial statements give a true and fair view of a company. Good audit protects not just shareholders, but employees, pension holders, suppliers, customers and the wider community. At the broadest level, it serves the public interest by underpinning transparency and integrity in business.

Reform of the audit sector is clearly necessary and long overdue. The scandals we have heard about have damaged the reputation of the audit sector and the professionals who work in it. The Financial Reporting Council’s finding in December 2020 that over 80% of audits reviewed in the previous two years required improvement indicates the scale of the challenge. It also raised the issue of the importance of a challenge culture. Despite some improvements, there is still huge urgency, and it seems that the Government are dragging their feet. We are still waiting for legislation. The accounting and audit professions, the business community and the trade unions are all clear that change must come, and that the new audit, reporting and governance authority, which will step in when directors breach their duties, must be put on a clear statutory footing and given new powers that can only be conferred through legislation. I would be grateful for the Minister’s response to questions about plans for reform of section 172 of the Companies Act 2006 and directors’ duties.

I have some final remarks on the effectiveness of insolvency law and the director disqualification framework. R3 members note that for many years, regardless of the number of insolvency appointments and the number of reports submitted highlighting director behaviours that could warrant disqualification, broadly the same number of directors seem to have been disqualified each year, though there was a notable drop post pandemic. Are those numbers driven by resourcing constraints in the Insolvency Service, rather than assessment of director conduct?

Secondly, the annual enforcement statistics published this year indicate that there have been no disqualifications for phoenixing or insolvent trading. I would be grateful for the Minister’s view on enabling greater use of section 216 of the Insolvency Act 1986, so that it can be applied not only to companies in liquidation, but also to those that enter insolvent administration or are dissolved while the balance sheet is insolvent. That would accord with the Government’s recent extension of the director disqualification regime to dissolved companies.

During the recent passage through the Commons of the Economic Crime and Corporate Transparency Bill, we tabled amendments that would have improved the insolvency regime, including by tackling the practice of phoenixing, but the Government voted against them all. I hope that we can come back to some of those measures.

There is not just a failure to take this issue seriously, but a broader pattern of failing working people, who are so often left in the lurch. For too long, our economy has been ravaged by dire productivity, insecurity and stagnant pay. Government and business need to work together on a proper, pro-business, pro-worker, long-term plan for industry and the economy. Labour is committed to creating jobs that provide security, treat workers fairly and pay a decent wage through our new deal for working people—the biggest upgrade to workers’ rights in a generation. I would welcome assurances from the Minister that there will be progress on audit and corporate governance reform, and a further strengthening of the insolvency and director disqualification regime—two vital tools for keeping enterprise, employment and the economy protected from rogue directors, and for preventing the huge scandals that we have seen from ever happening again.

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[John McDonnell]

I worked for Silentnight as a youngster, but one of the other issues is the distressing of assets by the accountancy firms, so that they can get sold on. We have seen case after case of that.

[Rebecca Long Bailey]

My right hon. Friend is 100% right. I hope the Minister will come back with plans for more detailed reforms of the audit industry in due course.

I will finish on the point about the three reports that my right hon. Friend the Member for Hayes and Harlington (John McDonnell) mentioned. Lord Sikka provided three incredibly detailed reports a few years ago: one on the reform of regulatory architecture, one on reform of the audit industry and one on reform of the UK corporate governance regime. He did that along with a whole team of accountants and industry experts. The points made in those reports are as valid today as they were then, and they are non-partisan. I hope the Minister will take time to read those reports when he is bored over the weekend, and will take some pointers from them that he can take forward in Government policy.

Question put and agreed to.

Resolved,

That this House has considered insolvency law and director disqualifications.