Corporate Insolvency and Governance Bill

Jonathan Djanogly Excerpts

2nd reading & 2nd reading: House of Commons
Wednesday 3rd June 2020 Commons Chamber

[Alok Sharma]

My hon. Friend raises an incredibly important point. I championed this issue—support for small businesses—when I was on the Back Benches. As he will know, the Government’s payment terms are favourable in setting a very time-limited period within which payments must be made to Government suppliers, and of course the Government also require that if a large organisation is being paid by the Government under a contract, they need to pass on that speed of payment to smaller subcontractors. He will also know that in the manifesto on which he and I stood we committed to looking further at the role of the small business commissioner and how it might be strengthened. We will bring forward a consultation on that in due course.

I move now to the temporary measures in the Bill. The first set provides for a suspension of the serving of statutory demands and a restriction on winding-up petitions. These measures will be retrospective from 1 March and 27 April respectively and will last until one month after Royal Assent, although they can be extended if that is deemed necessary. The Coronavirus Act 2020 temporarily suspended the right of commercial landlords to forfeit the tenancies of retail businesses in order to protect tenants unable to trade because of covid-19. While this temporary suspension has been in place, the majority of landlords and tenants have been working well together to reach agreements on debt obligations, but a small number of landlords have been using aggressive debt recovery tactics to put pressure on tenants, including through the use of statutory demands and threats of winding up. For this reason, the measures in the Bill to limit the use of statutory demands and winding-up petitions have been welcomed by many, especially in the hospitality sector.

[Mr Jonathan Djanogly (Huntingdon) (Con)]

The Government have repeatedly spoken about this clause in the context of landlords, but can the Secretary of State confirm that it actually applies to all creditors?

[Alok Sharma]

It is intended to apply to all suppliers—I am sure I will be corrected if I am wrong on that. As my hon. Friend has also been keen to point out, although this measure is not restricted to commercial landlords, some landlords will have particular concerns, and I can reassure him that the Government will monitor the impact of the measure and are asking lenders and investors to consider how debt obligations can be met in a way that does not put unnecessary pressure on landlords.

--- Later in debate ---

[Mr Jonathan Djanogly (Huntingdon) (Con)]

I declare any interest I may have arising from my entry in the Register of Members’ Financial Interests. The Bill initiates the most significant changes in insolvency rules for at least the past 20 years, and it has two broad directions. The first introduces new requirements for moratoriums and company reconstructions, which have been consulted on in outline over the past two years. They were expected and are generally welcomed by practitioners and by business. However, when one looks at practitioners’ commentary, nearly all of them note that the devil is in the detail and they look forward to debates on the Bill. Of course, that is not going to happen to any extent, given that 170 pages of the Bill are allocated to two complicated proposals that were published a day before recess only two weeks ago. To allocate one day for all stages of the Bill is inadequate.

The foundation of our insolvency system is the Companies Act 1985 and the Insolvency Act 1986, both significant measures forged by a Conservative Government that have stood the test of time through the rebuilding of our economy after deindustrialisation, the dotcom crash and then the banking crash. Yes, we face another crisis, but rushing these changes through will not, in my view, produce the best law. For instance, if we take the moratorium, the key change is to introduce the concept of a monitor to review companies’ affairs. What will that involve? How will the role work, and will the monitor be able to charge for staff placed on site and so on? The purpose of the Bill is to present oven-ready processes that can be used to help businesses in the crisis, but I am not sure how that will work if practitioners, civil servants and possibly courts have to spend a long time working out what the law means.

The remaining provisions of the Bill have not even been consulted on despite their raising many serious issues of principle—above all prioritising the survival of businesses over the interests of creditors and consumers. We need to appreciate that the Government support schemes for businesses and employees, which have been popular and which I absolutely support, are often a blunt instrument. For instance, some businesses have taken state support, then gone on to renegotiate their leases, effectively leveraging their crisis support to undermine the market. The proposal to prevent winding-up petitions could accentuate that. Usually if companies are becoming insolvent, deals will be done and rents will fall, but banning winding-up petitions could undermine the market.

Why concentrate on big landlords? What about small companies sub-letting to cover part of their rent? They, too, will lose protection. As I asked the Minister, why are the Government talking just about rents when that applies to all debt and all sectors? Has the Minister considered that preventing winding-up petitions and the new wrongful trading termination provisions could reduce the willingness of banks and private lenders to issue credit? It could increase lenders’ risk aversion. It could increase demands for cash on delivery, prepayments and deposit increases. It could require more bonds and personal guarantees. That state meddling in the marketplace could have serious negative implications for credit and business, and I am interested to hear the Minister address those issues.

Some of the provisions are retrospective which, again, will undermine confidence in our economy. Why are the provisions being effected only for one month, as the hon. Member for North Antrim (Ian Paisley) and others have mentioned, which is simply unrealistic and points to extensions effected by ministerial order rather than by Commons debate?

Let us be quite clear: the provisions that will temporarily prevent winding-up petitions are being made on the basis of statutory demands not just from now but including those demands made between 1 March and 30 June. This suspension applies to all statutory demands, irrespective of whether the financial difficulties being experienced by the debtor have anything to do with covid, and of course they apply to all creditors. So a blanket ban is being introduced on a retrospective basis, with no reference to covid or the circumstances of the company. If I were to believe, as I do, that these provisions might merit the justification of proper scrutiny, a practitioners’ review and then feedback, I do not think that I would be asking for anything out of the ordinary.

On winding-up petitions being suspended, this is based on cash flow insolvency in circumstances where covid has had a financial effect on the relevant debtor, which has given rise to the proceedings in the first place. In such a situation, the creditor requesting the winding up must show the court that the company’s inability to pay its debts was not caused by the covid crisis. One wonders how, in the current health climate, the creditor will be able to show that this test has been met. Could the Minister enlighten us? Will there be a series of tests to be met, or will this all have to be fleshed out by the judiciary and the courts, which is presumably not the intention? Again, this provision is to be retrospective, so we could have a number of void petitions out there at the moment. Can the Minister advise us how many we are likely to be talking about?

The Bill goes even further, because it says that the court can make orders to restore a company where a petition was brought under the existing law but the requirement was not met. I believe that this would all be at the cost of the petitioner. Could the Minister confirm that? It looks like if creditor A has a petition in against company X, who owes A money, not only will creditor A be forced to withdraw his petition for winding up and be unable to collect his debt, but he might have to pay more money to company X to put X in the same position as if A had not tried to get his money back. We do live in strange times. Moreover, what about creditor A? How many mouths might creditor A have to feed from the money that should have come from X? What if X had been taking every loan and support going, but A had taken nothing from the state? I have met a lot of small businessmen who have not wanted to take anything during this crisis. There will clearly be knock-ons from this, and I am frankly unsure whether the legislation will help or hinder in certain respects.

Could the Minister explain why the winding-up provisions should be needed if the Government have confidence in their own new moratorium proposals, which will allow courts, following assessment, to stop winding ups? Will directors get any benefit from the wrongful trading proposals, knowing that they could be in breach of other directors’ duties and that these proposals are only temporary, so they could well need to justify their decision to trade on at a later date in any event?

The wrongful trading provisions have served us very well, and let us remember that they were brought in to reassure creditors and consumers who were disgusted at companies being used to trade in situations where they were clearly going to the wall. The reform of termination clauses in supply contracts had been suggested some time ago; I appreciate that. The problem is that if we stop people freely negotiating contracts in one direction, businesses will look for other ways of limiting their exposure. Ultimately, we can all understand that if I, as a supplier, am not paid for the previous consignment, I might not want to supply any more until I have been paid, because I might not get paid if the customer were to go insolvent. So we will head to cash on delivery, reduced credit, shorter payment terms and possibly contract terms. This will not help our economy.

[Mark Pawsey]

Does my hon. Friend agree that part of the problem is the 30-day, 60-day, 90-day culture that has arisen in trading between companies? It is much easier now for companies to get an earlier payment, because so many payments are by electronic transfer, and the notion that the cheque has to be there when the guy delivers the goods no longer applies. If this measure moves trading in that direction, does he agree that that would not necessarily be a bad thing?

[Mr Djanogly]

Not necessarily. These are the sorts of things that I would like to have heard debated, frankly.

The provisions have a limited time exclusion of, I think, one month for small companies. I am not sure of the worth of that. If a large company entered into a very large contract and failed to be paid yet was still forced to supply, that could be just as devastating as a scenario in which a small company had to do likewise on a smaller order. In my experience, not only are these clauses often negotiated, but there are standard gives and takes to be had. For instance, a hard termination clause for any type of insolvency event may be narrowed down to exclude deals with creditors or waived if the debt is repaid, say after a month, despite an insolvency event having occurred.

Removing the ability for negotiation in the way the Bill does may have a minimal impact at the cost of damaging our reputation as a place for free contracting. I can see that there are safeguards for suppliers to go to court on the grounds of hardship to the supplier, but going to the court in that way will not be a cheap process, and it will run the risk of throwing good money, which the supplier may not have, after the existing debt.

I agree with the proposals to enable AGMs to be held flexibly, but why mess about with the filing deadlines? If companies have filing problems, the current system allows for that to be quietly considered by the Department. Why publicly undermine our corporate governance and national economic credibility, especially on the filing of accounts?

My concern is that the Bill, although well meant, may not properly work for lack of scrutiny, or may provide dubious short-term benefit at the cost of longer-term distrust in our economic system. In market economies, weaker businesses will sometimes fail, particularly in a downturn. I suggest that the Government’s role is to ensure confidence in the marketplace rather than in companies themselves.

One thing that has been missing from the debate so far is the question of corporate governance in the wider sense. I notice—the shadow Minister, the hon. Member for Manchester Central (Lucy Powell), nods—that the Opposition have tabled new clause 3, which addresses that. As it happens, I do not agree with all the things in that new clause. However, I do recognise, and it is important to say, that a lot of companies have been conducting excellent corporate governance. A lot of directors have forgone salaries. A lot of companies have not paid dividends and are doing the right thing. A lot of good work has been going on, and I would like to see more recognition of that; let us recognise the good.

Although corporate governance is mentioned on the front of the Bill, it is about how we will suspend corporate governance. That may be for good reasons, but we should use the opportunity of the Bill, and particularly its Second Reading, to discuss how we are going to move corporate governance forward too. I would like to hear a little about that from the Minister when he winds up the debate.