Draft Insolvency (Amendment) (EU Exit) Regulations 2018

Kelly Tolhurst Excerpts

Thursday 24th January 2019 General Committees

[The Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy (Kelly Tolhurst)]

I beg to move,

That the Committee has considered the draft Insolvency (Amendment) (EU Exit) Regulations 2018.

It is a pleasure to serve under your chairmanship, Mr Gray. The regulations, which were laid before the House on 19 November 2018, address issues in UK insolvency law that will arise in the event that we leave the European Union without a deal. Cross-border insolvency is an area in which, as legal and insolvency professionals in the private sector have rightly and firmly pointed out, the EU system is greatly beneficial. If we are to ensure the best outcomes for all parties involved, it is important that insolvencies are dealt with as expediently as possible. The sooner a business in distress is dealt with, the more likely it is that it can be saved. When that is not possible, the simpler and clearer the insolvency process is, the more likely it is that the assets will be realised efficiently and money returned to creditors.

EU law achieves that goal by providing a framework for mutual cross-border co-operation on insolvency matters through the EU insolvency regulation. That is based on main proceedings in a single member state, eliminating the need to start proceedings in other member states where there may be assets to deal with. It is in the interests of both the UK and the EU to retain that system, and the Government have been clear, with the support of the UK insolvency sector, that we wish to continue it. However, it would be irresponsible of us to not plan for all possible outcomes, including leaving the EU without a deal. We have laid this instrument before the House to ensure that the UK’s insolvency regime continues to function effectively after exit day even if we leave the EU without a deal.

As I have already suggested, the EU insolvency regulation ensures that member states automatically recognise an insolvency order made in an EU country. That helps the insolvency practitioner dealing with the case to recover assets as quickly as possible and return as much money as possible to creditors. However, EU law also contains a provision to ensure co-operation between all the different parties in an insolvency, including insolvency practitioners and courts in different member states where necessary. It ensures that individual member states’ own laws are respected. For those protections to operate, they must apply to everyone. Unfortunately, once we leave the EU, that will not be the case in the UK.

As we leave the EU, the European Union (Withdrawal) Act 2018 will retain a version of the EU regulation in UK law, but the safeguards that the regulation provides will no longer operate correctly: as the UK will no longer be a member state, the remaining member states will no longer be bound to recognise our insolvency proceedings or co-operate with us. While office holders in insolvency cases originating from EU member states could make use of the UK’s retained EU insolvency regulation to lay claim to assets here, they would not necessarily be bound by the EU regulation rules when dealing with those assets in EU states, nor would they be bound by EU rules to recognise the claims of UK creditors.

Senior members of the insolvency professional sector have argued that reciprocity is an essential part of continuing with this legislation. Without a deal, it is vital that we do not continue indefinitely to apply EU rules that could override our own laws and prevent us from dealing effectively with insolvencies in the UK. To reflect that, the instrument repeals the majority of the EU insolvency regulation, keeping only the small part necessary to make sure we do not lose any existing rights to open insolvency proceedings in the UK. We are retaining the categories of proceedings under the EU insolvency regulation to assist the acceptance of UK insolvencies in EU countries in future, continuing with concepts and language that the courts in the EU will recognise.

The instrument continues to apply the current EU laws to existing cases in which main insolvency proceedings are already open on exit day, but as a safeguard for those existing cases, since we cannot assume that the EU member states will continue to apply the same rules where the UK is concerned, the courts may disapply the EU rules where they lead to a different outcome than would have been the case before we left, and where that prejudices creditors or others with an interest in an insolvency. In such cases, the court will be allowed instead to apply the powers in the UK’s Cross-Border Insolvency Regulations 2006 or to make some other appropriate order to resolve the situation.

That brings me to the concerns raised by the Joint Committee on Statutory Instruments. It has suggested that these saving provisions lack clarity, are defectively drafted and make unexpected use of the powers in the European Union (Withdrawal) Act 2018. Officials have worked closely with the JCSI to explain why it is necessary that the courts have a broad power, rather than something narrower. Detailed examples were provided to the JCSI to demonstrate some of the many different situations in which the power might be needed. In its report, the JCSI commented that those examples were helpful, and it expressed its gratitude.

These situations can be complex. For example, suppose that the main insolvency proceedings are opened against a company before exit day in another EU member state. They will be governed by the EU insolvency regulation. One of the requirements of that regulation is that an insolvency practitioner who is dealing with the case must inform EU creditors as soon as the insolvency proceedings are commenced. The regulation also says that the notice should provide the creditors with details of how to make a claim. That is important as there can be time limits on making claims in insolvency. However, after exit day the requirement to provide notice of the insolvency will no longer apply to UK creditors, because the requirement is limited to those creditors in member states and the UK will no longer be an EU member state after exit day. In consequence, UK creditors may not find out about the existence of an insolvency proceeding in time to make valid claims, and if nothing is done their claims may be rejected. At the same time, the insolvency practitioner would be permitted—under the retained version of the EU insolvency regulation that the withdrawal Act will include in our UK law—to seize any of the company’s assets here in the UK to repay creditors who have made valid claims. That is clearly unacceptable.

Under the proposed amendment in these regulations, the court can consider that the interests of UK creditors are being materially prejudiced, and make an appropriate order as it sees fit. For example, it could freeze the company’s UK bank account until the office-holder accepts the UK creditors’ claims. I think we can all agree that that would be a fair and just outcome.

Further examples were included within the JCSI’s published report. The provisions provide the court with the necessary discretion to deal with scenarios such as that, and other unexpected outcomes from the interaction of UK insolvency law following exit with the domestic law of the remaining EU member states. As the UK cannot exercise any control over those other states’ laws, a broader power for the courts to step in is both necessary and appropriate. This does not create a new power that the courts would be unfamiliar with. Insolvency law already contains similar provisions and powers for the courts in other cases where broad discretion is necessary. The power safeguards individuals and businesses who have an interest in an insolvency. It is the best way to ensure that, where they could be treated less favourably after EU exit than before we left, the courts will be able to step in.

The instrument also amends the Employment Rights Act 1996 and the Pension Schemes Act 1993, which set out protections for employees following the insolvency of their employer. The protections remain unchanged and the effect of the instrument in this area is to ensure that the current financial support given to UK-based employees when their employer in the EU becomes insolvent will continue after exit day.

In the absence of a Northern Ireland Executive, the instrument updates and makes similar changes to the law on insolvency and employment rights in Northern Ireland, on behalf of the Northern Ireland Government. That includes updating Northern Ireland employment legislation in this area, where there had been no opportunity to mirror a previous amendment made to British law in 2017. I commend the regulations to the Committee.

--- Later in debate ---

[Kelly Tolhurst]

I thank the hon. Member for Sefton Central for his comments and contribution to the debate. We remain optimistic about reaching a deal of mutual benefit to the UK and the EU, but it is important to maintain our regulatory and legislative framework for dealing with insolvency should we leave without a deal. That is why we introduced this instrument.

The Department has consulted with the profession and spoken to some of the groups to try to ensure that that the statutory instrument will work as well as possible. Obviously, we have consulted R3, which the hon. Gentleman mentioned. As I outlined, we are very much focused on delivering a deal.

The hon. Gentleman is quite right that the statutory instrument relates entirely to things happening in the UK, but does not enable us to have any influence on or dictate to EU member states how they treat UK orders in the event of no deal.

[Bill Esterson]

indicated assent.

[Kelly Tolhurst]

I see the hon. Gentleman understands that point.

As the hon. Gentleman will know, in what we have laid out as our future economic relationship in a deal, our focus is on ensuring that we are able to deal with mutual recognition and reciprocal status going forward if a deal is to be had. We recognise, with the profession, that if we can come to an agreement in this area in a deal situation, that would be in everyone’s best interest. With a deal, we would continue our civil judicial co-operation, including on cross-border insolvency. That is in the best interests of both the UK and the EU, as he outlined. However, it is not possible for us to unilaterally continue with the co-operation on cross-border insolvencies; we can achieve the benefits that both sides currently enjoy only through a mutual recognition agreement with the EU. The declaration on the future relationship was clear that it would include wide-ranging agreements on trade, including trade in professional and business services and the framework necessary to support that.

We will continue in those endeavours, but this SI is intended to ensure that, in a no-deal situation, UK law provides clarity for the profession and that we are able to operate on day one. After that date, it would be down to us to bring any further changes to our insolvency regulations that are not in the scope of the draft regulation to the House, as we see fit. After leaving, there may be things that come up that we might need to change, but that would be done in the course of standard business.

Regarding the hon. Gentleman’s concerns about the Pension Protection Fund, I assure the Committee that the Prime Minister and the Government have been clear that we will not row back on workers’ rights through the withdrawal Act. Employees living and working in the UK for a company registered here or in the EU will continue to receive redundancy-related payments from the national insurance fund where their insolvent employer cannot make them, as they do now. The draft regulations ensure that the law in this area is clear and can operate correctly when we are no longer an EU member state. One of the limitations is that within this SI we cannot guarantee for workers in EU states, how EU member states will deal with the employees working in those states. What we can do, as laid out in this SI, is to ensure that people working in the UK, be it for EU companies operating in the UK or UK companies, will still have those protections as they are now for UK workers.

On the hon. Gentleman’s questions about the impact assessment, we have been in this situation many times over recent months and I know it is a particular concern for him. However, for this particular SI we have assessed the direct cost of to business in terms of the costs of insolvency and have estimated that the direct cost would be £2.7 million, due to the extra costs that may arise when practitioners need to open cases in EU member states, which they do not currently have to do under EU regulations.

[Nick Smith]

I do not know whether this is the case, but if there is a no-deal Brexit, will EU-based employers pay the levy into the Pension Protection Fund?

[Kelly Tolhurst]

EU member states will be operating under the current EU regulations as they stand, according to how they have implemented those rules in their own states. We currently submit to the levy here, so workers in the UK, whatever their nationality, will still be entitled to all of the same protections and benefits that exist today. With regard to how individual member states implement the EU regulation, we cannot guarantee how they will interpret a UK no-deal situation. We hope EU member states will treat all UK workers in the same way as we will treat people working in the UK, but that is something we cannot dictate. Does that give some clarity?

[Nick Smith]

No, the Minister did not absolutely clear up the matter for me. Will she check whether EU-based employers will continue to pay the levy into the pension protection fund on behalf of UK employees should we leave without agreement?

[Kelly Tolhurst]

I apologise if I was not clear. Perhaps I was trying to explain the matter in a more complicated way. Yes, they will all pay the PPF levy. I was simply trying to highlight that we here can expressly say we are making sure that all people working in the UK, no matter what their nationality, will be afforded all protections. What we do not have any control over is future changes that might occur in other member states and in EU regulations in a no-deal situation. At that point we will be regarded as a third country, but under the current regulations they will still pay into the fund.

The changes proposed in the draft regulation go some way to protecting the UK insolvency market in the event of a no deal. They ensure that citizens, businesses and the insolvency profession will not be disadvantaged by unilaterally retaining EU rules when reciprocal and necessary safeguards would not be guaranteed by the EU. The proposed changes provide certainty and clarity regarding cross-border insolvency cases with the EU following exit.

The regulations also ensure that protections for UK employees of insolvent employers are maintained after the UK exits the EU: something we all agree is vital. The instrument is essential to repeal the majority of EU insolvency regulations from UK law and to retain the status quo for employment rights in the UK. I hope I have been able to answer all the questions and I commend the regulations to the Committee.

Question put and agreed to.

Resolved,

That the Committee has considered the draft Insolvency (Amendment) (EU Exit) Regulations 2018.