Corporate Insolvency and Governance Act 2020 (Coronavirus) (Change of Expiry Date) Regulations 2021

Lord Callanan Excerpts

Thursday 18th March 2021 Grand Committee

Moved by

[Lord Callanan]

That the Grand Committee do consider the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Change of Expiry Date) Regulations 2021

Relevant document: 46th Report from the Secondary Legislation Scrutiny Committee

[The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Callanan) (Con)]

My Lords, these regulations were laid before the House on 11 February. We have shared a long and difficult journey since restrictions were first needed in March 2020. As individuals, we have had to endure the very necessary but nonetheless difficult requirement to socially distance, with limits on where we can go, what we can do and who we can see. That, of course, has had an impact on businesses, with many having to close temporarily, and many more being able to trade only under very tight restrictions.

I am sure noble Lords all shared my sense of optimism when, on 22 February, the Prime Minister was able to set out the road map for the staged lifting of restrictions in England, with plans for Scotland and Wales being published by the devolved Administrations soon after. We can at last look forward to a return to normality in the months ahead. This would not have been possible without our wonderful NHS workers, both in their caring for sufferers from the virus and in their astonishing efficiency in the successful rollout of our unprecedented vaccination programme. Over the next few weeks, businesses that have been closed for many months will be able to reopen and trade, initially subject to certain limitations but, if all goes well, free of restrictions in parts of Great Britain from late June.

Noble Lords will recall that the Corporate Insolvency and Governance Act 2020 provided urgent support for businesses severely impacted by the effects of the pandemic. Temporary measures such as suspension of the use of statutory demands and restrictions on winding-up petitions, and the suspension of personal liability for wrongful trading, were put in place to allow viable businesses the best possible opportunity to survive.

New insolvency and business rescue procedures were also introduced, which will allow companies breathing space to decide on the best course of action in the face of financial distress, or to use a new formal restructuring process. As a contingency, and to enable the Government to rise to meet unexpected challenges and strains on the corporate insolvency regime as a result of the pandemic, the Act provided the Secretary of State with a general power to make temporary amendments or modifications to the effect of specified insolvency and governance legislation through regulations.

This power was needed because at that time we just did not know what the future would bring. We had hoped, of course, that the pandemic would have run its course by autumn last year, but, sadly, as we all know, that turned out not to be the case. The general power meant that the Government could act quickly to make the urgent changes needed to prevent unnecessary insolvencies, to allow the regulatory and administrative frameworks to deal with any impact of the pandemic on case numbers, and to mitigate the impact of the legislation on the duties of those with corporate responsibility.

As this was such a wide power, its use was restricted. It can be used only for the purposes I have just mentioned, and only where the temporary change was in response to the impact of the pandemic. The general power can be used only where the need is urgent, the provision being made is a proportionate response to the challenge being met, and exercising that power is the only way to achieve the desired outcome. In addition, the Secretary of State has a duty not only to assess the impact of using the power on those affected by any changes but to keep any regulations made using the power under review and to revoke them if they are no longer needed.

The legislation creating this general power also specified that it would sunset on 30 April 2021, although that date could be extended by further regulation. The original expiry date for the general power was set when we all hoped that the pandemic would be over and life would return to normal by the autumn. It would allow the power to be used while businesses were recovering and adapting to life after the virus.

While we were of course hoping to be free of restrictions in June, businesses have suffered the impacts of the virus for a year now, and we may need to be able to use the general power while the economy recovers. The unprecedented package of Government support which has been put in place has so far allowed as many otherwise viable businesses as possible to survive, saving jobs and livelihoods in the process. But there is of course no question of it being business as usual as soon as lockdown restrictions are fully lifted. Indeed, the Office for Budget Responsibility is not expecting the economy to have fully recovered until the middle of next year.

These regulations use a power in Section 24(3) of the Corporate Insolvency and Governance Act 2020 to extend the sunset date of the general power, and will mean that the Secretary of State will be able to use it for a further year. Extending the period during which we can use the general power will mean that we can continue to be able to act quickly should the need arise, to give the best opportunities to allow viable businesses to survive the pandemic, and, in the process, save jobs and livelihoods.

The general power could, in addition, be essential to any strategy that we need to deal with any extraordinary pressures on the administrative and regulatory regimes. I can reassure noble Lords that the Government’s ability to extend the life of the general power is not open-ended. In particular, any further extension of the power is limited by Section 24(4), which prohibits the power being exercised after 24 June 2022—that is to say, for two years, starting with the day after the Act conferring the general power was passed.

It is important to note that these regulations do not introduce a new power but rather extend an existing one which we think is still needed. The general power has been used once since its creation to revive the suspension of personal liability for wrongful trading when national restrictions were reintroduced late last year. That suspension has not been extended, due to the apparent improvement in trading conditions at the time of its expiry at the end of September.

There are no specific plans to use the power again at present, but this could of course quickly change, and it remains an essential part of our toolkit in dealing with the impact of the pandemic on business. I commend these draft regulations to the House.

--- Later in debate ---

[Lord Callanan (Con)]

I thank all noble Lords for their interesting and valuable contributions to this debate. The Government’s road map for the staged lifting of restrictions is cause for great optimism, and we can look forward to many businesses, including shops, pubs, and restaurants, being able to reopen successfully in April. But we have to recognise that these businesses and many others have suffered from the impact of the pandemic for a year now, and in many cases could take time to return to full pre-Covid financial health. The Government are determined to do whatever they can to continue to support businesses throughout this period of economic recovery. For example, many business owners and employees will have welcomed the Chancellor’s statement in the Budget that the furlough scheme will be extended to September this year.

All the same, traders and company directors will be having to assess whether full recovery of their businesses in a post-Covid economy is possible, and government financial support, along with the temporary easements in the Corporate Insolvency and Governance Act, must at some point be brought to an end. Having a power to use regulations to make temporary amendments to corporate insolvency and governance legislation, or modifications to its effect, will mean that we can continue to act quickly to meet the challenges which arise as a result of these uncertain times.

This was illustrated when the power was used to revive the suspension of personal liability for wrongful trading. This was a Corporate Insolvency and Governance Act 2020 provision which had expired at the end of September last year when trading conditions for many businesses had improved. Other temporary easements in the Act had been extended, but given the importance of wrongful trading as a protection for creditors and a deterrent to trading when insolvency proceedings are inevitable, the suspension was allowed to expire.

Sadly, as noble Lords will recall, there was a surge in infection levels in late October leading to national restrictions being reintroduced across Great Britain and businesses once again being required to close their doors. As a result, many company directors were once more faced with great uncertainty about their companies’ futures. Using the power to revive the suspension of wrongful trading meant that directors of companies which would have been viable but for the impact of the pandemic were able to make decisions as to whether they should continue to trade based solely on their knowledge and experience, rather than under the threat of becoming liable to contribute to the company’s debts themselves should insolvency proceedings then follow. This meant that unnecessary insolvencies could be avoided and is an example of how the power could be used going forward to save jobs and livelihoods.

My noble friend Lady Neville-Rolfe asked why we need the power for a further year. Although we now have a road map for the lifting of restrictions, the impact on businesses will continue after return to what we would call normality. The OBR predicts that the economy is unlikely to return to pre-Covid levels before the middle of next year, so we need to keep the power on the statute book until then. My noble friend also asked how we might intend to use the power. I am afraid I must say to her that, at the moment, we just do not know. There are no plans to use the power at present, but it is a contingency and we need to be in a position where we can meet urgent challenges quickly. If the worst happens, as the noble Lord, Lord Sikka, indicated, we may need the power as part of our strategy to deal with any increases in insolvency case numbers.

We also need to keep the power because, although the Prime Minister has now announced a road map for a gradual reopening, the impact of restrictions on businesses is likely to be felt beyond the point that we would consider to be full normality. As I have said, the OBR is expecting the economy to return to pre-Covid levels by the middle of next year, but we do not know for certain what will happen in the meantime. However, we do know that many businesses are struggling and may need protection. If we were to extend for less than a year and, as likely, a further extension was needed, we would be back here debating the same question in just a few months because of the requirement for debate before the extension can occur.

My noble friend Lady Neville-Rolfe referred to the audit reform proposals. The White Paper published this morning is not, of course, the subject of today’s debate, but I can certainly tell her that we have carefully thought through the director accountability proposals that she referred to. They would cover only the biggest companies, with turnovers into the hundreds of millions, and employing hundreds, or even thousands, of people. I think most people would think it appropriate that we ask directors of such companies to take a little more responsibility for the accounts and financial information produced by their companies. As I said, this will not apply to small business, to SMEs or to entrepreneurs, so I think I can put my noble friend’s mind at rest.

The noble Lord, Lord Sikka, asked what was being done to prepare for the approaching cliff edge of potential insolvency cases when government support measures and temporary easements end. Official statistics published by the Insolvency Service show that case numbers are still low in comparison with the same period last year, and it seems inevitable that there will be an impact on insolvency case numbers. This is being closely considered, and extending the power for a further year will allow any temporary changes needed to be made quickly. I thank the noble Lord for reminding the Government of the importance of closely monitoring the operation of the insolvency practitioner regulation regime.

The noble Lord, Lord Lennie, asked whether the other measures introduced by the Corporate Insolvency and Governance Act would be extended. We are considering that question at the moment, and I hope that we will be in a position to make an announcement shortly. I thank the noble Lord for asking about the other temporary measures in the Act, and I can assure him that they too are under close consideration; any announcement will be made shortly.

I think I have addressed all the points raised in the debate, and I thank all noble Lords who have contributed. I commend these draft regulations to the Committee.

Motion agreed.