Corporate Insolvency and Governance Bill

Lord Hendy Excerpts

2nd reading & 2nd reading (Hansard) & 2nd reading (Hansard): House of Lords
Tuesday 9th June 2020 Lords Chamber

[Lord Hendy (Lab) [V]]

My Lords, preserving companies in financial difficulties as going concerns is laudable. The workers of such companies will welcome measures that keep at bay corporate predators intent on stripping a company’s assets, thus destroying jobs. But the Bill does not eliminate the dangers to workers. Indeed, it contains no specific provisions to protect workers. Let me amplify some omissions which have been touched on by my noble friend Lord Stevenson and others.

Most fundamental is the absence of any obligation that workers and their representatives be involved in proposals for a moratorium or a restructuring—proposals likely to affect them profoundly. The Companies Act 2006 requires directors to take into account the interests of the workers, but they are not obliged to ask the workers for their views. We know that directors commonly ignore workers’ interests when a company is in financial difficulty. Often, the workers first learn that the company has gone bust on TV—well after all key decisions have been taken. The 1992 trade union Act requires consultation before redundancy, but we know that too often that does not happen, even where administrators have been appointed. It is cheaper to pay compensation than to keep the company going while consultation takes place. In the Woolworths administration, £67.8 million was paid out in compensation for failure to consult; at Comet, it was £26 million.

Another point is that those payments were not made by the companies, the directors or the administrators. They were made by the taxpayer, under legislation that requires the National Insurance Fund to pay some awards, unpaid wages and pension contributions. The burden is shifted to the taxpayer because the workers’ claims are insufficiently protected by insolvency law. It is true that the Insolvency Act 1986 confers preferred creditor status on employees in respect of some unpaid awards, wages and pension contributions. Preferred creditor status sounds good, but it ranks behind all secured creditors, including, often, the shareholders themselves, where private equity is invested by way of secured loans rather than share purchase. After the secured creditors have been paid out, often there is not enough to go around the preferred creditors. In the case of Bernard Matthews, the pension fund recovered next to nothing, while the secured creditors were paid in full. Debts owed to workers outside preferred creditor status rank at the bottom, with all other unsecured creditors. Since the company is, by definition, in financial difficulty, usually there is not enough for them. What is required is to make the benefits of this Bill contingent on the company fulfilling its obligations to their workers first. Noble friends and I will table amendments to achieve this if the Government do not.

Corporate Insolvency and Governance Bill

Lord Hendy Excerpts

Committee stage & Committee: 1st sitting (Hansard) & Committee: 1st sitting (Hansard): House of Lords
Tuesday 16th June 2020 Lords Chamber

[The Deputy Chairman of Committees]

I now call the noble Lord, Lord Hendy.

[Lord Hendy (Lab) [V]]

My Lords, in speaking to Amendments 83 to 86, I will begin with an introduction and then make two points, which will also shorten my contributions to amendments in later groups. The Government rightly foresee that, in consequence of the pandemic, many companies will run into or are already in financial difficulty. Companies become insolvent all the time; we all know the fates of Woolworths, Bernard Matthews, Mothercare, Thomas Cook, Wrightbus, Jamie’s Italian, Carillion, Flybe and many more. There were 17,196 company insolvencies in 2019 alone, but Covid-19 will make it worse.

Hundreds of thousands of workers are directly engaged by the companies in danger. There are hundreds of thousands more in their supply chains. Many will find themselves among the 2 million unemployed workers estimated by the Office for Budget Responsibility to join the 1.36 million unemployed before lockdown—a total of 3.36 million unemployed: a catastrophe. Not only are livelihoods at risk, but the terms and conditions, and the pensions, of those whose jobs are saved are also at risk. We have already seen this in companies that are not insolvent: pay cuts of 10% at the Daily Mirror; of 20% at BAM Construct; of 20% at Ryanair, with a loss of possibly 3,000 jobs; and up to 60% at British Airways, with 12,000 jobs to go.

There can be no doubt that the opportunities offered by the Bill, though generally welcome, will be utilised, as in Chapter 11 proceedings in the USA, to scrap jobs, cut pay and dump pension liabilities. I understand that the Minister has recognised the risk to pensions, yet the remarkable fact remains—and this is the first of my two points—that, in the 234 pages of the Bill, the workers, even those directly engaged, are not mentioned. They are at risk, but not protected.

Most strikingly, the Bill provides no requirement for workers and their representatives to be involved in the decisions that follow the recognition that a company is in financial difficulty and the consequences of such decisions—decisions that are profoundly likely to affect their futures. In the other place, it was said that, in court approval for restructures, the court will have regard to the workers and pensioners in its duty to ensure that the outcome is just and equitable. That will not wash. There is no duty to have regard to the interests of workers and pensioners, and no provision requiring workers or pensioners to be represented in or heard by the court.

It is true that Section 172(1)(b) of the Companies Act provides that among the considerations that directors must take into account are the interests of the employees. But the directors are not obliged to ask them for their views or discuss with them the possible consequences of an application under the Bill. Still less is there any requirement to bargain collectively over these matters. Directors commonly ignore the interests of workers when a company is in financial difficulty. Often, the workers first learn that the company has gone into liquidation on the TV, well after all key decisions have been taken—for example, at Carillion, or Flybe earlier this year.

Section 188 of the Trade Union and Labour Relations (Consolidation) Act requires consultation before redundancy. We know that too often, that does not happen, even where administrators have been appointed. It is often cheaper to liquidate the company than to keep it going while consultation takes place. In the administration of Woolworths, £67.8 million was paid in compensation for failure to consult. For Comet, it was £26 million. But the companies, directors and administrators that choose to break the law by not consulting do not pay. Where there are insufficient funds, the burden falls on the taxpayer, under Part XI of the Employment Rights Act, by which the National Insurance Fund pays—capped at £538 a week—up to eight weeks’ unpaid wages, wages in lieu of statutory notice, holiday pay and basic awards for unfair dismissal. Why does the taxpayer pay? Insolvency law distributes the risk of economic failure in a grossly unfair manner.

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[Baroness Bowles of Berkhamsted [V]]

My Lords, I will also speak to the other amendments in this group. In some ways, I see this group as a continuation of the previous debate concerning the effect of the moratorium on pension funds and small companies. Amendment 23 inserts the prescribed part for unsecured creditors into the A18 priority. It should in fact have had an extra condition to it that said “when there is a pension scheme” but, in the amendment rush, that somehow got left off. Noble Lords will see that in the explanatory statement I did reference pensions as being of particular relevance.

This was an idea I had as part of the continuing story of the adjusted insolvency waterfall and the damage that can be done to pensions. My objective was to probe how else the prescribed part could not be diminished or how there could be some form of compensating balance. Another way could be by putting an extra or reserved part into the higher priority, designated as a first tranche reserved towards pension deficit, with any remaining pension deficit still sharing in the later general pool of the prescribed part. For example, if the prescribed part is raised to 30% so that there is more available in general for pension deficits, as other noble Lords have suggested, could the extra 10% be moved to be given a higher exclusive priority reserved for pension debt alone?

As I said before in the group on pensions, the Government have lifted the lid on changing priorities, and what has to date been accepted as an uncomfortable compromise regarding the position of pension deficit is now open to challenge. Why should there not now be some extra reserved part or special preference in the mix, especially given the point made more than once already that pensions really belong with wages and salaries? They should never have been demoted to unsecured creditors.

As a generality, I see the raising to 30% as beneficial, not just for making more available for pension deficits but also for SMEs. Irrespective of whether there is any changed priority as part of the compensating measures that one will have to start looking at, the rise to 30% —which has been proposed before—is given more impetus in the light of what is happening in the Bill. I beg to move.

[Lord Hendy [V]]

My Lords, my contribution dovetails with that of the noble Baroness, Lady Bowles, whose remarks I support. I speak to Amendment 56, the purpose of which is to preserve for the unsecured creditors a larger share of the assets available for distribution than the legislation currently provides. The legislation recognises that something must be preserved for them, but the question is: how much?

The first part of our amendment seeks 30% of the “prescribed part” of the company’s property. This is an arbitrary figure, intended to be reasonably fair. The problem is that the “prescribed part” is fixed by a formula and is capped. I understand it to be £800,000, or thereabouts, but I confess that I am no expert on this. Consequently, 30% may be a very small sum and spread very thin. The second part of the amendment therefore proposes that, in any event, if assets are being sold to pay debt, as is usual, at least 30% of the proceeds should be reserved for the unsecured creditors, leaving 70% for the secured and other creditors.

I add a word about unsecured creditors. Included in this, for reasons I touched on earlier, will be much of the debt owed to employees of the company, which falls outside that preserved for preferred creditors. The unsecured creditors also include all the workers for the company who are not classed in law as employees but who are nominally self-employed or engaged through a personal company. This is a significant sector of the workforce—over 5 million people in total.

As I mentioned earlier, it is right that workers should have priority because, unlike secured creditors, they cannot diversify the risk of the company becoming insolvent, and their stock of labour is ever-diminishing. There is another reason that they should be given preference: they spend their remuneration; they do not put it in hidden bank accounts in the Cayman Islands. They spend it because they and their families have to live on it. This creates demand and is good for the economy and for business.

Also included among the unsecured creditors are the many SMEs in the company’s supply chain. This may involve dozens of suppliers who have supplied materials, items or labour on credit, but cannot recover them. In turn, they may employ hundreds or thousands of workers. It is right that, in a complex and interconnected economy, unsecured creditors and their workers should be guaranteed an appropriate slice of the cake.

[Lord Mendelsohn [V]]

My Lords, I reinforce my support for Amendment 56, in my name and those of my noble friends Lord Hendy, Lord Hain and Lord Monks, and Amendment 59, in the name of my noble friend Lord Stevenson of Balmacara. I had intended to introduce amendments in these areas, but these are far better crafted than I could ever have achieved.

I would like the Minister to address the operation of these arrangements, the changes to the status of different creditors and how these will be properly balanced to operate as intended, rather than to allow abuse and preserve value in the deal, and how changing creditor status provides for a successful rescue of the company.

We have to appreciate that monitors, moratoriums and restructurings under this legislation are still likely to be in a minority of cases, especially if the comparisons for evaluations, or evaluating the condition of the business, provide both a high bar and ample scope to game the outcome. The majority of cases will still be covered under a going concern administration, whether that leads to a pre-pack liquidation sale or a scheme of arrangements to maintain the company. In many circumstances, the need for protections is even greater.

The new restructuring regime, which should be significantly more attractive, has created a lot of complications by relying on the model of creditor-in-possession financing rather than debtor-in-possession financing. The crucial difference is that this means that external financing is encouraged and given super-priority status, while unsecured creditors can be further disadvantaged by both existing debts and further trading risks. Debtor-in-possession arrangements generally encourage existing shareholders, creditors and finance holders to participate in the future rescue of the business. The amendments would ensure that in this layering of priorities, the weakest in line are not the ones that the system continues to place at a disadvantage. It is important that the Minister should indicate whether the Government are willing to provide extra protections for unsecured creditors and workers who have an unsecured credit with the business.

Have the Government considered a debtor-in-possession financing model and will they consider allowing this in the future? In the spirit of providing a floor to support unsecured creditors, what flexibility can they look for in the system and how are they expected to operate, so that they can participate in the future upside, be that an equity upside or an arranged scheme, thereafter?

Finally, I support the amendments tabled by the noble Baronesses, Lady Bowles and Lady Neville-Rolfe. Can the Minister make it clear how these decisions will be reviewed and what role the Government expect the Insolvency Service to play in order to make sure that abuses can be dealt with and that all forms of creditor can be properly balanced and ensured?

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[Lord Vaux of Harrowden [V]]

My Lords, I believe that I have a minute and a half and we have 18 amendments to get through, which is not terribly satisfactory. My Amendment 51 seeks to introduce a permanent exemption to the termination of supply clauses for very small businesses. I am very concerned that these clauses could be particularly difficult and burdensome for small businesses. The Government recognise this with a temporary exemption, but the clauses are permanent. Having to supply with uncertainty of payment, possibly on top of overdue debts prior to the moratorium, will be disproportionate at any time, pandemic or no pandemic.

Given the time, I will not go through more detailed arguments than that, other than to say, in response to the point that the Government made in one of the previous meetings we had that making it permanent for all small businesses would render the supply protections less useful, that I have therefore drafted the amendment so that it applies only to much smaller companies that are 50% of the size of the ones the temporary exemption applies to. That is arbitrary and I am very happy to discuss it further.

In addition, my Amendment 54 is a very small technical amendment that would simply reduce the tests that a small company that is less than a year old has to apply to meet the small company exemption. It would have to apply only a turnover test. It is a little, technical thing, but it would make life easier for small companies. I beg to move.

[Lord Hendy [V]]

Could I ask the Deputy Chairman of Committees how long we have?

[The Deputy Chairman of Committees]

If the Government Chief Whip would like to make a short statement, he can at this point.

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[Lord Hendy [V]]

Thank you. Amendments 107 to 116 seek to add a third condition to the two proposed conditions for the court to approve a compromise or arrangement.

In Amendments 109 to 111, we seek to require that companies pay all outstanding payments of workers’ remuneration et cetera. This is a reflection of the amendments moved in group one, and therefore I will not develop the arguments again.

Amendment 112 would ensure that the company’s obligations to its pension scheme have absolute priority. Again, your Lordships heard the arguments for that in the debate on the first group of amendments, with contributions from my noble friends Lady Drake and Lady Warwick, the noble Baronesses, Lady Bowles and Lady Altmann, and the noble Lord, Lord Balfe.

Amendment 113 is a repetition of the condition that we proposed in the debate on the fourth group of amendments, which is that 30% of the sale of any assets should be used for the satisfaction of unsecured creditors. I will not repeat those arguments.

Amendments 114 and 115 are, in our submission, important. They are intended to redress the striking deficiency in the Bill of failing to include any mechanism of industrial democracy by which workers may have a say in the vital decisions contained in the Bill that are likely to have a profound effect on their lives.

Amendment 114 proposes workers on boards, just as in most of the rest of Europe. Such a proposal has been the subject of discussion since the 19th century and particularly since the 1977 Bullock report. It was proposed by Mrs May when she was Prime Minister. This is a golden opportunity to put it into effect as a condition. Workers being on boards would make the interests of all stakeholders being properly taken into account much more likely.

Amendment 115 proposes an alternative form of industrial democracy: collective bargaining. Our amendment recognises that there are no recognised unions in many workplaces. We therefore deploy the mechanism for workplace representatives to be elected, which is found in the legislation for collective redundancy consultation. The statutory requirement to bargain collectively has a long history, going back to the Trade Boards Act 1909 and, in a different and more limited form, Schedule A1 to the 1992 trade union Act. It is normal in Europe. The Government would also have the satisfaction of complying with their obligations in international law.

Amendment 116 is intended to discourage restructures intended to raise cash simply to pay dividends, buy back shares or pay the directors excessively.

Amendment 117 is intended to extend the benefits of the previous measures to the broader legal category of workers as well as that of employees.

I am disappointed that, because of the time, I cannot develop further any of the merits of these amendments at this point.

[Baroness Altmann [V]]

My Lords, I will not detain the Committee for very long. I add my support for the protection of workers’ rights that would be achieved by the amendments in this group.

Corporate Insolvency and Governance Bill

Lord Hendy Excerpts

Report stage & Report stage (Hansard) & Report stage (Hansard): House of Lords
Tuesday 23rd June 2020 Lords Chamber

[Baroness Bryan of Partick (Lab) [V]]

My Lords, I too speak in support of Amendment 75. Although it is much weaker than the original amendments, it touches on an important debate that is happening not just in the UK but in most of the developed capitalist countries about the status of employees in a company.

Nearly 30 years ago, two academics wrote a paper entitled “The End of History for Corporate Law”. As often happens with such pronouncements, they were premature. The authors assumed that shareholder capitalism was unchallengeable. It is now common to hear senior executives and influential economists extol the importance of moving towards stakeholder capitalism. The chief executive of Black Rock, Larry Fink, wrote recently about climate change but said that sharing data should go

“beyond climate to questions around how each company serves its full set of stakeholders, such as the diversity of its workforce”.

The Financial Times reported that a business round table of 151 US chief executives has revised its concept of “purpose of corporation”. They have renounced shareholder value and would instead lead their companies to the benefit of all stakeholders—customers, suppliers, employees and communities. Mark Carney wrote recently in the Economist that companies would be judged on how they treated employees, suppliers and customers, by who shared and who hoarded, and that the corona crisis was

“a test of stakeholder capitalism.”

He might have had in mind companies such as easyJet, which has sought state aid after cancelling most of its flights but went ahead with a £174 million dividend payout while asking employees to take unpaid leave and face substantial changes to their terms and conditions.

This amendment should be knocking at an open door. I am sure that noble Lords will want to accept it, and that what it calls for will become common practice before too long. It is a modest proposal that does no more than require a company to consult the representatives of its employees. I am sure that many of us would want to go further than that, and no doubt this is an issue that we will return to over the coming months and years.

[Lord Hendy (Lab) [V]]

My Lords, I too shall speak to Amendment 75. In precisely one week’s time, we will celebrate the 70th anniversary of the ratification by the United Kingdom on 30 June 1950 of Convention No. 98 of the International Labour Organization, one of the two most fundamental conventions in international labour law. It has not only been expressly ratified by 167 nations but is considered part of customary international law. Article 4 reads as follows:

“Measures appropriate to national conditions shall be taken, where necessary, to encourage and promote the full development and utilisation of machinery for voluntary negotiation between employers or employers’ organisations and workers’ organisations, with a view to the regulation of terms and conditions of employment by means of collective agreements.”


Another anniversary will be commemorated on 11 July, for on that day in 1962, as a member of the Council of Europe, the United Kingdom ratified Article 6 of the 1961 European Social Charter. The article reads:

“With a view to ensuring the effective exercise of the right to bargain collectively, the Contracting Parties undertake … to promote joint consultation between workers and employers … to promote, where necessary and appropriate, machinery for voluntary negotiations between employers or employers’ organisations and workers’ organisations, with a view to the regulation of terms and conditions of employment by means of collective agreements”.


This amendment does not seek the fulfilment of the Government’s obligation to promote collective bargaining on the consequences for workers in a company that is running into financial difficulties and the measures such as a moratorium to alleviate them, but it does require the fulfilment of the more modest obligation to promote consultation between workers and employers about such consequences. It is difficult to the point of impossibility to see what objection there could be to the imposition on directors of an obligation to hear from their workers—in this case their employees—their perceptions of and suggestions for ameliorating the company’s situation. Under the Companies Act, directors already have an obligation to take into account the interests of the employees, so it is really not asking much to require them to ask their employees to express their views.

Given that the biggest impact of the moratoria and other measures relating to a company’s financial difficulties will be on the workers whose livelihoods are on the line, why not hear their voices? They will be the most ardent and innovative in finding ways of keeping the company alive. Certainly, the Minister and his team have offered no objection to the principle or the practicality of this so far. All that has been said is that employees are already protected and that the courts have a duty to ensure that arrangements are fair and equitable.

The first point is hopeless. There is no extant legal obligation to hear the voices of workers, no obligation to bargain collectively, no obligation to consult save where collective redundancy procedures apply, and no requirement to have worker directors on the board. The second point is equally without merit. There is no provision for workers to be parties to, to be represented, or even to be heard in the specific court proceedings to which this Bill relates. Without hearing from representatives of the workers in respect of the measures being proposed, how can the court be satisfied that any measure is fair and equitable to them? I urge the Government to accept the amendment and to fulfil at least partly their international legal obligations.

[Lord Hain (Lab) [V]]

My Lords, following the excellent speeches of my noble friends Lord Hendy, Lady Bryan and Lord Kerslake, I wish to support Amendment 75.

There was a moment during the response of the Minister, the noble Lord, Lord Callanan, in Committee to various amendments aimed at protecting the interests of a company’s workforce in the moratorium process when I was reminded of the Hatton Garden safe deposit robbery in 2015, the biggest burglary in British legal history. The conspirators in that crime called carving up the proceeds “the slaughter”. One of the gang nearly missed out on the slaughter. He had bailed out after the first attempt to break in because he did not want to risk returning to the scene of the crime. Some of his co-conspirators felt that he had thereby forfeited any share of the proceeds. Fortunately for him, there was honour among thieves, and they relented and gave him a cut.

The Minister argued that workers are already well protected and that consulting employees or their representatives in the moratorium process is unnecessary because the aim of the Bill is to keep companies in business. In his view, consulting employees would risk publicising a firm’s problems before it could be protected from creditor action, leading to more company failures—in short, that the workers should know their place, run along and let their betters deal with the problem. If he had patted them on the head, I would not have been surprised. Surely there should be a less patronising attitude to people who may have invested much of their working lives in a company that is now facing financial distress.

For workers, insolvency puts more than just their jobs in jeopardy. They may have back pay at risk. Their pension rights may be in danger. Their redundancy rights may be under threat and their tax and national insurance responsibilities may be in doubt. Indeed, the company may even have defaulted on payments to HMRC already deducted from their pay. Their employer may be defaulting on its equal pay and equal rights obligations.

Workers have a vital interest in the insolvency process. They deserve a voice in the consultation process and surely the Government cannot deny that; otherwise, they will be left where they are now—on the outside, at the end of a long tail of unsecured creditors, unrecognised, unheard and unwelcome, while the professional insolvency practitioners practise their black arts. Britain’s workers deserve better, and that is the purpose of Amendment 75.

The amendment is very modest, simply requiring companies to consult their workforces. It imposes no vetoes by employees on the moratorium process and specifies no hurdles that have to be surmounted; instead, it simply imposes an obligation to consult. Surely the Government must agree to that principle or, alternatively, endorse an attitude that says in effect that company owners’ rights matter, creditor and debtor rights matter but employee rights do not. I urge the Minister—and, if not, then your Lordship’s House—to support Amendment 75 or, alternatively, as I now understand he might do, at least to give some proper guarantees that employees will not be left in the lurch.