Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill

Lord Leigh of Hurley Excerpts

Report stage
Wednesday 1st December 2021 Lords Chamber

I look forward with interest to hearing the Minister’s comments, particularly referring back to the discussions that we had in Committee. A significant number of concerns were expressed from all sides of the Chamber at the way that this legislation has been brought forward; we need to put a marker down around that. Having said that, given the critical situation facing businesses, and therefore local authorities, and therefore communities, we recognise the need to move forward with the legislation, but we need to recognise that there are some very serious questions still to be answered.

[Lord Leigh of Hurley (Con)]

My Lords, I want to add my comments on Amendment 2. I remind the House of my interests: I advise SME businesses and am also a landlord.

Increasingly, a number of people that I talk to, specifically in the retail sector, are very concerned that the Government are not listening to their concerns in respect of rates. Over the last 18 months, a number of companies have gone through CVAs. As a result of those CVAs, they have entered into turnover-based rents with landlords, enabling them to carry on trading from particular locations. But the size of the rates has meant that, despite having turnover rents, they are not able to carry on trading from retail premises, specifically because of the rates; more importantly, they are not able to open new locations that would otherwise be economically viable because of turnover rents, specifically because of rates.

I do not expect my noble friend the Minister to answer these concerns in this debate on this amendment, but business, particularly the retail sector, would like it acknowledged that the Government are aware of, focused on and planning steps to address this issue.

[The Minister of State, Home Office and Department for Levelling Up, Housing & Communities (Lord Greenhalgh) (Con)]

I thank noble Lords for raising two important issues. The noble Baroness, Lady Pinnock, asked whether we will have data to know whether the £1.5 billion is enough and that we are not short-changing local government in any way. The noble Baroness, Lady Blake of Leeds, wanted to know about the future of business rates reform, given that we are seeing the economy shift to online and that many bricks-and-mortar businesses are struggling to pay their rates bills. I will try to address those points in turn.

I can give the noble Baroness, Lady Pinnock, some assurance on the availability of VOA statistics, which tell us about the adequacy of the Government’s support. During 2022, the VOA will provide new data specifically marking out Covid-related MCCs but, even in the existing data sets, we can get an insight into the nature of these cases. I quote more recent figures from October: as of 30 September 2021, 63,780 challenges were outstanding in England, the vast majority of which are on hold pending this Bill. Far more challenges could come forward from ratepayers who have already made checks—a check being the first stage in appealing the rateable value of one’s property. In the period since April 2020, the VOA has received more than 400,000 checks. So, there is a wealth of statistical evidence out there and it will be enhanced next year. This evidence cautions against any suggestion that we should introduce a like-for-like compensation for Covid-related reductions in rateable value, which, on account of this Bill, will rightly not materialise. That was never the intention, and we should not seek to create an equivalence.

On the point made by my noble friend Lord Leigh of Hurley and the noble Baroness, Lady Blake, we recognise that particular industries have been hit very hard by the pandemic. We have statistics on the drop in gross value added by industry, and there is a wide range of reductions by sector. That comes to the question of how we divide the £1.5 billion, which I will return to in the debate on the next group of amendments.

Let me give the Government’s most up-to-date position. Following the conclusion of the business rates review, the Government will shortly consult on measures arising from that review and seek to bring forward legislation in due course. The consultation was published only yesterday and explicitly anticipates future legislation to deliver major reforms. These include three-yearly revaluations, a major ask of ratepayers, support for property improvements and support for green plant and machinery. So, noble Lords should have complete confidence that there will be an opportunity for them to consider, debate and scrutinise these measures and the Government’s overall business rates policy.

I should have declared my residential and commercial property interests as set out in the register; I forgot to do that right at the beginning. I must underline that I have not been involved with any material change of circumstance approach, but I recognise that many businesses, including many small businesses, are waiting eagerly to hear how we will resolve this situation.

--- Later in debate ---

[Lord Leigh of Hurley (Con)]

My Lords, I have put my name to Amendments 5 and 6, although, with all credit to the noble Lord, Lord Fox, his team did most of the work in compiling the text. Given the hybrid nature of the Bill, I need to declare a completely different set of interests, which is that I am chairman of an AIM company, Manolete Partners plc, which is in the insolvency-related area.

The direction of travel from the noble Lord, Lord Fox, and me is to ensure that regular creditors, in addition to Her Majesty’s Government and agencies such as HMRC, are looked after where companies have been dissolved. It is clear that some people are prepared to be struck off as directors and do not see that as much of an impediment to their business life. I am grateful to the insolvency trade association, R3, which has advised us that insolvency and restructuring professionals, who have extensive experience in tackling fraud, have noted that serious serial rogue directors do not see being disqualified as a significant deterrent, and will often go on to commit repeat frauds. Insolvency practitioners frequently see disqualified directors contributing to successive business failures or breaching the terms of their disqualification by working as shadow directors or “advisers” to these phoenix companies that are subsequently set up. In fact, R3 has given us specific examples of where that has taken place.

It is clear that the disqualification mechanism is not in itself deterring culpable directors, thereby putting the public at risk. For the policy to be effective, it is clear that investigations should lead to prosecutions. It is not clear to me how the prosecution of a director of a dissolved company—that is, a company that no longer exists—can legally take place without the company first being restored. Perhaps the Minister can clarify that. Does the Insolvency Service intend to restore every company when it is going for prosecutions? That is why we want to see how the Insolvency Service will do that and how successful it has been. That is why Amendment 5, particularly proposed new subsections (2) and (3), is required.

There is still the open question: is this the right route? For example, should we be looking at changing the law somehow to allow prosecution of directors of former companies, now dissolved, without returning them to the register? I would be keen to push the Insolvency Service to tell us, as proposed new subsection (2)(b) of Amendment 5 requires. But what the noble Lord, Lord Fox, and I are most concerned about is compensation. In that regard, I thank the Minister for his letter of 22 November setting out the position on the existing regime as far as Sections 15A and 15B of the Company Directors Disqualification Act 1986 are concerned in respect of compensation orders.

As I understand it, using a compensation order means that many other frauds, not just the bounce-backs that prompted this legislation, can be carried out, whereby the directors simply will not get investigated or identified if the dissolved company is left alone. As I have mentioned, currently it is only by restoring these entities and putting them through an insolvency process that misplaced assets, other frauds, misfeasance and so on can be identified, leading to further action against these directors.

I genuinely think there is some confusion—certainly for me and possibly the noble Lord, Lord Fox, and others—in understanding whether or not a company needs to be restored before further action can be taken. If it is not restored, what are the mechanics of a compensation order in respect of a company that does not exist anymore? We would like to see the evidence of what the Insolvency Service is up to. With a dissolved company remaining dissolved, the normal creditors—non-government creditors—stand to gain nothing from the compensation order because the fraud concerned related primarily to bounce-back loan fraud. This is clearly very important where the Government are the victim and we all want to assist them, but that does not help the wider body of creditors who have suffered.

I appreciate we are straying into some technical areas, and we are going to have to rely on assurances that compensation orders will be used by the courts for the benefit of all creditors rather than just HMRC. We are also, frankly, just going to have to wait and see what definition will be used for public interest. I do not think there has been any offer of assistance in defining public interest. We are going to have to see how many cases are dealt with by the Insolvency Service. That is why we have tabled Amendment 6, so we can see what happens and—as is our usual style—then suggest some helpful further steps that might be taken.

I am aware that the Insolvency Service, as has been mentioned, publishes an annual report, which I have read carefully; it was updated a couple of weeks ago. That shows that the Insolvency Service is a big and important agency. I was surprised to learn that it spends some £625 million per year. By statute, it has to report on its activities, and I was pleased to see that it has an 84% customer satisfaction result, on which I congratulate it and the Minister. But it is not clear to me from reading this report that the specific items requested in Amendment 6, particularly subsection (2) of the proposed new clause, would be required to be disclosed as separate, specific issues. I welcome the Minister’s views on how we can best achieve some transparency, and how the Government are getting on with implementing this Bill and achieving the aims we all seek.

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

My Lords, Amendments 4, 5 and 6 seek to put reporting requirements into statute, and I am happy to comment on them. I am grateful to noble Lords for giving me the opportunity to talk both about the process of investigation and disqualification and the reporting work that the Insolvency Service already undertakes. I also put on record my thanks to the noble Baroness, Lady Blake, the noble Lord, Lord Fox, and my noble friend Lord Leigh, for the very constructive and helpful meetings that we have had in the lead-up to this debate.

Before I talk specifically about resourcing and reporting of investigative outcomes, let me take some time to remind noble Lords of the process which leads to the disqualification of company directors, focusing on the situation where a company is subject to insolvency proceedings—which is different to the situation where a company is dissolved. The officeholder, whether they be an administrative receiver, a liquidator or an administrator, must report to the Secretary of State on the conduct of the directors of the company within three months of the company going into insolvent liquidation, administration or administrative receivership. Upon receipt of this conduct return, the Insolvency Service will assess the information provided to prioritise the case in terms of its public interest. Factors that could be considered—for the benefit of my noble friend Lord Leigh—might be the seriousness of the misconduct in terms of the damage caused, the previous behaviour of the director in question and the need for protection of the public from the actions of the director. This assessment is used to prioritise the most serious cases, which are then investigated using the powers in the Company Directors Disqualification Act 1986.

Of course, not all investigations will lead to disqualification proceedings being brought. One outcome of the investigation might be that the director acted reasonably given the information that was available to them at the time, and if this became apparent then the investigation would be concluded. Where there is evidence of misconduct, though, and the Secretary of State is satisfied that public interest criteria are met, disqualification proceedings may be sought, either through an application to the court or through the director giving an undertaking not to act as such for a period of time, depending on the determined seriousness of the misconduct. An application for disqualification must not be made after three years from the start of the insolvency proceedings unless the court gives its permission. For unfit directors of insolvent companies, the period of disqualification can be between two and 15 years.

Following on from successful disqualification proceedings, if it can be identified that the director’s conduct caused losses to creditors, then the Secretary of State may seek payment from the director for their benefit by way of disqualification compensation. As with the disqualification proceedings, this may be dealt with by way of an application to a court or by an undertaking given by the director. Compensation may be paid to the Secretary of State for the benefit of a specific creditor or creditors, or a specific class or classes of creditors, or instead may be paid to the insolvency officeholder for the benefit of all creditors.

Compensation work is undertaken by investigators at the Insolvency Service, so as much of the money as possible may be returned to creditors. I confirm for the benefit of the noble Lord, Lord Fox, and my noble friend Lord Leigh, that no preference is given to any particular creditors or groups of creditors, other than that the compensation payments are for the benefit of those who have lost out as a result of the misconduct. It is important to note also that, if the insolvency officeholder had already used the various provisions in the Insolvency Act 1986 which allow them to seek recoveries for the benefit of creditors, such as the fraudulent or wrongful trading provisions, then compensation would very probably not be sought for the conduct which led to those claims so that the directors would not face double jeopardy.

Noble Lords will have seen that the Bill gives a similar standing to the new measures to investigate and disqualify former directors of dissolved companies as currently exists for insolvent companies and they use the same sections of the Company Directors Disqualification Act. Unlike insolvent companies, though, there will not be an officeholder in a dissolved company, so the investigation process will not start with a report on the director’s conduct. Instead, the Secretary of State will in most cases be alerted to potential misconduct through complaints received by members of the public. This will not mean that conduct reports provided by insolvency officeholders will be overlooked in favour of complaints received in dissolved companies. All will be assessed in terms of their relative seriousness and the level of public interest. A disqualification application must not be made after three years from the date of dissolution unless the court gives its permission.

This would perhaps be an appropriate point in my remarks to pay tribute to the excellent work of insolvency practitioners, who provide the conduct returns to the Insolvency Service, and who in many cases continue to assist with the investigative effort beyond that initial assessment.

Noble Lords may well recall that these measures were developed and consulted on back in 2018, before any of us had even heard of a disease called Covid-19 or a bounce-back loan. At the time, the Insolvency Service had been receiving a regular low level of complaints about the abuse of the process of company dissolution. Many of those complaints concerned its use in phoenix companies—where one company is dissolved only for another to spring up essentially doing the same thing but without the debts. Because of the dissolution, the Insolvency Service had been unable to take action against the directors responsible. The opinions of stakeholders on new powers to tackle this kind of misconduct were sought, and these were generally fairly positively received. Implementation of the measures has now become even more important and more urgent because of the risk of abuse of the dissolution process to avoid repayment of bounce-back loans.

This brings me to the question from the noble Baroness, Lady Blake. I can tell the noble Baroness that the Bounce Back Loan Scheme closed for new applicants on 31 March 2021. At the time of the scheme’s closure, £47.4 billion-worth of finance had been provided to some 1.5 million businesses. Given the levels of uncertainty around the economy and the virus, the anticipated fraud levels are very preliminary and speculative. They are not based on any repayment data because that did not even begin until May 2021.

I make a final point on the process for disqualification. I can confirm to my noble friend Lord Leigh that it would not be necessary for a company to be restored to the register for the conduct of its directors to be investigated, and the same applies if and when compensation is sought from a disqualified former director of a dissolved company. There will be no automatic restoration process, nor is there any need for one for the purposes of the investigation and disqualification. This way, the costs and administrative burden of restoration can be avoided.