Corporate Insolvency and Governance Bill

Lord Mendelsohn Excerpts

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

In the interests of time, I feel that that is all I need to say at this stage. I thank my noble friend the Minister for all the work that has gone into this important Bill.

[Lord Mendelsohn (Lab) [V]]

My Lords, I will speak to Amendment 3 and make some general observations.

Amendment 3 relates to the recognition of the appropriate debts of creditors. In particular, one must be concerned about smaller businesses, which may well suffer as creditors and unsecured creditors from such a transaction. While these may be smaller crumbs of comfort than the overall Bill, it is absolutely right that businesses that fall into this process properly recognise the full extent of the debts that they owe so that statutory interest is recognised as a cost and a consequence for them. It is right that these debts should be appreciated and recognised in the statements that the monitors have to put forward. I hope that the Minister will consider the Government introducing this measure, not just to make sure of the full amount that is owed to a company because of late payment and late settlement of their debts but also because it sends an important cultural message.

I support some of the measures introduced by other Members of this House. In particular, it is very important that we probe the Minister for much more detail about the role of the monitor. We must look at the qualifications, skills and independence of the people who will occupy those posts, as well as the costs.

Here I am concerned that the impact assessment itself shows that very little work has been done on the likely operating mechanisms of the Bill. The figures that it uses are from a study in 2010, and I hasten to add that in the last decade we have seen a significant increase in the rise of professional service costs, and the costs in the impact assessment do not fully recognise those.

We do not have a full appreciation of what skills are required for this, and I strongly support the notions expressed by my noble friend Lord Stevenson that there are many others who we might want to introduce into this area who have appropriate skills that are recognised by professional accountancy bodies. Many people who have been involved in the turnaround industry would do very well at this task—much better than qualified insolvency practitioners. I would be interested to hear the Minister’s comments as to how the Government will look at the appropriate skills that are required for someone to successfully be able to carry out the role of a monitor, including the measures to try to ensure the proper independence of the monitor, that they have a real view for the potential future success of the business and that they are not beholden to any particular class, but particularly those who are connected parties.

However, I strongly support the amendment, which addresses the difficult question about the time for a monitor. This process should be given an extended period, and it would be worth while in the first instance extending the first period to ensure that we do not go through a quick cycle to make sure that it is there.

On the amendment in the name of the noble Lord, Lord Leigh, while many people will consider this to be a difference without a distinction, he will be able to express the nature of his interpretation.

It is important also to probe the Minister on the fact that we have seen that many businesses, particularly at latter stages, like to structure themselves in such a way that they can move a variety of the different connected parts of the business through different processes, and will disaggregate the overall enterprise and take individual companies to be able to crush suppliers or deal with the dispensing of staff during that period. It is important that the application of a company’s business helps us ensure that companies do not act inappropriately and section off parts of their businesses, as we saw just a couple of days after Second Reading, with one of the most disgraceful pre-packs of all time. A connected part of a business was crushed in order to eliminate the full suppliers, and it isolated a particular business rather than the whole enterprise. It will be important for the Minister to give us some reassurance that the definition of a company does not allow businesses to game the system, or allow some form of recourse or interpretation that makes that possible.

[Lord Hope of Craighead (CB) [V]]

My Lords, I will speak to Amendment 4 on the Marshalled List, which is in my name.

The context for what I propose is to be found in new Section A8, which requires the monitor, as soon as reasonably practicable after the moratorium comes into force, to notify every creditor of the company of whose claim he is aware, giving notice of when the moratorium came into force and when it will come to an end. The importance of this duty is highlighted by the fact that the monitor commits an offence if he fails without a reasonable excuse to comply with it. That is as it should be, as the creditors need to know about the moratorium as soon as possible, because it has such an obvious effect on them and their interests. Their right to recover the debt is effectively frozen for the duration of the moratorium. That may have significant adverse effects, which may need to be provided for urgently to avoid the creditors’ financial embarrassment. But the monitor’s duty to notify the creditors extends only to those of whose claims he is aware. There is no suggestion anywhere in the Bill, so far as I can see, that the monitor is under a duty to make inquiries. Therefore, the provision, as it stands, is a rather weak protection for the creditors, whose interests will inevitably be disadvantaged by the moratorium, against which they are being given no right to object.

In that context, I am proposing an addition to the list of relevant documents in new Section A6. These are the documents that must accompany the directors’ application for a moratorium. The amendment seeks to add to the definition of “the relevant documents” in Section A6(1) a list by the directors of all known creditors of the company. The aim of the amendment is to ensure that the monitor has access to this information as soon as possible. That is because he really does need it, if the performance of his duty to notify is to be effective for the protection of the creditors. The directors are, of course, in a much better position to say who the creditors are than the monitor, who is a newcomer to its affairs. Adding this list to the definition will greatly strengthen the effectiveness of the duty to notify in new Section A8. It will enable the performance by the monitor of his duty to notify to be much more effectively scrutinised, and enforced, if necessary, than it would be if all that can be done is to rely on what he happens to be “aware” of.

I should explain that the need for a provision of this kind was drawn to my attention by the Law Society of England and Wales. The wording of it has its support, and I invite the Minister to look at it very carefully. I appreciate, of course, the pressure the Minister is under to get the Bill through as soon as possible, and that the time he may need to get clearance for any amendments to it is also very limited. I would therefore be content if the Minister would give an assurance that he will indeed look at this matter and at the gap in the creditors’ protection that it exposes, perhaps with a view to an amendment by regulation under the power provided by Clause 18(1)(a), as R3 suggests, once the way these measures are working out in practice has been tested in the marketplace.

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[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?

[Baroness Neville-Rolfe [V]]

My Lords, as time is short, I will focus on my Amendment 60. A court of administration normally involves pre-packs, and that is why, with the support of my noble friend Lady Altmann, I want to provide a quick and easy way of ensuring that the power we gave HMG in the Small Business, Enterprise and Employment Act 2015 can be restored. This power was the victim of a sunset clause and a delay in making the necessary regulations. There are later amendments that we may reach today on pre-packs and the encouragement of the pre-pack pool. All of them reflect the fact that a group of us across the House who spoke at Second Reading, including the noble Lords, Lord Vaux and Lord Mendelsohn, think that we need early action on pre-packs. I imagine that we are all rather disappointed—although the usual opportunity for a discussion in the Bishops’ Bar is not available—by the Minister’s response at Second Reading. His suggestion was that strengthening professional standards and existing regulation would be adequate, and if not, there could be legislation at a future date —a sort of mañana.

My amendment is very simple: it would give the Government back the power to make the necessary regulation on pre-packs but it would sunset that power after a year, both to provide the incentive for speedy resolution of this issue and to avoid any unwelcome use of the delegated power for other purposes down the line. I would obviously be delighted if the simple sunset clause I have used in Clause 62 might also help us to consider and find a path to resolving some of the important delegated powers issues we were discussing earlier; I am very hopeful that the Government will be listening in that regard.

I hope that my noble friend the Minister and his department will listen to those of us who have concerns and agree to amend the Bill to deal with the pre-pack issue, perhaps in the way that I have proposed.

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[Lord Callanan]

My Lords, these are a number of technical amendments tabled by the Government in my name to ensure that financial collateral arrangements, charges and securities are carved out from the effects of the moratorium. This is part of the Government’s intention to exclude certain financial services contracts from the moratorium.

I am conscious that time is getting on. I have an extensive speaking note and I can go through it in great detail if noble Lords wish me to do so, but it probably best serves the interests of the Committee if I stop at this point and let noble Lords who wish to contribute on this matter come in. I can respond at the end, rather than go through a lot of technical detail that might not be of interest to those present. That might be to the benefit of the Committee, given the late hour and the fact that we are pressed for time.

[Lord Mendelsohn [V]]

My Lords, I am encouraged by the Minister’s indication during the debate that the Government are open to amendments and it is useful to hear that they have published material relating to insolvency practitioners, even though I am yet to find out where we can get hold of it. However, I am not entirely satisfied by the Government’s assurance that they appreciate how to deal with some of the complexities that they have put forward. That is not least the case in this group of amendments. I would like to understand not the entire effect but the assumption of which particular cases and how many of them these amendments are likely to affect, and whether they are just technical or do in fact change some of the current core financing arrangements for larger companies.

While I welcome the progress towards a more flexible insolvency regime and appreciate the need for temporary arrangements to help to navigate the current emergency, this legislation, as necessary as it may be, ends up asking a lot more questions than it answers. The truncated process is of course, as many noble Lords have mentioned, wholly unsatisfactory not just for scrutiny but to allow the Government to consider these matters and others as they should. It defies logic that the process was done fully in one day in the other place.

It is not just that the impact assessment is based on out-of-date data and contradictory calculations; the permanent provisions were consulted on, although in their previous form they were never going to be implemented in such a piecemeal fashion. It appears to be widely accepted that it is not just the flaws but the time required to adjust this regime that will be complicated. The permanent measures will take longer to implement, and it will take time for people to get used to how they operate. The temporary measures are a bit too limited to operate in their own guise.

However, the Government cannot have it both ways. They cannot claim that these measures are to get things working in an emergency and at the same time widen the number of options, the required skills, the number of participants and the variety of arrangements required where practitioners or courts will need to be trained or practised in. And, of course, this omits some of the most significant elements that will still need to be addressed, such as whether HMRC will have a preference or take an active role in this, as well as the role of the pre-pack regime and others. It is not just a question of all the delegated powers that noble Lords have spoken so eloquently and raised such meaningful and compelling objections and warnings about. It is also that the regulatory regime is weak and unclear, and so much of this should be in the Bill.

However, we are where we are, and the Government are going to do this whatever we say. Bluntly, this is not this House’s first rodeo, but it is our job to be realistic. This legislation will require further regulation and change, and much work is already taking place in a number of the agencies or in other places that is likely to lead to measures being added to the legislation at a later date. Therefore, we should address how this will work best in the future.

The most important element here is to receive proper reassurance from the Minister of an enhanced process to deal with the implementation, review, secondary legislation and regulation of this legislation, so any clear statements and undertakings in this regard would be important, whether given here or on Report. Will the Government create a post-legislative scrutiny process or, for example, would they be keen for this House to establish a process or a committee that could provide a meaningful role? Will the provision of information be sufficient, and what sort of information will be provided to this House? What will be measured by government, so that we can properly evaluate the operation of the legislation?

What other reviews or agencies, from the professional bodies to the Insolvency Service or the courts, are currently being consulted? What part of these discussions can we be told now, and what will be made available in the future to help resolve concerns or help us to have a debate prior to legislation or regulation being brought forward? Can clearer statements be made by Ministers about how they expect it to work, so that the courts have a clear indication on what to make rulings on and how they should do so? I suspect that the courts will be slightly busier than the Minister anticipates, not least because financial indemnity insurance will provide a very adequate target for people to exercise some degree of accountability in the courts.

Of course, the affirmative procedure for regulation is all that we have, but will the Government look at how this process can be enhanced with a greater provision of information, and possibly consultation, prior to the regulations being tabled? Any such assurances on how we will deal with where we are, and how we might deal with what might evolve into a better and more robust system, would be gratefully received.

[Lord Thomas of Cwmgiedd [V]]

In view of the course that the debate has taken and the statements by the Minister, I can be very brief. I welcome Amendments 92, 104 and 106, which ensure that unsecured bonds are caught by the exclusions of the moratorium and ipso facto provisions. However, there are many other technical issues to address, and I very much hope that this can be done by further government amendments before Report. That would certainly be preferable to making changes and correcting errors through the regulation-making powers. I welcome what the Minister has said so far and very much look forward to seeing the further amendments dealing with these technical problems.

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[Lord Mendelsohn [V]]

My Lords, I will briefly speak in support of Amendment 75, which is also in my name, on the Small Business Commissioner. Only in the UK system have we decided to have a Small Business Commissioner to deal with late payments and model it on existing arrangements in other countries. Every other country uses legislation to deal with late payments. However, they have found that the small business administration in America or in Australia, or other types of such agencies, have played a useful role in the insolvency process, building support and confidence for smaller businesses and being a useful vehicle for larger companies and professional services to do a variety of things—from the renegotiation of leases to dealing with supplier contracts, for example. Apart from the measures my noble friend Lord Stevenson described, there are of course other ways in which involving the Small Business Commissioner is a big help in making sure that this legislation works and that it properly protects the interests of smaller operators, ensuring that larger operators and the asymmetry of powers can be adequately addressed and a smoother process can be assured. Enhancing the role of the Small Business Commissioner by adopting this amendment and introducing some sort of formal role or consultative power would be a useful step toward ensuring that this process works smoothly.

[Baroness Anelay of St Johns [V]]

My Lords, I will speak to Amendment 143, which is in my name. The Bill is of course welcome and gives legal certainty to certain charities about how they can, without any penalty, “disobey” the rules in their own governing document on whether and when to hold AGMs and other meetings and file certain documents. But some charities are excluded from this sensible legal assistance—those established either by Act of Parliament or by Royal Charter. They are mostly long-established and include national museums and leading cultural organisations such as the Royal College of Music and the National Art Collection Fund, as well as some leading universities and colleges. It should also be noted that, even if a charity does not have to hold an AGM during the relevant period, it may none the less be advisable for it to take advantage of the temporary flexibility offered by the Bill to other charities and go ahead with a meeting to consider resolutions which might need to be passed in the next few months—for example, the appointment or re-appointment of board members.

My objective today is to ask the Government to explain why they have excluded certain categories of charities from the flexibilities provided by this Bill. If the Government have decided that the Bill is not the right vehicle for these charities, I would like my noble friend the Minister to explain why. It is important that the Government explain today what other guarantee of certainty they can give to the excluded charities, so that they will not face any disadvantage.

Much earlier this afternoon, in answer to the noble Baroness, Lady Falkner, my noble friend Lord Callanan stated that there had been extensive consultation over a long period about provisions in the Bill. I would be grateful if the Minister said now what discussions she or her officials have had with DCMS and the Charity Commission in deciding what assistance should or should not be provided by legislation to the excluded charities. Did those discussions take place before the pandemic began, or have they taken into account discussions since then with representatives of the excluded charities about the impact of the pandemic on them and how they might be given certainty?

My concern is that there is a group of excepted—excluded—charities which do not have the same benefits as others listed in Schedule 14. I feel that it is unfair to leave them to the vagaries of decisions by the Charity Commission as to whether they can go ahead and break the rules of their own governing document. They are respectable charities; they need to have the respect of being given the flexibility to operate in the same way during this pandemic as charities currently covered by the Bill. I look forward to the Minister’s response.