Corporate Insolvency and Governance Bill

Lord Vaux of Harrowden Excerpts

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

[Lord Vaux of Harrowden (CB) [V]]

My Lords, insolvency rules are a delicate balance between giving a business the best chance of survival while protecting the position of creditors. In these difficult times, it is appropriate to move that balance a little towards the survival of the business for the greater good of the economy, so I generally support the Bill.

I want to raise two issues that relate to the protection of creditors. First, and echoing the noble Baroness, Lady Burt, the Bill prevents a much wider range of suppliers terminating a contract when a company enters the insolvency procedure. This is a permanent change. The Bill gives a temporary exemption to small companies during the current pandemic, which presumably recognises that continuing supply may be disproportionately difficult or risky for a small company, but this exemption is only temporary. This is an area where I think the Bill may have tipped the balance too far from protecting creditors. Will the Government consider a permanent exemption for at least the very smallest businesses which are most likely to be at risk in this situation?

Secondly, like several noble Lords, I want to raise pre-packs. Around one-quarter of administrations involve a pre-pack deal where the sale of all or part of a business is agreed with a purchaser, often a connected party, prior to the company being put into administration. Pre-packs can be a useful and appropriate business rescue tool, but there is a very strong perception of a lack of transparency and there are concerns that they allow directors to create so-called phoenix companies and simply dump the creditors.

In 2014, the coalition Government commissioned the Graham report. It highlighted that nearly two-thirds of pre-packs involved sales to connected parties. It said that, as well as lacking transparency, pre-packs that involve related parties often involve very limited, if any, marketing and that returns to creditors are often lower. Indeed, unsecured creditors are more likely to receive nothing in connected cases than in unconnected cases.

The Graham report recommended the creation of a pre-pack pool of experienced business people who could provide an independent opinion on whether the proposed pre-pack was reasonable. The pool was launched in 2015. Referral to the pool is purely voluntary and is initiated by the connected party. The Graham report also recognised that this voluntary approach might not work and said that, if that was the case, the Government should consider legislating. Unfortunately, the voluntary process has not worked. Only 10% of connected party pre-packs are being referred to the pool, with just 21 referrals last year. Indeed, the Pre Pack Pool oversight committee has recently written to the noble Lord, Lord Callanan, saying that it believes that the body is unsustainable unless referrals are made mandatory.

As mentioned by the noble Baroness, Lady Neville-Rolfe, the Small Business, Enterprise and Employment Act 2015 included a power to make it mandatory. That power had a five-year sunset clause, and it was allowed to elapse unused just a couple of weeks ago. According to the Times, the Insolvency Service blamed Brexit, the general elections and the pandemic for the failure to use these powers. The insolvency and restructuring trade body R3 has also expressed disappointment that no action has been taken to improve confidence in this important business rescue tool.

The Bill gives us the opportunity to fix that. It is important that we act quickly, given the unfortunate likelihood of higher numbers of companies becoming insolvent. Will the Government consider adding a clause to the Bill to make the referral of connected party pre-packs to the pool mandatory? That would be a very simple but important way of making sure that the balance between saving a business and protecting creditors is appropriate and transparent.