Corporate Insolvency and Governance Bill

Lord Vaux of Harrowden Excerpts

Committee stage & Committee: 2nd sitting (Hansard) & Committee: 2nd sitting (Hansard): House of Lords
Wednesday 17th June 2020 Lords Chamber

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

My Lords, I metaphorically rise to support Amendment 57 in the name of the noble Lord, Lord Hodgson of Astley Abbotts, and to speak to my very similar Amendment 61. Both relate to pre-packs.

The Minister said yesterday that pre-packs are

“a useful tool that allows businesses and jobs to be saved.”—[Official Report, 16/6/20; col. 2092.]

I do not think that anyone disagrees with that. Equally, few disagree that pre-pack deals with related parties involve clear conflicts of interest and raise serious transparency concerns—speaking of which, I can now see noble Lords, which is a great benefit. Indeed, at Second Reading the Minister directly recognised these concerns.

The 2014 Graham report, as mentioned by the noble Lord, Lord Hodgson, very clearly set out its findings that related party pre-packs often involve limited, if any, marketing and on average achieve worse outcomes for creditors. There is truth in the perception of creditors being dumped while directors sail on unharmed with their phoenix company.

The Pre Pack Pool was created in 2015 to introduce an element of independent review into connected party pre-packs. The hope was that this could be a voluntary process, but, sadly, this has not worked; only around 10% of pre-packs have been referred. I am afraid this confirms my slightly cynical view of how the insolvency industry works in practice. The Government had the power to fix this, as we have heard, under the Small Business, Enterprise and Employment Act 2015, but, as the noble Baroness, Lady Neville-Rolfe, pointed out, this expired two or three weeks ago.

I was initially tempted by her approach, as set out in Amendment 60—which, incidentally, should have been in this group—simply to reinstate the power to regulate. However, the Government did not use that power for five years, so I have limited confidence that they would do so in another year. Anyway, as we debated yesterday, this Bill already has more than enough powers to regulate.

The Minister said at Second Reading that:

“If strengthening of professional standards and the existing regulation do not deliver increased creditor confidence in connected pre-pack sales, the Government will look to bring forward further legislation.”—[Official Report, 9/6/20; col. 1728.]


That was very welcome, but fixing this issue is more urgent than that, given the current situation, and, frankly, it is already clear that professional standards and existing regulations are not working. Yesterday, the Minister praised the ethical and professional standards of the insolvency industry, saying that we should rely on those for independence and so on. That is touchingly naive—that might be the first time anyone has described the Minister in those terms.

Just last week, there were three high-profile pre-packs to related parties, which attracted a high degree of negative publicity. Only one was referred to the pool. Sadly, there are likely to be many more in coming months. Surely the Minister agrees that we should make sure these happen more transparently? As the noble Lord, Lord Hodgson, has pointed out, we may lose the Pre Pack Pool altogether if we do not take action. It wrote to the Minister to say that it is not sustainable under the current voluntary approach. The industry is also in favour; R3 has said that it would like to see action.

Making referral of connected pre-pack sales to the Pre Pack Pool mandatory in this Bill seems the obvious solution. It is very simple and could start working immediately; no new bodies need to be created and there are no material costs involved. Everything needed already exists. The Pre Pack Pool takes a very light-touch approach and can act quickly, so I strongly urge the Minister to include a clause to this effect in the Bill. It may not be enough in the longer term and we should continue to monitor pre-packs, but making referral mandatory would at least improve transparency with no material cost or complication. It would be very helpful if the Minister could give us his views on the usefulness of the Pre Pack Pool—whether he agrees it is unsustainable on a voluntary basis and whether he thinks it matters if it ceases to exist.

There is one subtle difference between my Amendment 61 and Amendment 57 in the name of the noble Lord, Lord Hodgson; mine says simply that a connected pre-pack deal cannot go ahead until it has been referred and the Pre Pack Pool has reported. The noble Lord’s amendment is more robust, saying that the report must also be positive. I would be happy with either approach. We need to improve transparency to prevent creditors being unfairly dumped, however we do it.

[Baroness Altmann (Con) [V]]

My Lords, I echo the words of previous speakers. I have added my name to Amendment 61 in the name of the noble Lord, Lord Vaux, but I also support the amendment of my noble friend Lord Hodgson of Astley Abbotts. As the noble Lord, Lord Vaux, has said, either approach would at least give a fighting chance of avoiding the sort of gaming of creditors that we have seen so often in the past. Indeed, when I was first involved in the pensions system in the early 2000s, the insolvency restructuring that pre-packs have sometimes engaged in was widespread as a means of dumping the defined benefit pension liabilities.

I fear that this Bill will pave the way for the same type of activity, to the detriment of the Pension Protection Fund and all employers sponsoring defined benefit pension schemes. Therefore, I urge my noble friend to take these amendments seriously; I plead that he look at the activities of the Pre Pack Pool and move to a mandatory approach, which, as has been so well described, would clearly better protect against the sorts of corporate activity that have so often brought capitalism into disrepute.

--- Later in debate ---

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

I thank and pay tribute to my noble friend Lord Hodgson for ably introducing this grouping and speaking so powerfully on this subject. In fact, such is the power with which he speaks that when he spoke, claps of thunder echoed around the Chamber. We do not have any of our right reverend Prelates here to advise us, but perhaps my noble friend’s amendments have support from authorities even higher than those in this House. I am also grateful to the noble Lord, Lord Vaux, for speaking so eloquently on this topic, and grateful to him, my noble friend and the noble Lord, Lord Mendelsohn, for the time that they made available for us to discuss these issues in the last couple of weeks.

At the risk of further increasing my noble friend’s blood pressure, I say to him that the measures in the Bill are indeed intended to help companies to maximise their chances of survival during the Covid-19 emergency, to protect jobs and support the recovery of the economy. That is why other measures, which would not necessarily alleviate the impact of the current emergency, have not been included in the Bill.

I will reply also to the points from the noble Lords, Lord Adonis and Lord Mendelsohn. The Pre Pack Pool wrote to me on this subject a few weeks ago, and I responded on 29 May. I understand its concerns; officials will be meeting the pool and the Insolvency Service to take forward the discussions and the concerns that it has rightly raised.

I also see that the Small Business, Enterprise and Employment Act 2015 has provided some inspiration for these amendments, which would require mandatory reference to the aforementioned Pre Pack Pool. Aside from specific considerations as to whether a requirement for a positive opinion from the pool might conflict with the strategy duties of the administrator, I would be concerned that the amendment might impose an additional burden on businesses at this difficult time. Furthermore, as my noble friend Lord Hodgson reminded us, the Pre Pack Pool operates as a limited company, and I ask whether it is right to restrict the required opinions to one source of supply.

There are already legislative and professional regulatory requirements in respect of pre-pack sales. When deciding whether to go ahead with any sale in administration, the administrator is required to take into consideration the statutory objectives of administration, which include rescuing the company as a going concern and achieving a better result for creditors as a whole. The administrator must also send a detailed narrative explanation to creditors, justifying why a pre-pack sale was undertaken. That is sent to the administrators’ regulatory body, which monitors it to ensure that administrators comply with the spirit as well as the letter of this requirement. At Second Reading, I explained that we continue to work with regulators and industry stakeholders to discuss the options for strengthening the professional regulatory requirements. I can tell noble Lords that if that fails to give greater assurance to creditors, we will consider bringing forward further legislation.

For the reasons that I have set out, I am therefore unable to accept these amendments and I hope that my noble friend and the noble Lord, Lord Vaux, will therefore be able to withdraw and not press their amendments.

[Lord Vaux of Harrowden [V]]

In his response, the Minister did not answer the question of whether he believes that the Pre Pack Pool is useful, sustainable on a voluntary basis, and whether it matters if it ceases to exist. Could he answer that now?