Corporate Insolvency and Governance Act 2020 (Coronavirus) (Suspension of Liability For WrongFul Trading and Extension of the Relevant Period) Regulations 2020

Paul Scully Excerpts

Monday 14th December 2020 General Committees

[The Chair]

Before we begin, I remind Members to sit in the seats with the ticks for social distancing reasons—I think everybody is anyway. Colleagues at Hansard would be very grateful if any speaking notes could go to them at [e-mail].

[The Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy (Paul Scully)]

I beg to move,

That the Committee has considered the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Suspension of Liability for Wrongful Trading and Extension of the Relevant Period) Regulations 2020 (S.I., 2020, No. 1349).

The regulations were laid before the House on 25 November, but as they are a made affirmative statutory instrument they need to be approved by the House before the deadline. We take the Joint Committee on Statutory Instruments very seriously as an important part of the scrutiny process, but at this stage we need to press ahead with important debates to ensure that the regulations’ passage is not delayed, as the Committee has not been able to report back so far.

There is at last light at the end of the tunnel, but it is a sad fact that the coronavirus pandemic continues to impact on our daily lives. We need to continue to keep our citizens safe and enable our NHS to carry on, but we also need to make sure that we can work with our businesses so that they can survive and build back. Our response to coronavirus has had a well-documented impact on the trading of shops, pubs, restaurants, leisure facilities and many other businesses up and down the country. We have provided businesses with an unprecedented level of support to get through this, but clearly we need to work with them until they are in a more stable situation.

Although the promise of a vaccine gives us good reason for cautious optimism about life returning to some degree of normality, we must in the meantime recognise the impact on business of the necessary but unfortunate restrictions on our daily life that are still in place. This statutory instrument revives one of the measures in the Corporate Insolvency and Governance Act 2020 and extends another. It revives the suspension of wrongful trading liability to 30 April and extends the flexibilities around the manner in which companies and other qualifying bodies can hold general meetings until 30 March 2021. These measures, like others in the Act, are designed to support companies and their directors in dealing with the impact of the pandemic.

I turn first to the suspension of the wrongful trading provisions of the Insolvency Act 1986, a measure that is being revived by these regulations. Wrongful trading is an action that may be taken by a liquidator or administrator that can lead to the courts making a declaration that director is personally liable for losses to creditors if a company carries on trading while insolvent. The provision may be used to recover losses to creditors, but its strength lies in acting as a powerful deterrent to insolvent trading in the first place, and as such it is a very important protection for creditors. In fact, the deterrent is so strong that in the spring there were genuine concerns that many directors would feel obliged to cause their companies to cease trading. The uncertainty about what might happen and how long restrictions might last meant that they did not know if the companies could survive and, if they tried to keep going, they could have been held personally liable for wrongful trading.

The 2020 Act suspended the wrongful trading provisions between 1 March and 30 September, which allowed directors to use their best endeavours to save companies that, but for the impact of the pandemic, would have been viable, allowing them to access Government support to continue trading and to save jobs and livelihoods. It gave them reassurance that if the worst happened and the companies subsequently entered insolvency proceedings, they would not be held personally liable for the wrongful trading. That suspension ended on 30 September, as at the time restrictions were starting to be lifted. Many companies were able to return to more normal trading, having taken advantage of the package of Government support available to them, and it was right for the important protection given to creditors by the wrongful trading provisions to return.

We have experienced a new wave of the virus, so it has been necessary for further restrictions to be imposed across most of Great Britain. Once again, directors face uncertainty about future trading conditions and, once again, they need the reassurance that they can continue to trade and save companies that would be profitable but for the restrictions without the fear of personal liability. The regulations use the power to make temporary changes to the effect of corporate insolvency legislation given by the 2020 Act to suspend the wrongful trading provisions again from 26 November to 30 April next year. That means that directors need not close viable companies because of uncertainty about their own position, helping to save jobs and contributing to the economic recovery. The 30 April expiry date will be kept under review. If in due course it becomes clear that the suspension is no longer needed to prevent companies from entering insolvency proceedings unnecessarily, it will be removed, even if that is before the end of April 2021.

In considering the suspension, it is important for us to recall that it does not remove the other vital protections for creditors that exist when a company is in an insolvent position. It is not a licence for directors to act recklessly. Indeed, directors who act irresponsibly can still find themselves subject to repercussions such as fraudulent trading actions under the Insolvency Act or disqualification from acting as a company director.

To turn briefly to the annual general meeting measure, the Corporate Insolvency and Governance Act also introduced temporary flexibilities around the manner in which companies and other qualifying bodies could hold general meetings. That allowed bodies to balance their constitutional agreement arrangements with the prevailing coronavirus restrictions and in doing so, safeguard the wellbeing of their shareholders and members. That is crucial for the operation of the UK’s strong corporate governance regime, which makes sure that the boards of companies and other bodies are fully held to account by their members. Without an extension, that scrutiny would be made increasingly difficult.

Despite the fact that in large part the season for AGMs is behind us, we know that there remain about 80 large companies still to hold them between now and the end of March. That excludes the multitude of smaller companies, charitable incorporated organisations and mutual societies that have simply similar obligations. The extension in the regulations will give them comfort that they can continue to convene these and other general meetings safely and in a way that is consistent with their legal obligations.

I hope that the Committee will agree that these two measures will provide much-needed reassurance to business in the critical trading period leading up to and beyond the Christmas period, and I commend the regulations to the Committee.

--- Later in debate ---

[Paul Scully]

Fantastic. There we go.

I thank the hon. Member for Manchester Central for her considered response. We agree on the need for certainty for business and, as she rightly says, on the need to save businesses and jobs today while also having a medium and long-term plan. I am acutely aware of the various measures coming to various ends. I speak to the retail sector and hospitality sector on a regular basis and, indeed, to small businesses. They continue to talk about rates, VAT and the moratorium on statutory demands and winding-up petitions. These measures are of great benefit to them, but we need to see what we can do. The best way of doing it, as well as reviewing it, as we clearly will, is to ensure that we can get the companies up and running as soon as possible. I hope that the vaccine and mass testing, as well as improved testing, will mean that in the new year, as the incidences come down, we will be able to trade safely and retailers, those in hospitality and all those kind of businesses will be able to give a warm welcome as well as a safe one and get customers back. They largely welcome the Government’s financial support, but what they really welcome is customers coming back. We will all need to talk up our economy when it is safe and appropriate to do so.

On the question of why we are doing this now and why we will come back to the measures, the wrongful trading measures are clearly a deterrent but they are also an important protection for creditors. It seems right that when things were looking up, we allowed creditors that extra protection by bringing the wrongful trading provisions back into operation. On AGMs, again, they are there for a reason: to report back to shareholders and hold companies, large and small, accountable to them. The more shareholders can fully participate the better, but given the situation we are in at the moment it is important that we extend the ability to have virtual AGMs.

The regulations will, I hope, provide some comfort and reassurance for company directors and allow them to use their best efforts to get their companies through this pandemic and out the other side, ready to continue to contribute to the economic recovery of this country. I thank hon. Members for their contributions to the debate and I hope that the Committee will approve the regulations.

Question put and agreed to.