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

Paul Scully Excerpts

Committee stage
Tuesday 6th July 2021 Public Bill Committees

[Navendu Mishra]

Your contribution is quite depressing, but thank you for making it.

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

Q I am here with my corporate governance hat on, but I am also Minister for Consumers. The issues that you raise about scams are really important, and it is really important that we continue to address that. We just had Scams Awareness Week; we have been raising awareness so that people do not get involved, but it is also important that we make sure that institutions and networks are addressed in these sort of ways.

It is interesting: you talked about the amendment, which actually asks for a single report in a year. Clearly, we want to be managing the situation and making sure that it is effective. In terms of the time that you are looking at, obviously that does not negate the ability for criminal action to be taken; it is to restore directors.

I really want to focus on the Bill itself, and the focus within that and what we are doing positively to try to tackle some of these issues—including on phoenixing, which you started off talking about. I know you talked about lots of other things, and other things that we can be doing and are doing, but do you agree that the Bill adds an extra weapon to tackle phoenixing itself?

Andrew Agathangelou: I certainly do. As I said earlier, it is a significant, valuable, worthwhile step in the right direction. My plea—forgive me; I guess I am repeating myself here—is that we look at the whole ecosystem. For example, why on earth are we not including fraud and so on in the online safety Bill? I know that is another topic, but can you see how, from my point of view, these are all interconnected issues—this is all the ecosystem?

I guess I am saying that Parliament can take one of two views here. You can either deal with this tactical, ad hoc Bill, which is of course worthwhile, in isolation of everything else. However, for goodness’ sake, please do not do that; actually look at the bigger picture here—the interconnected matrices of other issues that Parliament ought to be grabbing by the scruff of the neck and finally sorting out.

[Paul Scully]

I appreciate that. If you look at corporate governance and Companies House reform and all these issues, and indeed at the online harms Bill, I am sure you will have plenty of opportunity to comment on that. As I say, this deals with one specific issue because of the impetus now. That is all I wanted to raise.

[The Chair]

If nobody else has any questions for our witness, I thank you on behalf of the Committee for your evidence, Mr Agathangelou. I am sure the Committee welcomed your frank speaking throughout. Thank you very much.

Andrew Agathangelou: Thank you all.

Examination of Witness

Kate Nicholls gave evidence.

--- Later in debate ---

[Luke Hall]

Q We are clearly moved to give 100% rate relief to many businesses with a £16 billion pot. Of course, I understand that some of the businesses you work with and represent will have been disappointed about where the line was drawn, so to speak. I just wonder, notwithstanding the point you made earlier in answer to the question about guidance, whether there is anything you would like local authorities to start thinking about as they start to draw up their own guidance schemes in response to some of the early challenges that have been faced by some of the businesses you will be working with.

Kate Nicholls: We would urge local authorities to work with us to identify themselves where the areas of greatest need are. One of the things that has frustrated a lot of our businesses is that there is a central message from Government, and it is not necessarily interpreted on the ground as fluidly as Government might have hoped. When you look at some of the local authority areas, we have had businesses that are clearly designed to be captured and covered by the support mechanisms that are available, but local authorities have often taken the view that if it is not directly specified in guidance and it is not a named company or a named type of business, they are precluded from using their discretion and being able to provide support to those businesses. That is the frustration that our businesses have had on the ground going forward.

It would be helpful if local authorities could be a bit more permissive in identifying the businesses that they know are hurting at a local level, rather than applying a prescriptive approach that says, “If your name’s not down, you’re not coming in,” or “Here’s a tick, you are covered.” That would help immeasurably in those businesses that tend to fall between the cracks because they are not clearcut: if you are a coach operator, are you a tourist business or are you not? A local authority should be able to understand its local area and know which ones are and therefore need to be helped, and which ones actually managed okay. Those are the kinds of areas in which we would like local authorities to use their own discretion, not wait to be told specifically by Government that they can help those businesses.

[Paul Scully]

Q Briefly, with my hospitality Minister hat on, and following on from that question, Kate, you will remember that Minister Huddleston and I wrote to local authorities asking them to use their additional restrictions grant before they access their top-up. Have you seen any evidence of any local authorities responding to that, either by giving more money to businesses on their books or by widening the base to fill some of the cracks that you are highlighting?

Kate Nicholls: There are a few notable exceptions, but you can measure on the fingers of fewer than two hands the local authorities and businesses we have been able to help that have had a positive response to that request. All too often, the response has been that the grants that we are talking about are closed, there is no more money, and they will get back in touch with the businesses if more money becomes available.

It is incredibly frustrating that you have this disconnect at a central level. We hear what is being pledged, and we hear and understand the work that is being done by Ministers to communicate to those local authorities, but the operators on the ground just get a “No”. Some local authorities have been more creative than others, and some have been more proactive than others, but generally speaking it has been a long, slow process, and it has been very difficult to get money out of the local authorities for the businesses that desperately need it. It has been too slow in being processed. We know, because of the work we are doing we are doing at a central Government level, that it is there and has been made available; it is just not cascading out.

--- Later in debate ---

[Peter Grant]

Q I have one final question. The legislation as it stands would set a three-year time limit on any application for disqualification, starting from when the company was dissolved. What are your views on that three-year time limit? Is too short, too long, or just about right?

Duncan Swift: I have to say, from experience, it is too short. Rogue directors or individuals who abuse the position of director go to great pains to extract all the asset value out of the companies that they are abusing and to provide a false, or certainly incomplete, trail of their actions as directors of the company. As an office holder coming in after the event, it is like pulling together a 3,000 or 4,000-piece jigsaw puzzle when holding only about five pieces to start with. You are having to make inquiries with multiple stakeholders, as well as interviewing the directors and their associates, to start to get the bits of the jigsaw puzzle necessary for a picture of what actually went on, in order to convince a court that what went on was actually a fraud upon the creditors and that the director had not acted properly. Again, from experience, although a relatively speedy pulling together of the jigsaw puzzle and convincing of the court takes three years, there are many cases where it takes far longer.

[Paul Scully]

Q To expand on a few of those areas, starting with the three-year time limit to file a disqualification application, the Insolvency Service or the Secretary of State can already examine historic conduct, but they have three years to file the application for disqualification. Can you expand a bit on what you meant about the court process, which presumably comes afterwards?

Duncan Swift: What I was explaining about the timeline was that for the office holder—whether it be the Insolvency Service or the official receiver as liquidator, or the Insolvency Service coming in to pull together a picture of the company’s financial dealings and the director’s conduct in the course of those dealings—it takes time. In the first phase in particular, it can take two years to get a reasonably complete picture before one can be confident of putting forward an application to court, either for a recovery of assets or, I would have thought, the disqualification of a director in circumstances where that individual may well be using the proceeds of such activities to defend their position, as well as seeking to confuse it to defend against the likelihood of such claims being brought against them.

[Paul Scully]

Q We talked a little about compensation orders earlier, which already exist for insolvent companies. This legislation would effectively extend them to dissolved companies, so that compensation can affect all creditors— individual and classes of creditors. A lot of the stuff you talked about at the beginning related to a wider piece of work that you would like to see on Insolvency Service reform and corporate governance. However, do you find the fact that we are bringing compensation orders within the realm of dissolved companies of benefit to—

Duncan Swift: Forgive me, but my understanding and experience of compensation orders is that they are brought on behalf of a single creditor or a few creditors. I suggest a more comprehensive approach: that the insolvency process that already exists is applied, and if a dissolved company is found to be insolvent, it is readily restored to the register and put through the insolvency process. That will have two consequences: a full investigation by the office holder, who in the first instance of the compulsory liquidation is the official receiver of the directors’ conduct; and for that process to recover such assets that are available for the benefit of all creditors of that company, not only a few.

[Paul Scully]

Q Okay. The other issue I want to clarify is the resource issue that we started off talking about. In some of the conversations that we had with earlier panellists, we were talking about the public interest test and the prioritisation of the cases that were most likely to get a result, frankly. Is it purely a resource issue that you are raising? Is it one of those that is not working as well? Are you saying that the filters may be wrong within those tests? Could you expand on that?

Duncan Swift: All I can go on is the statistics issued by the Insolvency Service on disqualification orders or undertakings from directors for misconduct relative to the total number of corporate insolvencies per annum, and the member feedback that R3 receives. At an anecdotal level, members report that they have submitted serious adverse conduct reports against individuals, only to find that no action has been taken against said individuals by the Insolvency Service. We are not told why. Clearly there is a threshold.

Coming back to the statistics, it would appear that the Insolvency Service is consistently—year in, year out, irrespective of fluctuations in the total number of corporate insolvencies—disqualifying about 1,200 individuals per annum. That suggests to me that there is a resource issue. I am not in a position to ask the Insolvency Service whether that is the case, but that is what it feels like.

[Paul Scully]

Q That is interesting—thank you very much. Obviously, we consulted on this back in 2018, but there is a particular compulsion to do this now, to tackle the most egregious cases of fraud involving the financial support given by the taxpayer throughout the pandemic. Presumably you welcome that, and therefore the drive to get this measure—albeit that it is not as wide as you would like—through now?

Duncan Swift: Yes. As I said at the start, this is a step in the right direction, but unfortunately it does not go far enough.

[Paul Scully]

Q Sure, but going back to the numbers—I know that it is anecdotal so it is difficult to tell—what sort of deterrent effect do you think this will have?

Duncan Swift: I repeat: it is a step in the right direction, but it is not enough. Individuals who would choose to abuse the benefits of directorship of limited liability companies are not dissuaded by the prospect of being disqualified—that is my experience and that of the members of R3. A more significant deterrent is that they are not only disqualified but the ill-gotten gains of said actions that led to their disqualification are required to be repaid and recovered for the benefit of those who have suffered as a consequence of those actions. If that also includes criminal liability, so much the better; I am sure that will add to the weight of the deterrent. They are far less likely to do it if they can see the routes to the gains that they obtain from such behaviour being readily recoverable.

[The Chair]

There are no further questions, Mr Swift. We thank you for your evidence this afternoon, and for your flexibility on timing, which we greatly appreciate. That brings us to the end of today’s sitting. The Committee will meet again on Thursday 8 July to begin line-by-line scrutiny of the Bill.

Ordered, That further consideration be now adjourned. —(Paul Scully.)