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

Paul Scully Excerpts

Committee stage
Tuesday 6th July 2021 Public Bill Committees

[Ms Marie Rimmer (St Helens South and Whiston) (Lab)]

Q Good morning, Mr Pegge. Clause 2(14) states that the provisions

“have effect in relation to conduct…occurring, and in relation to companies dissolved, at any time before, as well as after, the passing of this Act.”

Do you support making these provisions retrospective and, if so, how should the Insolvency Service make use of these retrospective powers?

Stephen Pegge: As I understand it, the support for this measure was confirmed as early as 2018 and it has really been a lack of parliamentary time that has made it difficult for it to be put in place. Given that we are aware of abuse that has happened in the meantime, I support this measure being retrospective. I appreciate that that retrospectivity is not often applied to such Bills, but we are talking about a fairly high evidence threshold and about situations where natural justice would support this measure being made with retrospective effect.

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

Q It is good to see you again, Stephen. That is an interesting point about the retrospective nature of the measure, given what you were saying about businesses taking on more debt throughout the pandemic. Obviously, the insolvency practitioners will work through things, as you have rightly said, in order of public interest. What do you think they may look to do to give lenders confidence, by approaching the pandemic response finance first?

Stephen Pegge: Clearly, when lenders are undertaking a credit assessment, they will consider both the willingness to repay and the ability to repay, the probability of default and the loss in the event of default. All those could potentially be, and I would say probably at the margin, factors that could be influenced by the use of dissolution as a means of avoiding liability.

Quite clearly, it is very difficult for a company that has been struck off the register to make payments under a loan, so there will be the avoidance of debt in those circumstances. Given that currently there is time and cost involved in restoring a company to the register, the ability then to take this action against directors after the event both to deter and, if the activity should still carry on, to investigate and take action against directors in a more timely and cost-effective way should reduce the ultimate losses to creditors. I think there has been an estimate that creditors could be saved around £1 billion as a result of this measure, which would be significant in terms of credit assessments.

The net effect is the ability to provide more finance with less time having to be spent on assessment up front, on better terms, and in circumstances that should help the recovery. However, I will emphasise, Minister, that this is only one factor and it is all operating at the margin. Nevertheless, it is certainly something that during the past year has become a matter of concern, especially in relation to bounce back loans.

[Paul Scully]

Q It is a complicated scene, as you say, and this is only one part of it. I think you are, therefore, suggesting that strengthening the regime in this way will give further confidence to lenders, and especially SME companies within the supply chains.

Stephen Pegge: Yes, exactly. It will, therefore, be possible to focus more time and support on those who deserve the finance, without the distraction of those who are abusing the process.

[Paul Scully]

Q Finally, what effect do you think there would be on lending if this regime did not come into place or the loophole were not closed? Would there be a chilling effect?

Stephen Pegge: As you say, it is a matter of a chilling effect. It is one other factor that would weigh on finance providers’ minds when making lending decisions. This is a crucial time for lenders to provide finance. If you look at the latest Bank of England figures, for May, which were published last week, some £7 billion of new lending was provided to SMEs.

Latest surveys suggest that high proportions of loan applications are being sanctioned—something like 85%—and we want that to continue. The expectation that this sort of loophole is being closed should build confidence. It will ensure that there is discouragement of bad actors, so that it does not grow out of proportion, which we fear might otherwise be the case.

[Peter Grant]

Q Good morning again, Mr Pegge. I apologise because I think I mispronounced your name earlier because I tried to read it without my glasses on. In an earlier answer, you referred to the retrospective nature of parts of the Bill. You indicated that you supported them. In particular, you referred to the fact that the Government had made it clear since 2018 that the legislation was coming.

Clearly, we are not creating a new offence that was not illegal at the time. We are considering legislation to make it easier for the authorities to act against people who may have committed offences, which I think is an important distinction. Even given that, is there an argument that the retrospective power should apply only to the date when the Government first published their proposals to legislate? Would you still support the Insolvency Service if it wanted to take action in relation to things that had happened in, say, 2015 or 2016? Would you have any concerns about that?

Stephen Pegge: As you say, this is essentially a technical loophole, which the Bill seeks to close. All it does is confer powers of investigation, with significant and rigorous practices in terms of investigation. The risk of miscarriage of justice is relatively limited. I do not have a particular date in mind. The point I was trying to emphasise was that this has widespread support and has had for some time.

--- Later in debate ---

[Peter Grant]

Q You say that you have not heard any such representations from the Insolvency Service. Have you had any such representations from lenders or creditors? They may take a different view from the Insolvency Service if it is their money that is at stake.

David Kerr: Perhaps some in the creditor community would like it to be a six-year period, but I do not think they have argued strongly for it, and I do not think there is a necessarily a case made for that. From a creditor perspective, in an ideal world, perhaps it would be open ended. That may be unrealistic.

[Paul Scully]

Q Thank you for giving evidence, Mr Kerr. Can you talk a little bit more about the deterrent that you spoke about? How much of an impact do you think the measure, and especially the threat of disqualification, will have on providing the necessary deterrence?

David Kerr: The current disqualification provisions act as a deterrent to some extent, because directors know that, in respect of every company that goes into an insolvent liquidation or administration, there will be some inquiry. There is an obligation on the insolvency practitioner to carry out a certain amount of inquiry into the conduct of the directors of those companies and make a report in each of those cases to the Insolvency Service on their conduct. The provisions do not provide for the same report. It will have to be triggered by something else, whether that is a creditor complaint or other information, but it will provide the opportunity for the service to make the same inquiry.

[Paul Scully]

Q You talked earlier about the public interest test and prioritisation. Obviously, we are trying to strengthen the enforcement regime to deal with the most egregious cases of fraud in relation to the financial support that the taxpayer has given throughout the pandemic. In your experience, has the insolvency practice been prioritising this work? As well as having the public interest test, or threshold, has it prioritised approaching the most serious cases at the earliest stage?

David Kerr: Do you mean the work of the Insolvency Service?

[Paul Scully]

Yes. We are talking about Insolvency Service resources. We would have expected the Insolvency Service to prioritise the work that it does on the most egregious cases, and that would indeed be how we would anticipate it moving forward. Have you seen that first hand?

David Kerr: This may not be a direct answer to your question, but the concern of the creditor community might be that, if this provision were used almost exclusively for the purposes of pursuing bounce back loan fraud, perhaps it would not have the wider benefit that could come from it. Perhaps that has to be the emphasis in the short term, but in the long run—it is a provision that was considered worthy of introducing back in 2018, before covid came along—one would hope that it will be of broader use.

Quite how the service will prioritise its limited resources and decide which cases to look at is a matter for it to work out once it gets the powers. One would hope that the cases that come to its attention through the insolvency practitioners’ reports will receive equal attention and that it will not be to the detriment of those cases that these other cases are being pursued.

[Paul Scully]

Q We heard a little bit in the earlier panel about phoenixing. Do you think this measure will help to combat that malpractice, where one company is shut down and dissolved and another takes its place, with the same directors, doing the same business from the same premises with the same staff?

David Kerr: That can happen, whether it is through an insolvency process or a dissolution. To the extent that it has happened through dissolution, the measure plugs that gap, because it is gives the same investigative powers to the Insolvency Service. It comes back to the deterrent point that you made previously. If the service is seen to be taking action in these cases and publicising the fact that it has done so, that will, one would have thought, have a deterrent effect.

[Paul Scully]

Q Finally, in terms of your role in credit management, what do you think this will do for the confidence of lenders and supply chains, in particular SMEs in those supply chains?

David Kerr: Generally, if the system is seen to be working well and those who abuse it are brought to account, then it helps enhance the confidence of those engaged in providing credit, whether it is through loans, trade credit or anything else. In that sense, it is a welcome provision that, if resourced and used as intended, should have the desired effect.

[Seema Malhotra]

Q To follow up on a couple of points, there have been critics of the proposals in this small piece of legislation. From your experience and that of your members, how long can it take for companies that have been dissolved to be restored to the register? In 2019, over half a million UK companies were dissolved but only 33 restored. In terms of the time it takes in practice, what could that look like?

David Kerr: I think the cost issue is the bigger disincentive for creditors that previously might have wanted to take steps to try and get somebody appointed to investigate. The service itself has made the point that there are legal costs and other costs associated with that process, and it would not be practical for creditors to mount that kind of action alone or, in many case, at all, given the amounts of their own debts.

The bigger disincentive is probably the cost and this avoids that. You are right in the sense that if there is a lengthy time process and if it takes several months, that eats into the three-year time limit that we have talked about, so that could be a problem. I think here, with this measure, we avoid that because the Department can have the ability to make appropriate inquiries and take action, without the need to go through that process.

--- Later in debate ---

[The Chair]

I call the Minister.

[Paul Scully]

Q I have just two brief questions, because you opened up and summarised well. The point about funding has come up quite a lot, and I wonder if you could expand on some of your comments. You talked about the public interest test and the prioritisation of the Insolvency Service’s cases, so that it would look at the bigger, most egregious issues first. Obviously, with the number of cases you are talking about, it would also presumably look at the ones where there is a realistic likelihood of a successful outcome, rather just investigating every case.

Dr Tribe: In some writing on this point in relation to Carillion, I suggested the reason that the Insolvency Service might be looking at a large public limited company to bring these mechanisms to bear is because that is a pretty well known, massive liquidation, which has lots of Government contracts linked to it and taxpayer money bound up in its activities. You can see why it would perhaps be appropriate, much as with previous well-known disqualifications, for the Insolvency Service to bring the action or the proceedings if the relevant public interest tests are met. That is because it helps with the agenda of sending out the appropriate messages to the commercial community that you should use corporate vehicles and corporate forms in an appropriate way, and that you should live up to your duties in an appropriate way generally, as well as facing some of the consequences if you misuse the form and harm creditors and other stakeholders.

On the prioritisation point, you could go for good messaging, in the sense of prioritising cases. I suppose that the problem with the bounce back loan scheme and this dissolution issue that we are dealing with is that, as I think one of the previous questions hinted at, the volume of cases could be so great that with prioritisation you will need to have quite a large group of civil servants working on the issue.

As for the question of how likely it is that we might get a result in a case, and therefore whether we should bring proceedings, we have seen recently that once the Insolvency Service’s tests are met, it is wholly appropriate that it should bring these proceedings, even if in due course the result is not what it thought or what its specialist advisers—the QCs and so on who have advised it—would have predicted. Hopefully, the money will be well spent in bringing proceedings, but sometimes we do not get the result for factual reasons, basically.

[Paul Scully]

Q I have a final question. You mentioned Carillion, which you wrote about and studied. Within Carillion and a number of other cases—Carillion is an interesting one, because there are a lot of supply chains in there—as I asked previous panel members, what extra confidence does plugging these loopholes bring to small and medium-sized enterprises?

Dr Tribe: Carillion, because it is a large plc, has messaging on the plc side of our regime, thinking about how directors behave in relation to those types of companies. This perhaps goes back to Mr Grant’s question about group structures—do not use group structures in a way that is problematic. That will be interesting to monitor on what is a live case; I do not want to mull on the facts of that case too closely.

Sorry, what was the second part of your question?

[Paul Scully]

Q It was about the fact that Carillion obviously has a large supply chain within it, and you have been dealing with and writing about cases with complex supply chains. What confidence can this measure to close that loophole give to SMEs in particular?

Dr Tribe: Thanks for that clarification. If we can ensure that any vehicle that is used in any form of creditor relationship with different entities has an individual put-off effect by going down this dissolution route that we have identified, it will hopefully increase confidence in the way people use the corporate form. The more loopholes we can close down that have caused us to think the form is being used inappropriately, the better.

Unfortunately, phoenixing, as we have discussed, has been going on for literally decades, and perhaps in the future we might be back here again with some other problem that has arisen because of nefarious activity.

[Jeff Smith]

Q I will just ask one final question. We have had some written evidence suggesting that the current regime is adequate. If you do not mind my quoting from it, it says:

“Applying the current controls properly, putting dissolved companies into liquidation and publicising that new policy will be a far more effective deterrent...That requires no new legislation at all.”

Do you have a view on that?

Dr Tribe: The trouble is that to get to that liquidation point, you have to go through the restoration stage. I think that submission might have also talked about the idea of restoring an entity to the register and then going through that insolvency route. I think the Insolvency Service did 33 of those in 2019—pre the bounce back loan issue and pre corona, obviously. Each one of those 33 will have cost it court fees, process fees at Companies House and so on, which means there is this extra layer of procedure that it has to get through before it can ultimately investigate the unfitness activity. I think the dissolution reform in this legislation ensures that that extra layer of bureaucracy—getting the companies back on the register, through restoration, then going through the insolvency processes—is cleared out, and we move straight to the enforcement section.

The other problem with restoration is that you perhaps undermine the integrity of the register itself if you take 33 companies off it, but you then want to put them back on because you need to go through the steps that we want for enforcement and so on. It is an interesting point, but I think you have a quicker public protection mechanism process that you can do now that gets you to a less costly enforcement outcome.