Insolvency Law and Director Disqualifications

Debate between Rebecca Long Bailey and Jim Shannon

Wednesday 14th June 2023 Westminster Hall

[Rebecca Long Bailey (Salford and Eccles) (Lab)]

I beg to move,

That this House has considered insolvency law and director disqualifications.

It is a pleasure to serve under your chairmanship, Ms Fovargue. Thank you for making time for this important debate.

Five years ago, Carillion collapsed in one of the biggest corporate scandals seen in recent years. Millions were racked up in debt, tens of thousands of workers lost their jobs and pensions, and thousands of supply chain businesses were put at risk, all because the auditors failed to hold Carillion’s board to account and a blind eye was turned to poor corporate behaviour. Five years on, have changes to the UK corporate governance regime been made to ensure that such a scandal cannot happen again? The answer, sadly, is not encouraging.

As the Unite the union has stated,

“In the end, four Carillion executives were fined £870,000 in total – a mere slap on the wrist given the hundreds of millions of pounds the company lost and the thousands of lives they ruined.”

Former BBC investigative journalist Bob Wylie, who wrote the Financial Times book of the year “Bandit Capitalism: Carillion and the Corruption of the British State”, summed up the present position perfectly when he said:

“The sad truth is they get away with it because they know they can.”

The most recent figures by the Insolvency Service for 2022-23 show that almost half of disqualifications were because of misuse or abuse of the bounce back loan scheme, rather than more robust action being taken against directors for unfit conduct prior to insolvency. I suggest that that is because the bar for disqualification for unfit conduct is very high and often difficult to prove, particularly where a director can claim to have relied on the advice of external advisers when making decisions. Further, the law surrounding whether directors have acted inappropriately in an insolvency situation, and specifically the point at which directors should begin to consult on redundancies and prioritise payments to creditors prior to insolvency, is ambiguous to say the least.

The Supreme Court recently affirmed that ambiguity in the case of BTI v. Sequana, noting that company directors are only required to begin prioritising creditors if it is probable that their company will plunge into insolvency. The problem is that no one knows what “probable” actually means. As the London Solicitors Litigation Association noted,

“the precise point in time at which the duty will be triggered and how to balance creditors’ interests with other competing interests of the business remains relatively elusive.”

It is that elusiveness that continues to allow some directors to act in a way that is detrimental to workers and other creditors.

The Bakers Food and Allied Workers Union highlights the cases of Dawnfresh Seafoods and Orchard House Foods, which it says

“raise significant concerns about the ability of business owners to abuse the process around administration and insolvency, leaving workers in the lurch and denying them the full value of their outstanding pay and redundancy monies owed—whilst Directors walk away with impunity, often with enormous levels of wealth intact.”

In the case of Dawnfresh, the union reports that the director allowed workers to carry on overtime shifts in full knowledge that he was about to bring in the receivers. He also took the opportunity before insolvency to rescue his own private art collection from company premises. The workers were left waiting for weeks without any source of income, obliged to depend on family and friends or use food banks in the resulting emergency, and they included one who was fighting leukaemia. A not dissimilar instance occurred at Orchard House Foods in Gateshead, with redundancy negotiations over the site’s closure seeing the company fail to pay workers ahead of the Christmas period.

Sadly, that practice does not just plague the food sector; it is increasingly evident across the wider economy. Thomas Cook, for example, also failed abjectly to consult over redundancies prior to insolvency, when it was known for some time that the company was in trouble. In a more recent case, journalists at Vice UK faced statutory redundancy terms, with many having to leave with almost nothing because the company filed for bankruptcy, while its recent global CEO was on an annual salary of $1.5 million. It is not just workers who lose out in these situations. Figures disclosed in response to written parliamentary questions tabled by my hon. Friend the Member for Ellesmere Port and Neston (Justin Madders) indicate that over the last two years alone statutory redundancy payments cost the taxpayer around £300 million.

If the law is not clear enough on the point at which creditors’ interests in an insolvency should be prioritised, what other mechanisms are there to sound the alarm?

[Jim Shannon (Strangford) (DUP)]

I commend the hon. Lady for securing this debate. I would like to be here for the whole debate, Ms Fovargue, but I have another event to attend at 3.30 pm. I apologise for not being here for the whole debate. Nevertheless, I would like to make a contribution.

There is another factor as well, which I would just like to outline for the record. Does the hon. Lady agree that in many situations the big businesses that she is referring to have the ability to use accountancy in their favour, by going insolvent and trading under different names, which too often has left those on the bottom of the ladder, such as suppliers and sole workers, with no option other than to swallow the pill and even go bankrupt themselves? Some of my constituents have experienced this. It is difficult to watch directors move on with impunity, while other people have to sell their homes to cover their costs. In other words, the small person at the bottom or the back of the queue always suffers and the big boy gets away.

[Rebecca Long Bailey]

I thank the hon. Member for his comments and I agree completely. There are huge issues surrounding the area of pre-pack administrations and the issue of phoenix companies, whereby directors are allowed to reappear in another form with the same kind of company structure with complete impunity. This certainly needs to be addressed by the Government.

Other mechanisms exist to sound the alarm on poor corporate governance. That is usually when the role of auditors should be key, but in recent years the unhealthy structure of the industry has been widely criticised, as well as the market dominance and conflicts of interest of the big accountancy firms. In this dysfunctional culture, firms must win and retain engagements from companies in order to generate revenue, but simultaneously they must objectively scrutinise the company reports of the very people they are trying to win business from. Indeed, the symptoms of this flawed culture are clear. The Financial Reporting Council has stated that 29% of the audits delivered by the seven biggest accounting firms fail to meet UK standards. It is abundantly clear that the UK corporate governance regime is in urgent need of reform

What actions have the Government taken so far? In his response to the debate, the Minster will no doubt refer to the Government’s White Paper on reforms to the UK corporate governance code, which the FRC is consulting upon as we speak. However, it is important to note that although the code is underpinned by listing rules that require premium-listed companies to “comply or explain” if they have not complied with a code provision, there is no strict legal requirement to comply with the code at all. It is merely a guidebook, and the lack of legal enforceability is clear. The Financial Times reported only last month that the FRC has reported falling levels of compliance since 2020, suggesting that boards are willing to risk avoiding the “comply or explain” requirements, particularly as the ultimate threat is simply to register dissatisfaction in a non-binding shareholder vote, or one that historically the company has a vanishingly small chance of losing.

Secondly, what is glaringly absent from the Government’s White Paper proposals so far is a statutory and enforceable Sarbanes-Oxley equivalent, which would make directors legally responsible for financial reporting governance. Instead, the White Paper opts for the fluffier “encouragement” of boards to include in their annual reports declarations about whether internal risk management and internal controls are effective or not. Similarly, the provisions that recommend that certain minimum clawback conditions or “trigger points” are included in directors’ remuneration arrangements are welcome in principle, but the reality is that these employment contracts are not publicly available so as to enable enforcement, and annual financial reports rarely provide comprehensive information.

Sadly, even the chief executive of the Institute of Chartered Accountants in England and Wales believes that the Government’s White Paper proposals on reform of the audit industry do not go far enough, stating:

“Taking these measures as a package with the draft audit reform Bill outlined, the government's approach has a half-hearted and lopsided feel to it… Lessons from Carillion and other recent company failures have been ignored, with little emphasis now on tightening internal controls and modernising corporate governance.”

A further five years on from Carillion, we are no closer to the creation of the Government’s long-promised audit, reporting and governance authority, or the passing of the Government’s promised audit reform Bill. When we can expect legislation on audit reform and the creation of ARGA?

Given these glaring deficiencies in the law, I will be grateful if the Minister considers some simple legislative changes that would provide much-needed clarity and protect workers, creditors, and the long-term health of companies. First, will he widen the scope of directors’ duties in section 172 of the Companies Act 2006, so that a duty is not owed solely to shareholders, as at present, but is owed to workers and other stakeholders as well? That must sit alongside a clear duty to prioritise the long-term welfare of a company, rather than simply the short-term maximisation of shareholder dividends.

Secondly, with regard to the duties of directors prior to insolvency, will the Government legislate to set clear definitions and parameters for when insolvency is deemed to be a “probable” event? That would provide much-needed clarity on when a duty to consult on redundancies is triggered, and when payments to workers and creditors need to be prioritised over shareholder dividend extraction.

Thirdly, will the Minister comment on why the Government proposals made in recent years to introduce workers on boards have been shelved? Will he commit to examine and develop policy in the light of the experience of other European jurisdictions, where direct representations of employees on both unitary and two-tier boards has actually helped to improve corporate performance and success, for the benefit of all stakeholders? Last, will he introduce clear Sarbanes-Oxley-equivalent legislation that would finally make directors legally responsible for financial reporting governance? If not, can he explain clearly the Government’s reasons for avoiding that in favour of more diluted and legally unenforceable guidance?

It is clear that the current UK corporate governance regime has become dysfunctional, ambiguous and unenforceable. Despite numerous scandals, it still has no room for the protection of employees and other stakeholders. I hope the Minister can reassure me today that things will change. Thank you for the opportunity to hold this debate, Ms Fovargue.

Finance (No. 2) Bill

Debate between Rebecca Long Bailey and Jim Shannon

Committee stage & Committee of the Whole House (Day 1)
Monday 19th April 2021 Commons Chamber

[Rebecca Long Bailey (Salford and Eccles) (Lab) [V]]

I speak to oppose clause 5 stand part, and in support of amendments 2, 3 and 4 in the name of my right hon. Friend the Member for Hayes and Harlington (John McDonnell) and others, as well as amendments in the name of my hon. Friend the Member for Streatham (Bell Ribeiro-Addy) and amendments from the Labour Front Bench.

The Chancellor committed to doing whatever is necessary to support people and businesses through the coronavirus pandemic. I want to believe him, but the £20 a week covid uplift to universal credit will be cut just at the time when the OBR has predicted that unemployment will peak. There has been no uplift at all, as we have heard, in covid support for those on legacy benefits or affected by the benefit cap. At the same time, an equivalent cut in working tax credit for households that have not yet made the move to universal credit will be imposed.

Further councils, whose budgets have been decimated over recent years, will be forced to increase council tax by up to 5%, pressuring household budgets even further, so the Bill is already sorely deficient in honouring the Chancellor’s original promise. However, in clause 5—the proposal to freeze the personal tax allowance—the promise is sadly contradicted entirely. The reality of the clause is that, if there is wage inflation over the next five years, someone earning just under the threshold now, for example, who then receives an inflationary pay increase for 2022-23 will start to pay tax.

As the Resolution Foundation has found, the poorest fifth of households are twice as likely to have seen their debts rise rather than fall during the crisis, so taking some of those lowest earners beyond the personal allowance threshold as their wages might slightly increase with inflation could result in their financial devastation. I therefore supported calls to remove clause 5, or at the very least for the Government to compromise and delay the changes.

I will also briefly mention clause 32 on self-employment income support. I do not disagree with the sentiment of the clause but, as the Government know, the support still does not go far enough. More than 2 million remain excluded from any Government support at all and, as I have repeatedly told this House, some have sadly taken their own lives as a result. I once again urge the Government to provide an immediate emergency grant to those affected, install new monthly arrangements while restrictions remain in place in complete parity with the extension of the coronavirus job retention scheme and the self-employment income support scheme, and remove the hard edges to eligibility criteria. Finally, they should backdate payments for a full and final settlement to deliver parity and fairness for those excluded from meaningful support.

[Jim Shannon]

It is a pleasure to serve under your chairmanship, Ms McDonagh. I very much welcomed the Minister’s response when I asked him about the Low Incomes Tax Reform Group. I will send him all the information that I am concerned about, which I hope he will be able to answer.

Clause 31 ensures that the one-off £500 payment for certain working households receiving tax credit is not taxable, which is welcome. The problem arises when a person receives a payment that they were not entitled to under the rules. As the payment is made automatically by HMRC without requiring a claim from the individual, if HMRC mistakenly makes a payment to someone who is not entitled to one under the direction and it is not subsequently repaid, it appears that the tax credit claimant will automatically be subject to a tax charge under the Finance Act 2020. That triggers notification requirements for the individual, assessing powers for HMRC and potential penalties.

I would like to understand whether consideration has been, or will be, given to ensuring that HMRC will set the bar high in terms of what constitutes fraud, and whether it will be limited to those people who fall under section 35 of the Tax Credits Act 2002, in relation to their underlying tax credit award. Over the last period, you, Ms McDonagh, I and everyone in this House has seen young families on the brink of financial collapse—in particular, in my office, due to the inconsistencies of the working tax credit as between those who are self-employed and those whose annual pay packs are constant.

Briefly on clause 32, I highlight the fact that taxpayers who have made amendments to their self-assessment tax returns on or after 3 March 2021 may have to pay back some or all of the grants that they have claimed. There is a real concern, which I share, that unrepresented taxpayers may not be aware of their obligations to notify HMRC and, accordingly, may face penalties, inadvertently and perhaps without right. Minister, how will we ensure that HMRC will take steps to ensure that taxpayers become aware of any obligation to repay in time to avoid such penalties? In particular, it is unsatisfactory that taxpayers who have made amendments on or after 3 March 2021 but prior to the date of the claim appear to be obliged to pay back some or all of the grant immediately upon receipt. Some may be unaware that they have to do so, but they face harsh penalties, which were originally aimed at fraudulent claims or for failing to do this on a timely basis. So I am concerned that innocent participants in this process may find themselves in difficult times.

Free School Meals: Summer Holidays

Debate between Rebecca Long Bailey and Jim Shannon

Tuesday 16th June 2020 Commons Chamber

[Rebecca Long Bailey]

The Secretary of State will be well aware of the issues with the Edenred voucher scheme —the fact that many families have arrived at supermarkets and been turned away, that many schools have had to step in when vouchers have not been readily available and fund school meals themselves, and that in many cases they have not received assurances from the Government that they will be recompensed for that monetary expenditure. Perhaps he can provide those assurances today.

[Jim Shannon (Strangford) (DUP)]

So far, the Welsh Government and Assembly have agreed to do it, the Scottish Parliament has agreed to do it, the Northern Ireland Assembly has within the last three or four hours agreed to do it, and at long last the Government here have agreed to do it. Society is measured by its attitude to those who are less well off. I congratulate the hon. Lady on bringing this forward and look forward to the Government’s participation and making this a success.

[Rebecca Long Bailey]

I thank the hon. Member for his comments.

These children are not just statistics. The vast majority are children in working families, where parents are working around the clock to cover bills but where there is never enough. They are the children of parents who perhaps cannot work, through no fault of their own, for reasons such as chronic ill health. They may be the children of communities that have suffered from generations of unemployment and who feel their hopes and dreams are unachievable, no matter how hard they try, because the jobs simply are not there.