Insolvency Law and Director Disqualifications

Debate between Seema Malhotra and John McDonnell

Wednesday 14th June 2023 Westminster Hall

[Seema Malhotra (Feltham and Heston) (Lab/Co-op)]

It is a pleasure to serve under your chairship, Ms Fovargue. I also congratulate my hon. Friend the Member for Salford and Eccles (Rebecca Long Bailey) on securing the debate and on her excellent opening speech. I thank my right hon. Friend the Member for Hayes and Harlington (John McDonnell) and the hon. Member for Gordon (Richard Thomson) for their important contributions on the chaos of regulatory bodies, and what really came through was the ongoing lack of a culture of challenge, and the links to the Economic Crime and Corporate Transparency Bill, which—I will speak to this later—we were keen for the Government to move much further on to tackle some of the weak areas, particularly phoenixing.

It is worth referencing that rising insolvencies, if we are talking about insolvency law and director disqualifications, also show an environment in which businesses are being hit hard. Many businesses are under strain due to the way in which they have been hit by the cost of doing business crisis, the supply chain crisis, the cost of living crisis, late payments and rising inflation and interest rates, with a Government that many businesses tell me is not on their side.

Monthly insolvencies hit record levels earlier this year in February and March. In March, there were almost 2,500 insolvencies, setting new records. However, alongside companies and directors who find themselves subject to insolvency despite their best efforts to survive, we know that there are business owners who abuse the process around administration and insolvency, with poor governance and stripping of assets. They incur high levels of debt and then dissolve the company, leaving workers and creditors in the lurch, and even denying workers the value of their outstanding pay and redundancy.

I thank the Bakers, Food and Allied Workers Union for its briefing and the caterers of Dawnfresh Foods and Orchard House Foods, which my hon. Friend the Member for Salford and Eccles also spoke about.

[John McDonnell]

We have had several representations from the bakers union over a period of time. It looks as though it is a sector where the strategy of insolvency has been used consistently. I wonder whether there could be a specific examination by the Government of this particular sector, because over the past eight or nine years we have had a pattern of behaviour, and it is one that is becoming almost endemic in the baking industry.

[Seema Malhotra]

I thank my right hon. Friend for his contribution. I agree with putting that question to the Minister and asking for a specific response.

The other issue is that rogue directors are able to walk away with seeming impunity. Some Government steps have been brought forward, and they have been important, but clearly they have not been enough—certainly not for the scale of the challenge. Recent public cases have highlighted the need for urgent action, but where steps have been taken by the Government there seems to be a lack of will to really grasp the challenges. I make reference to insolvency powers and audit and corporate governance reform here.

As one example, in 2021, clauses 2 and 3 of the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 introduced powers to enable the Insolvency Service to investigate directors of dissolved companies—measures that were first proposed in 2018. The Government’s main policy objectives were, first, to ensure that public concerns that rogue directors who abuse a company and insolvency law can be investigated and held accountable and, secondly, to provide a deterrent for company directors who may use the dissolution of the company to evade their responsibility to repay bounce back loans. Since the Bill became an Act, data showed to the Insolvency Service has focused mainly on the second policy objective, a point made effectively by my right hon. Friend the Member for Hayes and Harlington. In December ’21, the Insolvency Service gained powers to disqualify directors of dissolved companies, and, since 2022-23, just 25 directors of dissolved companies have been disqualified.

Many of the issues being talked about today were laid bare for all to see during the Carillion collapse in early 2018. Carillion had ostensibly been financially healthy. Its collapse saw more than 3,000 jobs lost, 450 public sector projects, including hospitals, schools and prisons, plunged into crisis and a company in billions of pounds of debt. In Hounslow, our leisure services were affected, and saved only by the council stepping in. Approximately 11,000 employees lost their jobs at British Home Stores, with a pension deficit of £571 million. These issues not only affect those close to the cases but cost the taxpayer, too. The National Audit Office reported that the Carillion affair cost the taxpayer at least £148 million, including £65 million in redundancy payments. Since the Government promised action on reforming corporate governance in the wake of the Carillion collapse, it took until May 2022 for a White Paper to emerge, and only in the past few weeks has the Financial Reporting Council issued its own consultation in response to the White Paper.

Let me say a few words on audit and corporate governance reform. This is an important policy space, in which reforms need to be robust for red flags to be seen early. An annual audit is a statutory requirement for listed and large companies. The purpose is to provide assurance to shareholders that financial statements give a true and fair view of a company. Good audit protects not just shareholders, but employees, pension holders, suppliers, customers and the wider community. At the broadest level, it serves the public interest by underpinning transparency and integrity in business.

Reform of the audit sector is clearly necessary and long overdue. The scandals we have heard about have damaged the reputation of the audit sector and the professionals who work in it. The Financial Reporting Council’s finding in December 2020 that over 80% of audits reviewed in the previous two years required improvement indicates the scale of the challenge. It also raised the issue of the importance of a challenge culture. Despite some improvements, there is still huge urgency, and it seems that the Government are dragging their feet. We are still waiting for legislation. The accounting and audit professions, the business community and the trade unions are all clear that change must come, and that the new audit, reporting and governance authority, which will step in when directors breach their duties, must be put on a clear statutory footing and given new powers that can only be conferred through legislation. I would be grateful for the Minister’s response to questions about plans for reform of section 172 of the Companies Act 2006 and directors’ duties.

I have some final remarks on the effectiveness of insolvency law and the director disqualification framework. R3 members note that for many years, regardless of the number of insolvency appointments and the number of reports submitted highlighting director behaviours that could warrant disqualification, broadly the same number of directors seem to have been disqualified each year, though there was a notable drop post pandemic. Are those numbers driven by resourcing constraints in the Insolvency Service, rather than assessment of director conduct?

Secondly, the annual enforcement statistics published this year indicate that there have been no disqualifications for phoenixing or insolvent trading. I would be grateful for the Minister’s view on enabling greater use of section 216 of the Insolvency Act 1986, so that it can be applied not only to companies in liquidation, but also to those that enter insolvent administration or are dissolved while the balance sheet is insolvent. That would accord with the Government’s recent extension of the director disqualification regime to dissolved companies.

During the recent passage through the Commons of the Economic Crime and Corporate Transparency Bill, we tabled amendments that would have improved the insolvency regime, including by tackling the practice of phoenixing, but the Government voted against them all. I hope that we can come back to some of those measures.

There is not just a failure to take this issue seriously, but a broader pattern of failing working people, who are so often left in the lurch. For too long, our economy has been ravaged by dire productivity, insecurity and stagnant pay. Government and business need to work together on a proper, pro-business, pro-worker, long-term plan for industry and the economy. Labour is committed to creating jobs that provide security, treat workers fairly and pay a decent wage through our new deal for working people—the biggest upgrade to workers’ rights in a generation. I would welcome assurances from the Minister that there will be progress on audit and corporate governance reform, and a further strengthening of the insolvency and director disqualification regime—two vital tools for keeping enterprise, employment and the economy protected from rogue directors, and for preventing the huge scandals that we have seen from ever happening again.

Nationality and Borders Bill

Debate between Seema Malhotra and John McDonnell

Consideration of Lords amendments
Tuesday 22nd March 2022 Commons Chamber

[John McDonnell (Hayes and Harlington) (Lab)]

When people look back on this debate, I think it will be in the same way that we look back on debates around the Poor Law. They tried to solve poverty in those times by being cruel to the poor; I think that is what we are trying to do here. We are not addressing the real issues we face.

I fully concur with everything the right hon. Member for Haltemprice and Howden (Mr Davis) said. I find it bizarre that we are even considering offshoring at this point in time; I think we all know that, practically, it is never going to come off—it is never going to happen—and this is a wasted debate.

I want to concentrate on employment rights. In my constituency, I have two detention centres, which house nearly 1,000 people. Most of them will be detained, but will then come into the community, and will eventually be allowed to remain. There are 1,700 asylum seekers in hotels in my constituency as well. They are not a burden—I welcome them. They may be a financial burden on local authorities and others—central Government need to support them—but, socially and emotionally, I welcome them completely.

The problem that these people have is that, most of the time, they are trapped in the system. Hon. Members just need to look at the figures from their own casework. Cases take at least six months or a year; I have dealt with cases that have been waiting for four or five years before there is a result. In the meantime, people are denied the right to earn a living. They are told to live off £5.40 a day, and that means they live in poverty.

Someone mentioned Syrian asylum seekers; those I have met are some of the most qualified people I have ever met. They have gone through universities and training; they have skills that they could use to give the country so much, and yet they are trapped in the system, living in poverty. And, tragically, what does living in poverty do, in some instances? People try different angles. Sometimes, unfortunately, they end up in criminality. This system, which refuses to allow people to exercise their skills and devote their talents to our community, forces them into poverty and, in some instances, criminality. All Lords amendment 7 said was, “Just allow these people to work—allow them to support themselves and their families, and to give something back to this country.”

[Seema Malhotra (Feltham and Heston) (Lab/Co-op)]

As my constituency neighbour, my right hon. Friend will be aware of the number of asylum seekers in Feltham and Heston who face the challenges that he has outlined. As well as being more humane, allowing people to work would also allow them to make a financial contribution. He will have heard stories similar to those I have—of young people with degrees, who have been tortured, who have fled for their lives, and want nothing more than to start their lives again in a country that they want to call home.

[John McDonnell]

More recently, a calculation was made of the sort of financial contribution that would be made to the country if we allowed people to work six months after they applied for asylum. At least £200 million would be put into our economy. We are denying ourselves these people’s ability to create wealth. I went through the same process when refugee Ugandan families turned up here in the time of Idi Amin; hon. Members may remember that. I have to tell the hon. Member for Ruislip, Northwood and Pinner (David Simmonds) that Hillingdon, then under the leadership of Terry Dicks, whom the hon. Gentleman will recall, was not kind to those refugees at the time. However, eventually those Ugandan Asians settled, and they made a huge contribution to this society, including a massive economic contribution, because we allowed them to use their talents and take up employment. Often, they created businesses. They made a great contribution, certainly in west London, as my hon. Friend the Member for Feltham and Heston (Seema Malhotra) can tell us.

I cannot understand the rationale for the Government’s approach. There is an argument that allowing employment will somehow add to the pull factor, but having to live off £5.40 a day is not the sort of pull factor that will attract millions to this country. We should look at the issue rationally, and recognise that the large number of people trapped in this poverty trap could contribute so much. That is why Lords amendment 7 needs to be looked at more rationally. Suffering cannot be part of our policy for dealing with the world refugee crisis—a crisis that will, as a result of climate change and other matters, become worse. We have to recognise that there will be movements of people. We have to accommodate that, and that is partly about making sure that those people are welcomed in a way that allows them to make an effective contribution to our society.