Considered in Grand Committee
My Lords, this statutory instrument was laid before the House on 24 September 2020.
Since the emergence of Covid-19, businesses have received billions of pounds in loans, tax deferrals, business rate reliefs and grants to support them and help save jobs. The Government’s recently launched winter economy plan has a further package of targeted measures to provide ongoing essential support as social restrictions are reintroduced in many regions of our country. However, the Government recognise that while most businesses have been able to reopen and many have received significant financial support, some continue to face uncertainty and financial difficulties.
This statutory instrument will help companies by extending most of the temporary measures introduced by the Corporate Insolvency and Governance Act 2020 which were due to expire on 30 September. The extensions to various parts of insolvency and company law will protect companies from aggressive creditor action, promote company rescue and give greater flexibility to businesses by allowing them to hold their annual general meetings in a way which is consistent with social distancing measures.
The Government recognise that these measures have a significant impact on the normal working of insolvency legislation and the rights of creditors. Therefore, it is right that they are not extended for longer than they are needed. We think it is right, therefore, that any consideration of an extension, and for how long, should be done on an individual basis, rather than in the round, taking into account all the circumstances and potential impacts. We will continue to monitor the situation closely and will act swiftly if evidence demonstrates the need to act further.
The temporary insolvency measures being extended are: first, the suspension of serving statutory demands and the restrictions on filing petitions to wind up companies until 31 December 2020; secondly, certain modifications to the moratorium provisions and the temporary moratorium rules, which are extended until 30 March 2021; and, thirdly, the small supplier exemption from termination clause provisions, which is also extended until 30 March 2021.
During these difficult trading times the temporary suspensions on serving statutory demands and restrictions on winding-up petitions have helped many essentially viable companies by removing the threat of aggressive creditor action at a time when many businesses are unable to operate at full capacity due to continuing social distancing restrictions.
Since the introduction of these measures there has been a decrease in the number of compulsory liquidations by 67%, compared with the same period last year. Not extending these measures may lead to essentially viable companies that would be able to pay their debts but for the virus being put into a value-destructive compulsory liquidation. Such an outcome would put jobs and investment at risk and would not be a satisfactory outcome for creditors or the economy. Extending these measures further will instead give confidence and support to companies that are doing their best to stay open in these unprecedented times.
Noble Lords will know that the Government have already extended the temporary suspension on the right of commercial landlords to forfeit the tenancies of businesses until 31 December 2020. This will give further protection to tenants who have only recently been able to restart trading after the restrictions introduced because of the pandemic.
Most landlords and tenants have been working together to reach agreements on debt obligations. However, there remains a risk that some landlords might use aggressive debt recovery tactics against companies struggling to meet rent commitments in these difficult trading conditions. These measures taken together will support such businesses.
While we believe that the extension of the statutory demand and winding-up provisions will be particularly welcomed by commercial tenants, it applies to all business sectors of the economy. A range of other legal options is available to creditors seeking to recover debts that are unaffected by the changes being made here—for example, it is possible to bring a civil claim to recover a debt—but it is important to note that these measures aim to encourage forbearance and do not extinguish any existing creditor rights or interests.
I turn to the other measures related to the moratorium. While support from government measures has meant that there has been suppressed demand to date for the new moratorium procedure, I am pleased that companies, particularly smaller ones, are beginning to make use of them. During normal economic conditions, moratoriums are intended to include important criteria that must be met before a company can enter into one. These criteria protect the integrity of the moratorium, which should be used only for companies with a realistic prospect of rescue.
Noble Lords will know that it was recognised during the debates on the Corporate Insolvency and Governance Bill that a temporary relaxation of these criteria would help fundamentally viable companies impacted by the pandemic to make use of the moratorium. These regulations extend some of those temporary relaxations to 30 March 2021. They, first, allow a company subject to a winding-up petition to access a moratorium by simply filing the relevant documents at court, rather than having to make an application to the court; and secondly, disapply the rule that prevents a company from entering a moratorium if it has been subject to certain insolvency measures within the last 12 months—for example, a company voluntary arrangement, an administration, or a previous moratorium.
The temporary modifications to moratoriums that are being extended relax the eligibility criteria for obtaining one, enabling a greater number of companies in financial distress access to rescue or restructure options free from creditor pressure. This extension recognises the extraordinary and temporary difficulties being caused by coronavirus and will make the moratorium as widely available as possible. The regulations also extend the temporary administrative rules for the moratorium that enable it to operate, as contained in Schedule 4 to the Corporate Insolvency and Governance Act.
The final measure to be extended in the insolvency framework is the small company supplier exemption from the prohibition of termination clauses, which this instrument extends to 30 March 2021. Termination clauses are often found in supply contracts between businesses. They are triggered when a company commences a formal insolvency or a rescue procedure, allowing the supplier to terminate supply immediately. They can also be used by suppliers to demand ransom-type payments to maintain the supply of essential goods or services that may be vital to continue trading and the withdrawal of which could jeopardise any potential rescue. Their prohibition means that contracted suppliers cannot terminate contracts or take other steps, such as demanding additional payments, simply on the basis that the company has entered an insolvency procedure or a moratorium. The measures give an important protection to distressed companies while they attempt a rescue.
However, in the current circumstances such a provision could hit small suppliers hard, potentially endangering their own solvency. While small businesses represent 99% of the business community, 64% of turnover is through businesses that do not fall within the definition of a small business. It therefore continues to be right to temporarily exempt small suppliers from the prohibition, thus allowing them to terminate supplies should they need to protect their own business.
Turning to annual general meetings, the Corporate Insolvency and Governance Act 2020 introduced temporary flexibilities around the way companies and other qualifying bodies could hold general meetings. This allows companies to balance the requirements of legislation and their constitutional arrangements with the prevailing coronavirus restrictions. In doing so, companies can safeguard the well-being of their employees, shareholders and members. This is crucial in the operation of the UK’s strong corporate governance regime, which makes sure that company boards are fully held to account by their members. Without an extension, this scrutiny would be made increasingly difficult.
Despite the fact that, in large part, the season for annual general meetings is behind us, we know that there remain over 100 large companies still to hold an AGM between now and the end of the year. To that we must add the multitude of smaller companies, charitable incorporated organisations and mutual societies that have similar obligations. The extension in these regulations will give companies comfort that they can continue to convene these and other general meetings safely and consistent with their legal obligations.
Overall, the package of temporary measures introduced by the Corporate Insolvency and Governance Act in June this year has been widely welcomed by businesses at this crucial time. We have been told by business that these measures have been essential in supporting them, with many companies now able to trade without the threat of aggressive creditor action being taken against them, and with the availability of new tools to help them to restructure and rescue themselves. I commend these regulations to the House.
My Lords, I chose to re-engage with the legislation—in which I played a part as the Bill passed through Parliament—to make just two very small points, which I am reinforcing from the time when I contributed originally.
My first point is to agree to and support the regulations, as I supported the Bill, but to draw the Minister’s attention to the fact that there has been some change since we last debated this. In terms of the geography of impact, the situation has dramatically changed. Areas have been designated tiers 1, 2 and 3. Those areas which have moved into tier 3, primarily in the north of England —in fact, wholly in the north of England, with the exception of Nottinghamshire—face interestingly contrasting challenges. Some businesses will of course benefit from the compulsory closure and the compensation and support that will therefore be available, both to individual employees and to the businesses themselves. That is to be welcomed. With tier 2, those businesses that are not mandated to close will feel the impact of what is, quite dramatically, a change in the economic activity in the area.
The area that I know best, which is the city of Sheffield and the Sheffield city region, moved into tier 3 from midnight on Friday evening. It is quite clear that the message that goes out, which affects people’s general activity levels, is that they should effectively be in lockdown. The consequence of that, and the economic change that it has brought, means that we will have a differential impact. I wonder whether the Minister would feel that there could be a differential date on the aspects of the legislation which relate to 31 December in particular, but also to 31 March. What leeway exists for the Government to be able to come back if that is necessary? If not, parts of the country will be hit in a very different way from the south. We are painfully aware, I think—and if we are not, we live in a cave in Derbyshire—of the real concern about the divide in our country and the impact that has.
My second point is about the level of debt overall, which has grown exponentially. Obviously, this legislation is intended to assist in terms of the immediate impact on business and the capacity to be able meet legitimate bills. I share the concern, articulated by the Minister, in relation to the supply chain. We have a real challenge there. I also feel that given the accumulation of the debt, it would be useful if he could say whether the Government have any plans to deal with the cliff edge and the transition from the legislation as it stands at the moment to the spring of next year. As it turns out, what has changed over these weeks is the apparent extension of the challenge of the virus, throughout the winter and into the spring of next year. Action must be taken to prevent the exact calamities that he referred to in moving this Motion.
My Lords, it is a great pleasure to follow the noble Lord, Lord Blunkett, and particularly to agree with points he made about the challenges of the north and areas that he knows extremely well. I thank the Minister for outlining the position with regard to the Corporate Insolvency and Governance Act 2020. It is, of course, a mixture of permanent provisions—in particular, the creation of the concept of the moratorium—and temporary provisions, or possibly, as we are beginning to see, semi-permanent ones. The moratorium of course represents a very substantive change in relation to the law on insolvency, perhaps the most material change since the changes brought about after the recommendations of the Cork committee in the 1980s.
I have several questions for the Minister in relation to points that are being presented to us, although, like the noble Lord, Lord Blunkett, I certainly support the Minister’s position. First, why do we have different dates for the extension? Why is it not all being extended, for example, to 30 March? Why is there a different date for the extension in restricting the use of statutory demands and the supplier exemption from the scope of the prohibition on termination clauses in supply contracts? I cannot quite see why that should be. In the same area, can the Minister say something about why the restriction on the use of wrongful trading is being ended totally? That is not being extended and I wonder why.
No consultation has been carried out in relation to this legislation, and I understand that that is because it is on a temporary or semi-temporary basis, as it has been going for less than a year. Given that it can be extended seemingly indefinitely, I wonder whether, if it is extended beyond a year, we will have formal consultation and a proper impact assessment.
In fairness, the memorandum refers to there being some discussion with companies and says in paragraph 7.9 that
“some 120 companies would be negatively impacted should the extension not be granted.”
I found that a little surprising in that it seemed a relatively precise figure—although it does say “some” 120, to be fair—and a very small number, considering that we have more than 4,200,000 companies registered. It is some 0.0025%; surely there must be other companies that would be impacted as well. What are these 120 companies? Are they all the same genre? Are they all small companies, medium companies, large companies? I quite understand that the Minister will not want to name them, but how is it that just 120 companies seem to be negatively impacted? How were they identified and why, seemingly, so few?
The Explanatory Memorandum also asserts that there is support for an extension of the temporary provisions of the Act, which I do not doubt, but from a range of shareholder representative groups. Can the Minister say a bit more about that? Who are these groups and what, precisely, did they say? I thank the Association of Business Recovery Professionals—R3, as it is known in common parlance—for a briefing on this. While supporting the measures in a general sense, it notes, correctly in my view, a point that the noble Lord, Lord Blunkett, also made: that the measures cannot be prolonged indefinitely. What is the Government’s view on this? I appreciate that it is a fast-moving situation, but some clarity on the Government’s approach to the making and extending of these rules would be useful, particularly given the level of corporate debt in the economy.
I also mentioned the lack of consultation on an impact assessment. I would be grateful if my noble friend the Minister could say something on that, should the regulations keep being extended.
Perhaps I may refer lastly to something that the Minister touched on, which is the position on meetings. I very much support and welcome that; it is perhaps long overdue. I do not know why this is not being done on a permanent basis because, in the Zoom world in which we live, we now know that many corporate meetings will be held like this anyway. Why can we not facilitate it on a permanent basis, as other countries have done? In the common law of our country, the Byng v London Life Association case allows company meetings to be held without one person being in the physical presence of another. We would need to put that on a statutory basis to replace some of our current requirements in legislation. Can my noble friend say something on that, too? However, I am very content with the general position in relation to the legislation. I just have those points and questions to put to him.
My Lords, I too welcome this statutory instrument and the extensions that it brings. I slightly question the timing of us having this debate. As I understand it, these regulations came into force a month ago. If we are to see further extensions, can they be put before Parliament in advance of their coming into force rather than a month later?
I will ask two fairly brief questions. First, similarly to the question of the noble Lord, Lord Blunkett, while the extensions are welcome it is clear that as the crisis continues—especially as we continue to tighten restrictions—the problems for many businesses continue to grow. Debt levels are inevitably rising. When conditions improve, as we all hope they will, and the temporary provisions expire businesses will not recover instantly. It will be a slow process as the economy, I hope, picks up again. From a cash-flow perspective the recovery period is often the most dangerous part of the cycle, as businesses need to build up stocks and so on before they start to see the revenue coming through. What thoughts does the Minister have about how we protect businesses during that recovery period—I hope this is not a bit premature—once these temporary provisions have come to an end?
Secondly, I particularly welcome the extension of the exemption from the contract termination clauses for small companies. As the Minister will recall, I am concerned that those clauses would have a disproportionate impact on the smallest companies. He referred to the same point in his speech; that is the reason for the extension. But that is potentially true for the smallest companies even in normal times, as well as when the crisis has ended and the extension has expired. Can he confirm whether the Government will keep this under close review and take action if the contract termination clauses have a negative impact on very small companies once the exemption period has ended?
My Lords, I add my congratulations to my noble friend the Minister on bringing forward and introducing these regulations. However, as the noble Lord, Lord Vaux, said, it is regrettable that the debate comes so late after they have been introduced. I will ask a number of brief questions.
Do the Government know how many companies have actually relied on the moratorium provisions, which we have discussed on previous regulations, and to what extent? I welcome these provisions and it would just be helpful to know how many have been operated. In paragraph 7.7 of the Explanatory Memorandum, reference is made to the need for
“temporary rules … to remain in place to allow time for permanent rules to be drafted”,
which would require “further secondary legislation”. Can my noble friend explain to us today what the timetable is for these permanent rules to be brought forward? Are they already in train and has the consultation period been embarked upon?
I am sure that my noble friend will keep an eye on the extent to which creditors are suffering from the fact that these protections have been given. Is he aware of any particular difficulties being incurred by them?
Overall, I welcome the thrust of the regulations. The deadline is today being extended to 31 December. Like my noble friend Lord Bourne, I ask my noble friend the Minister whether he envisages bringing forward a further extension to that timetable, which is likely to be needed.
I also echo the concerns expressed by the noble Lord, Lord Blunkett. Across the north, businesses are being particularly hard hit at this time. Many retailers in areas that are in lockdown are looking at potential liquidation. These regulations will obviously be welcome to them, but it seems that they are being discriminated against, as they are suffering greater restrictions than those operating in other parts of the country. I look forward to my noble friend’s reply. I support the main thrust of the regulations and welcome the opportunity to discuss them.
My Lords, this statutory instrument could have been an opportunity to correct some of the flaws of the Corporate Insolvency and Governance Act. The most notable flaw is the scope for financial creditors to game a moratorium and suck out assets and cash through the lending terms applicable to new lending during the moratorium period. My colleagues and I were particularly keen to see protection for small creditors, who are likely to be the victims of such strategies by financial creditors. We also sought to move into the highest priority for repayment these same small creditors, who lack the deep pockets to cope with a deferral of payments due to them. The Government have sadly missed this opportunity to act and small creditors, usually small goods and services suppliers, are the losers.
The purpose of this SI is to extend measures in the Act related to Covid in order, as the Government say, to relieve pressure on businesses dealing with the virus. That makes sense to us; we do not object to the SI. The need for it comes as no surprise, as the impact of the virus on businesses is far more prolonged and deeper than the Government anticipated in some rather misplaced bravado of June and July. As business groups have indicated, the revised measures recently announced by the Chancellor are welcome but fall short. The combination of the virus, the likely loss for many of the Christmas market and economic Brexit, even with a deal, is so acute that we will sadly return to this matter many times.
On termination dates for measures under this SI and other places in the Act, it is very difficult for business to deal with the uncertainty of dates that keep moving. I wish that the Minister might agree to put pressure on his colleagues to get some good, solid forecasting from the OBR and a full appreciation of the economic difficulties and crisis that we face in order to put in place strategies that might have a rather longer life and do not require constant extension and revision. Although the measures can often be good in themselves, the uncertainty that surrounds them tends to undermine a great deal of their effectiveness, which I think we would all agree is a shame at a time like this.
My Lords, I thank the Minister for introducing the SI in his customary clear way. We support the measures that are in it. The speeches from the Minister and other noble Lords who have spoken today have recalled for me the happy days, and indeed nights, that we spent on the Bill. It is good to see that some of the debate’s issues are still very live.
Most of the questions that I was going to ask have been asked by others, and I look forward to them getting a response from the Minister. The two that were most interesting, in my mind, included why the Government had chosen not to extend the measure about wrongful trading from directors. We had reservations about that when it was introduced in the Bill in the first place; it has not been continued, and I wonder whether he could explain the Government’s thinking on that point, a point made by the noble Lord, Lord Bourne of Aberystwyth as well.
On the Explanatory Memorandum, the noble Baroness, Lady McIntosh, raised the question of the numbers. We do not seem to know quite how many companies are taking advantage of the breathing space; perhaps the Minister could throw a bit more light on to that. She also raised the arrangements for temporary procedural rules to enable an operational moratorium and the question of whether they might become permanent—and, if so, on what timescale.
The noble Lord, Lord Bourne, asked why we were not moving forward with the technology to allow AGMs to be held virtually. I note that at paragraph 11.1 in the Explanatory Memorandum, the Government plan to produce best practice guidance on holding AGMs flexibly—better late than never, perhaps. I would be grateful to know what the timetable might be for making it permanent.
I have two points to finish. My noble friend Lord Blunkett’s points were really interesting. I hope that the Government will think hard about how they might anticipate the differential effect of the crisis across the country. My noble friend talked about the north, but it is also true in Scotland, Wales and Northern Ireland, where there are very different responses by companies, corporate bodies and individuals to this. Some consideration will need to be given to the differential impact of tiers 1, 2 and 3—and, possibly, 4 and 5, if they ever come—on companies big and small, and how we might deal with that. I hope that there has been some thinking done.
Finally, I noticed that the word “viable” comes a lot from Ministers when speaking about the crisis and on funding that might be available from the Government to take us through. What definition of viable is being used here, exactly? I am an accountant by background, although I did not practise very much, but I do not recognise viable as a term used in the accountancy profession. It is usually much harder edged and backed up by figures. “Viable” seems a very soggy way in which to approach this. Perhaps the Minister could expand on that when he comes to respond. However, to reassure him, we back this SI.
I thank all noble Lords who contributed to this short debate. I know that many also contributed to the legislation when we originally introduced it. There is a great deal of expertise in the House on this subject, and I am grateful to those who have thought to opine further on the extensions that we have introduced.
I thought that the debate started off well with an excellent contribution from the noble Lord, Lord Blunkett, who, rightly, highlighted the difficulties of businesses in areas such as his own dear Sheffield which are subject to tier 3 restrictions. The Government very much recognise the ever-changing context in which we operate, but I hope he is assured that the Government are keeping all these measures under review in light of the ongoing development with the pandemic, in order to act in a proportionate way should it prove necessary to do so. I can further offer assurances to the noble Lords, Lord Blunkett and Lord Vaux, and to my noble friend Lady McIntosh that the measures included in the order are being kept under review as part of this. We would not hesitate to move swiftly to extend them further if that is necessary to support business in a proportionate and viable manner.
My noble friend Lord Bourne raised questions on the differing dates of the extensions within the regulations. The reason for that is that they were assumed to be the best and most viable dates at the time, following consultations with various organisations and other government departments. However, as I said earlier, we will keep those measures under review. The temporary measures all have significant impacts on the normal working of various parts of insolvency legislation and the business community. The term of extension for one measure may not be desirable or needed for another. We think it right, therefore, that any consideration of an extension and for how long should be done on an individual basis, rather than in the round, taking into account all the circumstances and potential impacts.
My noble friend Lord Bourne and the noble Lord, Lord Stevenson, asked further about why restrictions on wrongful trading were not being extended. Careful consideration was given to whether to prolong each of the separate temporary measures introduced by the Corporate Insolvency and Governance Act; a package of targeted measures remains in place to assist companies in financial difficulties. We reached the view that a further extension of the prohibition restrictions on wrongful trading was not required at this time.
The end of the suspension represents the return of an important protection for creditors. As always, it is a question of getting the right balance. At the beginning of the pandemic, company directors faced a very uncertain future with regard to trading conditions. Now that the suspension has been in place for seven months, they will have had time to make a better assessment of the impact of the pandemic on their companies’ viability. We therefore considered it right to restore that provision.
The points made in the debate have highlighted the importance of the measures being extended by these regulations and the necessity of extending them so that businesses continue to benefit from them. The Government have considered the ongoing impact of Covid-19 and the potential impact of each measure to determine how for long each measure should be extended, if at all. Government officials have been in close dialogue with business and professional groups about these measures and the impact that they are having. Given that the Covid-19 crisis is still with us and businesses are still dealing with its impact, the consensus is that the measures being extended are still necessary.
The number of corporate bodies benefiting from the company law measures—my noble friend Lord Bourne referred to 100 companies—are public companies with obligations to hold AGMs with a variety that is testament to our varied business sectors. Countless other companies will benefit from having flexible general meetings in the coming months. The flexibilities are intended to be temporary and only for the purposes of assisting bodies in coping with Covid-19 restrictions. Once the measures and powers expire, meetings will continue to be held as normal and in line with the body’s normal constitution.
The Companies Act 2006 already gives companies the ability to hold general meetings in a virtual form but, generally, they would need to secure shareholder consent to appropriate changes in their articles of association. Ultimately, it is for companies and shareholders to agree what flexibilities they want over the longer term. We do not think it appropriate to mandate that meetings be held in a particular way. These measures give bodies the flexibility to hold meetings in a safe way, including through the use of electronic means. This will allow companies to respond appropriately to changing circumstances where required. I am happy to confirm for the noble Lord, Lord Stevenson, and my noble friend Lord Bourne that the Financial Reporting Council has published guidance on AGMs on its website.
The noble Lord, Lord Vaux, asked how to protect businesses in recovery after the end of the measures for which it is clear that the restrictions have changed. Government support has evolved; its goal remains to protect people’s jobs and livelihoods. As the path of the virus and the threat to the economy become clearer, government action needs to support jobs and businesses while at the same time allowing the economy to adapt to the new normal.
The noble Baroness, Lady McIntosh, asked me about the uptake of the measures, and I can confirm to her that two companies have obtained a moratorium under the Insolvency Act 1986, as amended by the Corporate Insolvency and Governance Act 2020. One company had a restructuring plan under the Companies Act 2006 amended by this Corporate Insolvency and Governance Act 2020 sanctioned by the court. The restructuring plan, which was backed by creditors and sanctioned by the court in September, has allowed the airline Virgin Atlantic to restructure its debts, and to attract in excess of £1 billion of investment and international press attention. I think we can see that the legislation has worked in this respect: it has saved a company that was in difficulties because of the pandemic. We all know what has happened to airlines and the aerospace industry so, in this particular regard, the legislation that we slaved over has proved to be valuable.
Other noble Lords raised questions on the regional uptake of the measures and the impact of different-sized businesses; we are constantly keeping all these measures under review, and they will be reviewed on an individual basis. The low number of cases of each of these new legislative tools since the Act came into force is very likely to be as a result of the range of Government support which is still available and still being provided to companies—as noble Lords will be aware, and as I mentioned above—including the range of temporary measures that have recently been extended for a further period.
These temporary rules on the moratorium need to remain in place to allow time for the permanent moratorium rules, which require further secondary legislation, to be drafted. The law requires that the England and Wales rules require consultation with the Insolvency Rules Committee, which of course will take some time. It would also be undesirable to require businesses to adjust to new procedural rules at a time of great economic uncertainty, such as having to adapt to changes in government fiscal support and other regulatory support as a result of coronavirus.
The noble Lord, Lord Stevenson, asked on the point of viability for insolvency. I accept his point that this is not a term normally used by accountants of his persuasion, but it is being generally used as a term to indicate which companies would be profitable otherwise than for the impact of Covid-19. Over the past few months, businesses have continued to face an exceptionally challenging time, with many unable to trade or their ability to trade at full capacity restricted due to social distancing measures.
These regulations will provide the much-needed continued support for businesses to concentrate their best efforts on continuing to trade and to build upon the foundations for economic recovery in the United Kingdom. Careful consideration, as I said earlier, has been given to extending these temporary measures, and the Government will monitor the situation very closely before making any decisions about any further extensions, including, of course, consulting further with businesses, their representatives and shareholder bodies. With that, I commend these regulations to the House.