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Corporate Insolvency and Governance Act 2020 (Coronavirus) (Suspension of Liability for Wrongful Trading and Extension of the Relevant Period) Regulations 2020

Volume 808: debated on Thursday 17 December 2020

Motion to Approve

Moved by

That the draft Regulations laid before the House on 25 November be approved.

Relevant documents: 37th Report from the Secondary Legislation Scrutiny Committee and 35th Report from the Joint Committee on Statutory Instruments (special attention drawn to the instrument).

My Lords, I think we all shared a sense of optimism last week when Margaret Keenan became the first person in the world to receive the Pfizer/BioNTech vaccine, administered at Coventry’s University Hospital. It gave us hope that, sooner or later, daily life for the majority may begin to return to some kind of normality. Until then, though, we continue to live with restrictions that are difficult for everyone but necessary to keep our citizens safe and make sure that the NHS is not overwhelmed. Today, all but a few areas of Great Britain are subject to restrictions put in place to limit the spread of the virus; the effect that this is having on many businesses, such as those in the retail and hospitality sectors, has been well documented.

The Government were swift to act and provide businesses with clarity and support when the impact of the pandemic was at its peak. Those companies that were worst hit were given every chance to survive and get through that period of uncertainty; I am grateful to everyone who contributed to the Corporate Insolvency and Governance Act. Businesses have benefited from a package of government support targeted at saving jobs and livelihoods, such as the furlough and job retention schemes, as well as billions of pounds in loans, rates relief and tax deferrals. However, until life returns to normal, we must recognise that the impact on businesses continues.

This instrument revives one of the measures introduced by the Corporate Insolvency and Governance Act 2020 and extends another measure. It revives the suspension of wrongful trading liability until 30 April and extends the flexibilities around the manner in which companies and other qualifying bodies can hold general meetings until 30 March. These measures, like others in that Act, are aimed at supporting directors in guiding their companies through the period in which business is being affected by the pandemic.

First, I shall deal with the temporary suspension of the wrongful trading provisions in the Insolvency Act, which expired on 30 September but which we propose to revive by this instrument. Noble Lords will be aware that wrongful trading is an action which may be taken by an insolvency officeholder, and can lead to a director being held personally liable for losses to a company’s creditors where it continues trading at a time when it is inevitable that it will enter formal insolvency proceedings. A successful action may lead to losses being recovered for the benefit of creditors but, more importantly, wrongful trading provisions have a vital role in preventing reckless insolvent trading in the first place. The threat of personal liability for directors is a strong deterrent to them causing companies to trade at their creditors’ risk. At the peak of the pandemic earlier this year, there were concerns that many would cause their companies to cease trading rather than risk personal liability in very uncertain trading conditions. They simply did not know what would happen or whether their companies could or would survive.

The temporary suspension of the wrongful trading provisions between 1 March and 30 September in the Corporate Insolvency and Governance Act allowed directors to discount the threat of personal liability for any worsening of their companies’ position during that period. It allowed them to take steps to save companies which would otherwise be viable but for the impact of the pandemic, without the concern that they would be penalised if things did not improve and the company had to enter insolvency proceedings. This then allowed them to access government support to continue trading, and therefore to save jobs and livelihoods.

I should say at this point that suspending wrongful trading does not give a free pass to directors and allow them to act irresponsibly. Other vital protections for creditors remain in place to protect them where a company is in an insolvent position, such as the director duties set out in the Companies Act, fraudulent trading or misfeasance actions under the Insolvency Act, or, ultimately, disqualification from acting as a company director.

At the end of September, many companies had returned to more normal levels of trading, so it was right that at that stage the protection given to creditors by the wrongful trading provisions should return. The suspension in the Corporate Insolvency and Governance Act was therefore allowed to expire on 30 September. Noble Lords will be well aware that since then, sadly, circumstances have worsened. A new wave of the virus has unfortunately meant further necessary restrictions being imposed across most of Great Britain. Directors again face uncertainty about future trading conditions; they need our support and reassurance that they can continue to trade and save companies that would be profitable but for the restrictions, without the fear of personal liability.

The Corporate Insolvency and Governance Act gave a power to make temporary changes to the effect of corporate insolvency legislation; this instrument uses that power to temporarily suspend the wrongful trading provisions again from 26 November until 30 April next year. This will give that reassurance to directors that they need not close viable companies solely because of uncertainty about their own position. It will help to save jobs, as well as contribute to the economic recovery. The suspension works by telling any court considering a wrongful trading action that it is to assume that a director is not to be held responsible for any worsening of the financial position of the company in the relevant period: 26 November 2020 to 30 April 2021. This was the approach that we used in the Act itself.

I am grateful for the report of the Joint Committee on Statutory Instruments, which addresses this specific point. It is important for directors to be absolutely certain that they will not face a wrongful trading action if they continue trading in uncertain circumstances, so if the assumption was in any way rebuttable this would not give them the reassurance they need when so much is at risk.

None of us can say for certain what will happen over the next few months, and the expiry date of 30 April 2021 will of course be kept under review. If, at some time before then, it becomes clear that the suspension has done its job in preventing companies entering insolvency proceedings unnecessarily, it will be removed. The protection for creditors will therefore return.

I move on to the measure on annual general meetings. The Corporate Insolvency and Governance Act also introduced temporary flexibilities around the manner in which companies and other qualifying bodies could hold general meetings. This is crucial to the operation of the UK’s strong corporate governance regime, which ensures that the boards of companies and other bodies are fully held to account by their members. This flexibility allows bodies to balance their constitutional arrangements with the prevailing coronavirus restrictions and, in doing so, safeguard the well-being of their shareholders and members.

Despite the fact that, in large part, the season for AGMs is now behind us, we know that around 80 large companies are still to hold annual general meetings between now and the end of March. That is excluding the multitude of smaller companies, charitable incorporated organisations and mutual societies which have similar obligations. The extension in these regulations until 30 March 2021 will give these bodies comfort that they can continue to convene these and other general meetings safely, while being consistent with their legal obligations.

I hope noble Lords will agree with many stakeholders that the two measures included in this instrument will provide much-needed reassurances to businesses in the critical trading period leading up to Christmas and beyond. I therefore commend these regulations to the House. I beg to move.

My Lords, I thank my noble friend for introducing these regulations and for his clear explanation. I also congratulate the Government on being the first in the world to roll out vaccinations to try to combat this pandemic, and on all they have done to try to protect businesses and jobs.

It is of course important to avoid businesses failing due to the impact of the pandemic and the associated restrictions on trading that the Government had to introduce. Of course, we must protect viable businesses in the current unprecedented circumstances. However, I wish to register my own concerns, which were echoed by the Secondary Legislation Scrutiny Committee’s report, about the measures in Regulation 2(1). These provide for an extension of the suspension of wrongful trading rules, such that company directors cannot be held liable if the firm’s financial position worsens. By the way, I welcome the exceptions for some of the financial firms holding client money.

The period from 26 November 2020 to 30 April 2021 puts creditors at risk. There is a valid concern that without any impact assessment—which I understand, given the emergency—there are serious risks that the suspension of directors’ exemption from personal liability and having to contribute to the assets of the company if it becomes insolvent could represent a blanket exemption, and a carte blanche, which would have broader consequences than originally intended.

I note, and am grateful for, my noble friend’s comment that these measures will be kept under review, and that should any poor practice be seen to be significant they will, potentially, be reviewed. But there are concerns for creditors in firms that might continue trading without the fear of consequences or the impact on those to whom the business might owe money, even if they know that the company is going to fail. I would be grateful if my noble friend could comment in a little more detail on the concerns raised by the committee, particularly in light of the assurances given to the House on Report for the then Corporate Insolvency and Governance Bill. It was said then:

“The suspension does not mean that a struggling company could just carry on trading without any regard for the consequences, but that, if it unfortunately enters insolvency, the directors will not face personal liability for using their best endeavours and trading while the pandemic is having such an impact on businesses.”—[Official Report, 23/6/20; col. 200.]

I understand that reassuring directors that carrying on their business in the light of problems raised by the pandemic is important. We do not want viable businesses to fail that otherwise would not need to.

However, this absolute exemption raises concerns. Again, I note that my noble friend suggests that there are other protections for creditors such as the rules around fraudulent trading and misfeasance. Can he expand a little on how these protections would help creditors where a director has used the opportunity to continue running the business, taking a salary and depleting whatever is left of the corporate resources, even knowing that the company will fail through nothing to do with the impact of the pandemic? There is no ability to take action because the courts are being told to disregard it, in all circumstances.

I also welcome the flexibility given to companies to extend to the end of March the period over which meetings need to be held, and I congratulate the Government on this practical measure, which I hope all noble Lords will support.

I recognise that these are not easy judgments, but I would be grateful if my noble friend could reassure the House on that point. Once again, I congratulate the Government on all the hard work that they have been doing and my noble friend and his department on all their work to protect and preserve businesses and jobs during this difficult time.

My Lords, I declare my interests as in the register as a company director. This is a simple statutory instrument and, for once, I have not been made more confused by the Explanatory Memorandum than I was before reading it. I welcome, in particular, the extension of the flexibility around the conduct of AGMs.

Like others in this debate, I am a veteran of the Corporate Insolvency and Governance Act and I recall our discussion on its Section 12. I can summarise by saying that it was not an ideal solution, but there was not really any other readily available solution. It is the same again now.

There are only three points on which I would like to comment. The first was raised in the report from the Joint Committee on Statutory Instruments and concerns whether all causes of downturns are excluded or just those relating to Covid. I recollect the comment by the Minister, which was quoted by the noble Baroness, Lady Altmann, about the suspension not meaning that a struggling company could just carry on trading without any regard for the consequences. I remember thinking at the time that the provision was nevertheless a blanket one when it came to insolvency. I am sure that it is possible to write legislation that distinguishes one way or another. Unless I dreamt it, I seem to recall that the debate covered that such an approach might generate many problems of trying to analyse root causes, undermine the certainty intended and even risk overloading the courts. The conclusion was that it was a least-bad option and I have to accept that we are in that position again.

My second point is about the period between 30 September and 26 November, which appears to go under the normal rules. It might have been useful to have some comment about that in the Explanatory Memorandum. I made the presumption that the hope was that things were getting back to normal and that this was why the Government did not extend the provision before it expired. There is perhaps a question as to why it is not being retrospectively extended, given that there were surely still specific businesses under restrictions and some areas of the country that went into local lockdowns, if not straightaway then pretty soon within that period. Was any thought given to a retrospective extension to cover that period? What is the effect of those two months not being covered? Do the Government think that there is protection from the two periods on either side, because it would be hard to pin things down to those exact two months?

Thirdly, how long can this go on for? I recognise that, in allowing the measure to lapse, the Government showed some keenness for it not to hang around overly long. I was going to ask if this was likely to be the last time that the measure is considered, but the Minister has told us that the Government will hold it under review, which obviously implies that there may well need to be another extension. At some point, there must be a limit to how long it goes on for. While the balance may be in favour of giving certainty to the company directors for short periods of time, the longer it goes on, the longer the concerns already expressed by the noble Baroness, Lady Altmann, begin to come to the fore and dominate. It will be very difficult for companies to know who they can and cannot supply and, ultimately, that would cause everything to grind to a halt through other uncertainty.

As I have said, this is the least-worst option, and perhaps it shows again that director liability provisions in company law could do with a more general overhaul for catching bad and unconscionable behaviours. It can be rather difficult to enforce the other measures around directors’ duties and so on, but I accept that that is for another day. For now, I will not object to this statutory instrument, but I would like to have some updates as we go along on the question of how long this goes on for. I do not really want to be here in September discovering that we are in for the extension after next.

My Lords, I thank the Minister for his comprehensive introduction of the statutory instrument and the other speakers for the points that they have made. I declare my interest as a retired fellow of the ACCA.

During the discussions on the Bill, this was probably the most contested part of the mixture of temporary and permanent changes that were made. It is interesting that that remains the position. The other changes seem to have settled reasonably well, though perhaps it is that we are relatively close to those changes and do not have all the information or evidence for them yet.

The issues that were most in people’s minds during the debates on the Bill were the signals that might have been sent out to those who might perhaps be considering breaking the law in relation to personal liability issues, by knowingly trading when they were likely to be insolvent. It is difficult to judge that in relation to the coronavirus, but time has obviously moved on and perhaps we now have a better understanding of the impact of this on our economy and the way in which we need to respond.

It is interesting that the department, despite being pressed in this House on the point, decided not to renew the original period of time under which this provision was brought in. As the noble Baroness, Lady Bowles, just mentioned, there is therefore a lacuna from 30 September to 26 November in which these powers did not exist. Presumably there will be court actions and evidence that we will be able to pick up later in the year about how this happened and from which we can learn. It is surprising that we do not seem to have any evidence about how many companies are involved. We do not really know—and will not for some time—what the impact will be. There is no impact assessment. As the Explanatory Memorandum says very clearly, this is indeed a judgment call. What has changed between the decision presumably taken not to renew this in September 2020 and the decision now to extend it, even though there will be a gap? Can the Minister help us on that?

The point raised in the report of the Joint Committee on Statutory Instruments is very interesting. The Minister answered this to some extent, but basically reasserted the department’s view as reported to the committee. Would he agree that this raises more of a question about how proceedings should be taken in the future on the question of where the evidence and balance of proof need to lie for the courts to make a decision that a director—or directors—has behaved against the law? There are obviously two options here, and it would be interesting to get a response, even if it is only that this is something that will need more work.

The broader point made by the noble Baroness, Lady Bowles, is important here. There are, increasingly, issues that need to be picked up around insolvency, corporate behaviour in relation to it and the way society judges it. This is a point we have made before, and it is still being broken down. Paragraph 7.6 of the Explanatory Memorandum lays out all the various ways in which creditors have retained protection when wrongful trading is proven. But it is a very complicated world: misfeasance, fraudulent trading, disqualification proceedings and compensation orders are all very different and rather expensive ways of trying to take forward any issue that one might have in relation to liquidation and the conditions under which personal liability might arise. I would be interested to know from the Minister whether the department will be looking at this in due course. A number of issues relating to company law will need to be addressed over the next few years; this might well be another point to take forward.

Finally, on the question of AGMs and the different arrangements to apply, these are sensible proposals; it is good that regulations are being extended. But it raises the question we raised last time of why some of these are not made permanent. Special considerations apply to charitable companies and SMEs, but relaxing the rules that require physical meetings seems appropriate for the long term, now we are all more used to working virtually.

I thank the noble Lord, Lord Stevenson, and the noble Baronesses, Lady Bowles and Lady Altmann, for their valuable contributions. They are all veterans of the previous Act’s debates, and the points they raised very much reflect some of the concerns raised during those debates. They have also highlighted the importance of the measures and the necessity of doing all we can to extend them so that support for businesses can continue. Businesses have continued to face an exceptionally challenging time, with many of them unable to trade at full capacity due to the need to protect the population. These regulations provide the much-needed support for businesses to build on the foundations for economic recovery.

Picking up on the points raised by all three noble Lords, who rightly reflected the concerns of creditors, it is worth pointing out that the suspension of wrongful trading does not give a free pass to directors allowing them to act irresponsibly. This was a point made by the noble Baroness, Lady Bowles. Other vital protections for creditors remain in place to protect them when a company is in an insolvent position. These are the director duties set out in the Companies Act; the provisions of fraudulent trading; the provisions on misfeasance actions under the Insolvency Act; and, ultimately, disqualifications from acting as a company director.

The noble Baronesses, Lady Altmann and Lady Bowles, both raised the matter raised by the JCSI, and we are of course grateful for their input and for bringing it to the attention of the House. The suspension works by telling any court considering a wrongful trading action that it is to assume that a director is not to be held responsible for any worsening of the financial position of the company in the relevant period—and this is crucial—from 26 November to 30 April. This was the position we used in the Act itself. The purpose of the suspension is to prevent directors from otherwise putting viable companies into insolvency proceedings just because of the risk to them of personal liability. As I said in the introduction, I reassure all three noble Lords that this suspension will be kept under review while the restrictions remain in place, and we will consider using the power to end the suspension early if trading conditions change such that the suspension is no longer needed or no longer proportionate.

The noble Baroness, Lady Bowles, also raised the subject of further extensions, but I can reassure her the Government will extend only for as long as is necessary. The covering Act only allows for that, but we will of course keep this matter under close consideration. The suspension is related solely to the relevant period that I referred to.

The noble Baroness, Lady Bowles, and the noble Lord, Lord Stevenson, rightly raised the issue of what the noble Lord, Lord Stevenson, called the “lacuna” period and asked why the suspension of wrongful trading was not extended in the previous regulations laid on 24 September. At the time, even though social distancing and restrictions on social gatherings remained, directors had had seven months to access the package of help put forward by the Government, and some trading had returned to more normal levels. It was important at that time that protection for directors was reinstated. The suspension did not, in and of itself, remove any director’s responsibility continually to assess the company’s situation. We believe that things have changed since then; the uncertainty facing businesses has worsened again, and it is now right that the suspension should return, allowing directors every opportunity to help their companies survive the pandemic. This is matter of fine judgment, but we believe that we have the balance right.

The noble Lord, Lord Stevenson, also raised the issue of AGMs. We will be mandating that all AGMs can be held virtually in future, but we do recognise the value of holding physical AGMs. It is not appropriate to mandate that all meetings be held electronically. It is for companies to work with their members to establish their preferred way of working and holding meetings in future, to secure their consent and to make the requisite changes to their articles of association.

After all of those answers, I think I have addressed all the concerns raised, but let me reiterate: careful consideration has been given to extending these temporary measures, and the Government will, as I said, monitor the situation very closely before making any further decisions on how best to support businesses and representatives as the UK returns to normal. With that, I commend these regulations to the House.

Motion agreed.