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Corporate Insolvency and Governance Act 2020 (Coronavirus) (Amendment of Schedule 10) (No. 2) Regulations 2021

Volume 815: debated on Tuesday 9 November 2021

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Amendment of Schedule 10) (No. 2) Regulations 2021.

Relevant document: 14th Report from the Secondary Legislation Scrutiny Committee

My Lords, the regulations were laid before the House on the 28 September 2021.

Following the emergence of Covid-19, the Government quickly implemented the Corporate Insolvency and Governance Act 2020, which introduced a set of permanent and temporary measures aimed at helping companies through the shock effects of the pandemic. In addition, many businesses have also benefited from an exceptional economic package of support from the Government in excess of £400 billion through the furlough and self-employed income support schemes, and through various grants and loans, and business rates and VAT relief.

Since their introduction last year, these measures have proved invaluable in protecting many businesses that were unable to trade from unnecessary insolvency due to the restrictions imposed in the national lockdown periods to deal with the pandemic. Most of the temporary insolvency measures, including the relaxation of wrongful trading, lapsed at the end of June this year, but the restrictions on company winding-up petitions were extended for a further three months until the end of September.

Without doubt, the pandemic has presented a huge challenge for us all, but we have listened and taken action to protect businesses whose very existence has been threatened by the lockdown restrictions that were necessary to keep us all safe. However, we recognise that these measures, and in particular the restrictions on the use of company winding-up petitions, are a severe restriction on creditors’ rights to enforce recovery of their debts and as such should not remain in place for longer than is necessary.

Now that we are back to full trading following the successful completion of the Government’s four-step roadmap out of lockdown on 19 July, all businesses are able to fully reopen without restriction. The signs are indicative of a strong economic bounce-back and the time is right to begin to restore the insolvency regime to its normal operation by returning some creditor rights.

We must bear in mind, however, that many businesses, particularly those sectors that were most affected by the lockdown restrictions for over a year, such as retail and hospitality, have been severely impacted and their solvency will be endangered by accrued debts and low cash reserves before they have been given a chance to trade back to profitability and financial health. As such, it is crucial that we do not pull the rug completely at this pivotal moment and instead allow the previous measures to end in a controlled way that provides affected businesses with a further period of protections.

These regulations therefore introduce a new kind of temporary restriction on winding up companies that is less of an impediment to creditors and tapers the version that has been in place since last year. The instrument replaces the previous high bar for winding-up petitions on the grounds of inability to pay debts, which required that petitioners satisfy a court that the debts were not Covid-19 related, with new targeted criteria for creditors which seek to encourage dialogue with their debtors prior to pursuing a winding up.

The new and temporary criteria for petitioning creditors, which came into force on 1 October 2021 for a period of six months, are: first, a requirement for creditors to demonstrate that they have sought to negotiate repayment of a debt before seeking to wind a company up; secondly, that the debt owed must be at least £10,000; and, thirdly, that a company winding-up petition cannot be brought in respect of a commercial rent as described by the provisions in the Coronavirus Act 2020.

On the first of those criteria—a new requirement for creditors to demonstrate that they have sought to negotiate the repayment of a debt—before presenting a winding-up petition a creditor must send a notice to the company giving it 21 days to respond with proposals for paying the debt. Creditors will then be required to confirm to the court that they have sent the notice, whether they have received any proposals from the company and, if so, state why they are not satisfactory. A creditor is not obliged to agree to the proposals put forward by the company. However, the court will be able to draw on its existing discretion to refuse to make a winding-up order where it appears that a creditor is attempting to abuse the winding-up process.

I am aware that, throughout the pandemic, many creditors and debtors have continued to work closely to find solutions together. I know that many businesses have come to agreements, and I thank them for their efforts in what are challenging circumstances for both sides. This measure reinforces the Government’s message that creditors and debtors should collaborate to find solutions to address arrears that have accrued as a result of the pandemic.

The second of the temporary criteria is that to present a company winding-up petition the debt owed must be at least £10,000. Ordinarily, there is no minimum amount that must be owed before a winding-up petition can be brought, although, when it is based on a statutory demand, the debt owed must be at least £750. A temporary increase in the minimum debt level to £10,000 will prevent petitions for relatively small debts that would otherwise be presented. In particular, this is likely to reduce the number of petitions presented against SMEs, which tend to have smaller debts and less cash reserves, making them most in need of additional support. The £10,000 limit also aligns with the current £10,000 limit for issuing proceedings in the small claims court and is easily identifiable as a measure to prevent winding-up petitions being presented for small debts and to allow businesses to focus on recovery.

The final element of the criteria is that a company winding-up petition cannot be presented in respect of commercial rent. The Committee will be aware that, during the summer, the Department for Levelling Up, Housing and Communities announced an extension of the moratorium on the forfeiture of commercial tenancies until 25 March 2022. This is to allow time for the implementation through primary legislation—the Commercial Rent (Coronavirus) Bill, which is being introduced to Parliament today—of a rent arbitration scheme to help industry deal with commercial rental debts that have accrued to a significant level during the national restrictions periods. Subject to parliamentary passage, it will come into force next year.

The restrictions on the commercial rent arrears recovery scheme have also been extended to 25 March 2022. This carve-out in relation to winding up is necessary in order not to destabilise the proposed rent arbitration scheme before it is introduced, and again reinforces the Government’s message that, wherever possible, creditors and their debtors should work together to find a way to come to amicable agreements on rent debt accrued during the periods of national lockdown. We recognise that this could cause continuing uncertainty for commercial landlords who themselves may be under pressure as a result of the pandemic. However, the rent arbitration scheme will deliver certainty to both the landlord and the tenant when an agreement to pay lockdown rent arrears has been unachievable. Furthermore, while rent debts accrued during lockdown are ring-fenced for the purpose of the arbitration scheme, all commercial rent owed after 19 July 2021 should be paid in full as and when it falls due.

In conclusion, these new targeted criteria demonstrate that the Government have listened and taken into account the concerns raised repeatedly about the potential cliff-edge scenario leading to a sharp increase in insolvencies when government regulatory and fiscal support end. The new targeted criteria reinforce the importance of striking a balance between the rights of creditors and the further protections needed by businesses most affected by the pandemic. I cannot stress enough that discussion is crucial between creditors and their debtors, as the best way to recovery will be the one where they work together. I ask them please to continue to negotiate and find solutions together, wherever possible. That would be my message to both sides. With that, I commend these regulations to the Committee.

My Lords, this is the latest instalment of long-running legislation, which may well come to an end fairly soon. None the less, there are a number of issues, and I should be grateful for clarification.

A recurring issue has been the relative absence of any cliff-edge arrangements to prevent a high number of business and personal bankruptcies. With the relaxation of the insolvency constraints from 1 October, the number of bankruptcies has already begun to accelerate and may well get worse. Further problems will come when businesses need to repay their Covid loans and, inevitably, their cash flows will be squeezed. The Government made a fundamental mistake in not taking an equity stake in large businesses; if they had done so, those businesses would not have to repay the loans and interest and their cash flows would have been preserved for productive use and investment in productive assets.

As far as I can make out, the statutory instrument does not amend the sections of the Insolvency Act 1986 that deal with the disposition of property between the presentation of a winding-up petition and the date of the winding-up order. This suggests to me that banks are perhaps already able to freeze the accounts of their clients, which might actually force some into bankruptcy. Perhaps the Minister could clarify whether that is the case.

The Minister also referred in passing to the 16 January 2021 announcement in a press release entitled Eviction Protection Extended for Businesses Most in Need, in which the Government promised that they would legislate to ring-fence Covid-related rent arrears that had been accrued as a result of trading restrictions placed on businesses, and introduce a system of binding arbitration for landlords and tenants who cannot come to a negotiated settlement on payment. Could the Minister say when this legislation will be enacted? I might have missed something; I am not aware that it has been enacted.

It has been? You may be right; I probably missed it.

Why are the same arbitrations terms not available to individuals? Why are they restricted to commercial landlords and commercial property? The increase in the threshold—from £750 to £10,000—for presenting a winding-up petition may give temporary reprieve to some small businesses, but the Government have missed an opportunity to offer permanent help to small businesses in matters of bankruptcy. This would have required a change in the order in which the creditors of an insolvent business are paid. Currently, secured creditors, which include banks, private equity, hedge funds and wealthy individuals, walk off with most of the proceeds from the sale of the assets of a bankrupt business, leaving little, if anything, for unsecured creditors, comprising employee pension schemes and supply-chain creditors, including many small businesses.

The insolvency law is forcing employees to forgo some of their pension rights. It also strangles many small businesses, because, in their capacity as unsecured creditors, they will receive next to nothing from the bankruptcy of a large customer. So, unlike financial conglomerates, they are forced to bear a highly disproportionate amount of risk arising from the bankruptcy of their clients. I cannot think of any moral or economic reason that justifies financial conglomerates being able to walk away with most of the assets of a bankrupt business, leaving small businesses and pension schemes with little or nothing.

It would be helpful to hear what moral and economic justification the Minister can offer; it is actually strangling SMEs and damaging employee pension interests. Could the Minister indicate whether, perhaps before the end of this Parliament, the Government have any plan to introduce legislation that will facilitate the equitable sharing of bankruptcy risks among all creditors? As I said, there is no economic or moral reason why secured creditors have to be prioritised. That law goes back to the 18th century, and here we are in the 21st century still not having changed it. Is it not time that we did?

My Lords, as the Minister has said, the statutory instrument introduces new temporary tapering measures that restrict the use of winding-up petitions. From 1 October, this instrument introduced a tapering effect, we are told by government, to protect companies from aggressive creditor enforcement as the economy opens up. The new temporary measures will be in place until 31 March 2022, but, ultimately, it is an extension of some support and a withdrawal of other support in the way it has been tapered.

We believe that it is right to maintain restrictions on serving winding-up petitions under Schedule 10 to the Corporate Insolvency and Governance Act 2020. It is vital that businesses that have sustained so much pressure during the last 18 months be supported right through to the end of the pandemic. This pressure was clearly demonstrated by the recently published annual report from the Insolvency Service, which found that although some measures had mitigated the impact of the pandemic on businesses, the number of people who have accessed the Redundancy Payments Service was up around 20% on normal levels.

Turning to the SI, we acknowledge and welcome the raised limit. At least there is considerable protection now for small businesses with debts below £10,000. This is important and is in line with the measures we have called for since June, when other support was withdrawn, to ensure that there are effective ways to deal with debt through the period of recovery. Without it, many more businesses would go bust. We have to remember that the economy is nowhere near out of the woods just yet: Covid is not over, and there is still uncertainty about what might happen going forward and whether there will be further restrictions.

So I hope that the Minister will be able to answer some questions on the specifics of the SI today. How many businesses did the Government speak to before moving forward with this tapering measure? The SI details the process of notice that needs to be given—21 days of consultation, allowing a response from the debtor then to be taken into account. What happens if, unreasonably, the creditor does not wish to accept the proposal? Would it then be for the courts to decide? Could any court fees then be payable? If the debtor does not win the case against them, will they then have to pay court fees as well as, possibly, the creditor? If the 21-day period begins just a few days before the measures are due to end in March next year, what does that mean for any of the disagreements going through between a creditor and a debtor? Will the 21 days that might start with the end of these provisions continue, with those rights secured? What are the Government doing to ensure that those who are concerned about the ending of the temporary insolvency measures seek effective advice early? How will the Government keep the measures under review?

The Joint Committee on Statutory Instruments drew this SI to the special attention of the House because it failed to comply with proper legislative practice. The most serious incident was a drafting error in a previous version, which meant that there would be a brief period during which no restrictions would apply, with the revocation provisions coming into force at the beginning of 28 September, before they were laid before Parliament. Does the Minister accept that the Government’s drafting mistake meant that Parliament was sidelined? With regard to the two-day gap—28 to 30 September—that was created by the initial version of this instrument, how many businesses were issued with winding-up orders on 29 and 30 September?

The Explanatory Memorandum states that the instrument is intended to

“help business get back to normal without facing a ‘cliff edge’”,

but Ministers need to recognise that the tail of recovery is set to continue well into next year and even the year after that. Therefore, I would like to hear from the Minister what assessment has been made of additional support that might be needed to get businesses through the next few months—especially when we place this statutory instrument in the context of the fuel supply, HGV and supply-chain crisis or crises in general. With a tough winter ahead and given the high number of Covid cases, the Government must ensure that support is not removed from businesses prematurely, which would have a catastrophic effect on businesses, high streets and communities across the country.

I first thank both noble Lords for their interesting and valuable contributions. Throughout this pandemic the Government have helped the companies that have been most affected by the restrictions that were necessary and were introduced to keep us all safe. Some of the issues raised today highlight how essential it is that we do not withdraw prematurely the help and support for those companies, now that they are able to reopen. We do not want to risk allowing them to fail now, because to do so would mean that all the support we have given so far is rendered pointless; and, of course, there would be a negative effect on the economy—on businesses and people’s jobs.

These new criteria seek to strike the right balance between the rights of creditors, who have not received payment for many months, and of their debtors, who would otherwise be viable were it not for the pandemic. In many cases, an unnecessary insolvency would be the worst outcome for all involved: for the company in question, for the employees and, of course, for the creditors.

These measures underpin the Government’s consistent message that discussion is essential between creditors and their debtors. They should continue to negotiate where possible to promote a return to full profitably for all involved, allowing debtors to return to their full pre-Covid financial health and to repay all their debts, not just debts to petitioning creditors.

The points raised have highlighted the importance of tapering the effects of the current temporary measures, and these targeted criteria seek to minimise the risk of unnecessary insolvencies while facilitating a gradual return to the normal operating of our world-class insolvency regime. These regulations will continue to provide much needed support for businesses, allowing them to concentrate their energies on continuing to trade and build upon the foundations of our economic recovery.

I will move on to address some of the points raised, starting with those made by the noble Lord, Lord Sikka. The SI does not amend the section of the Insolvency Act 1986 relating to winding-up orders. I note the point raised by the noble Lord about freezing bank accounts on a petition, but this was intended as part of the return of the framework back to normal operating. The noble Lord also raised several issues relating to company and insolvency law, none of which relates to this particular statutory instrument. A number of them went well beyond the scope of these regulations, but I can tell the noble Lord that we keep wider company and insolvency law frameworks under constant review and will not hesitate to bring forward amendments to the House if and when needed.

The noble Lord, Lord Lennie, asked how many stakeholders the Government have consulted and asked about user criteria. We have been in close dialogue with businesses and professional groups about these measures and their likely impact. Given that the effects of the Covid-19 crisis are still with us and businesses are still dealing with its impact, the consensus was that these measures are necessary to provide ongoing support to businesses that need it, while restoring some creditor powers.

The noble Lord asked how the court would decide whether a repayment proposal is reasonable. The courts are well versed in adjudicating on the grounds upon which a company winding-up order should be made and will be able to draw on their existing discretion and experience in that regard. If the company has had the time to present its proposals for repayment and still cannot satisfy the creditor, in many cases it is right that it should be wound up. However, having said that, the court will be able to refuse to make a winding-up order where it appears that a creditor is attempting to abuse the winding-up process.

The noble Lord also asked why the moratoriums preventing the forfeiture of commercial leases and the suspension of the CRAR regime end on 25 March 2022 when the rest of the measures expire on 31 March 2022. The primary objective of the tapering measures is to allow a gradual return to the normal operation of the insolvency regime, whereas the commercial rent element was included so as to not undermine the rent arbitration system before it is introduced.

I remind the noble Lord, Lord Sikka, that I said in my opening remarks that the legislation is being introduced in the House of Commons today. The Government will monitor closely how this temporary measure is working and, as ever, we will bring amendments to this House if necessary. No petitions were made during the period that the noble Lord referred to.

I think I have dealt with all the questions that were asked. I thank noble Lords again for their contributions to this debate and commend these regulations to the Committee.

Motion agreed.