Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill — House of Lords, 2021-12-01
Topic: Mixed Topics
Martin Callanan (Conservative, Centre-right): My Lords, Amendments 4, 5 and 6 seek to put reporting requirements into statute, and I am happy to comment on them. I am grateful to noble Lords for giving me the opportunity to talk both about the process of investigation and disqualification and the reporting work that the Insolvency Service already undertakes. I also put on record my thanks to the noble Baroness, Lady Blake, the noble Lord, Lord Fox, and my noble friend Lord Leigh, for the very constructive and helpful meetings that we have had in the lead-up to this debate Before I talk specifically about resourcing and reporting of investigative outcomes, let me take some time to remind noble Lords of the process which leads to the disqualification of company directors, focusing on the situation where a company is subject to insolvency proceedings—which is different to the situation where a company is dissolved. The officeholder, whether they be an administrative receiver, a liquidator or an administrator, must report to the Secretary of State on the conduct of the directors of the company within three months of the company going into insolvent liquidation, administration or administrative receivership. Upon receipt of this conduct return, the Insolvency Service will assess the information provided to prioritise the case in terms of its public interest. Factors that could be considered—for the benefit of my noble friend Lord Leigh—might be the seriousness of the misconduct in terms of the damage caused, the previous behaviour of the director in question and the need for protection of the public from the actions of the director. This assessment is used to prioritise the most serious cases, which are then investigated using the powers in the Company Directors Disqualification Act 1986 Of course, not all investigations will lead to disqualification proceedings being brought. One outcome of the investigation might be that the director acted reasonably given the information that was available to them at the time, and if this became apparent then the investigation would be concluded. Where there is evidence of misconduct, though, and the Secretary of State is satisfied that public interest criteria are met, disqualification proceedings may be sought, either through an application to the court or through the director giving an undertaking not to act as such for a period of time, depending on the determined seriousness of the misconduct. An application for disqualification must not be made after three years from the start of the insolvency proceedings unless the court gives its permission. For unfit directors of insolvent companies, the period of disqualification can be between two and 15 years Following on from successful disqualification proceedings, if it can be identified that the director’s conduct caused losses to creditors, then the Secretary of State may seek payment from the director for their benefit by way of disqualification compensation. As with the disqualification proceedings, this may be dealt with by way of an application to a court or by an undertaking given by the director. Compensation may be paid to the Secretary of State for the benefit of a specific creditor or creditors, or a specific class or classes of creditors, or instead may be paid to the insolvency officeholder for the benefit of all creditors Compensation work is undertaken by investigators at the Insolvency Service, so as much of the money as possible may be returned to creditors. I confirm for the benefit of the noble Lord, Lord Fox, and my noble friend Lord Leigh, that no preference is given to any particular creditors or groups of creditors, other than that the compensation payments are for the benefit of those who have lost out as a result of the misconduct. It is important to note also that, if the insolvency officeholder had already used the various provisions in the Insolvency Act 1986 which allow them to seek recoveries for the benefit of creditors, such as the fraudulent or wrongful trading provisions, then compensation would very probably not be sought for the conduct which led to those claims so that the directors would not face double jeopardy Noble Lords will have seen that the Bill gives a similar standing to the new measures to investigate and disqualify former directors of dissolved companies as currently exists for insolvent companies and they use the same sections of the Company Directors Disqualification Act. Unlike insolvent companies, though, there will not be an officeholder in a dissolved company, so the investigation process will not start with a report on the director’s conduct. Instead, the Secretary of State will in most cases be alerted to potential misconduct through complaints received by members of the public. This will not mean that conduct reports provided by insolvency officeholders will be overlooked in favour of complaints received in dissolved companies. All will be assessed in terms of their relative seriousness and the level of public interest. A disqualification application must not be made after three years from the date of dissolution unless the court gives its permission This would perhaps be an appropriate point in my remarks to pay tribute to the excellent work of insolvency practitioners, who provide the conduct returns to the Insolvency Service, and who in many cases continue to assist with the investigative effort beyond that initial assessment Noble Lords may well recall that these measures were developed and consulted on back in 2018, before any of us had even heard of a disease called Covid-19 or a bounce-back loan. At the time, the Insolvency Service had been receiving a regular low level of complaints about the abuse of the process of company dissolution. Many of those complaints concerned its use in phoenix companies—where one company is dissolved only for another to spring up essentially doing the same thing but without the debts. Because of the dissolution, the Insolvency Service had been unable to take action against the directors responsible. The opinions of stakeholders on new powers to tackle this kind of misconduct were sought, and these were generally fairly positively received. Implementation of the measures has now become even more important and more urgent because of the risk of abuse of the dissolution process to avoid repayment of bounce-back loans This brings me to the question from the noble Baroness, Lady Blake. I can tell the noble Baroness that the Bounce Back Loan Scheme closed for new applicants on 31 March 2021. At the time of the scheme’s closure, £47.4 billion-worth of finance had been provided to some 1.5 million businesses. Given the levels of uncertainty around the economy and the virus, the anticipated fraud levels are very preliminary and speculative. They are not based on any repayment data because that did not even begin until May 2021 I make a final point on the process for disqualification. I can confirm to my noble friend Lord Leigh that it would not be necessary for a company to be restored to the register for the conduct of its directors to be investigated, and the same applies if and when compensation is sought from a disqualified former director of a dissolved company. There will be no automatic restoration process, nor is there any need for one for the purposes of the investigation and disqualification. This way, the costs and administrative burden of restoration can be avoided.