New Clause 15 - Repeal of rules relating to the submission of D1 forms in hard copy

Deregulation Bill – in a Public Bill Committee at 4:00 pm on 25th March 2014.

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‘(1) Section 3 of The Insolvent Companies (Reports on Conduct of Directors) Rules 1996 is amended in accordance with subsection (2).

(2) Leave out subsection (2) of the Rules mentioned in subsection (1) and insert—

“(2) Such a report shall be made in the manner most economically efficient and convenient, whilst retaining the necessary confidentiality and security provisions.”.

(3) Within six months of this Act coming into force, the Secretary of State shall establish a new online form for the submission of the information previously submitted via the Form D1 to enable the early identification of serious delinquent behaviour by directors.’.—(Toby Perkins.)

Brought up, and read the First time.

Photo of Toby Perkins Toby Perkins Shadow Minister (Business, Innovation and Skills)

I beg to move, That the clause be read a Second time.

I again draw the Committee’s attention to the donation from R3, in the form of work done for my office on bringing forward new clause 15, which is on the repeal of D1 forms hard copy rules. The bones of this new clause are that the original D1 form was brought in before certain technological developments. Section 3 of the Insolvent Companies (Reports on Conduct of Directors) Rules 1996 means that the D1 form must exist in hard copy, but that is expensive. Our new clause seeks to modernise the section by taking advantage of widespread technological developments.

The vast majority of British businesses work hard, and many are fighting hard to survive at a difficult time. A small minority of those businesses that have unfortunately gone under have done so as a result of malicious practice by a company director or directors. When a company goes under as a result of one of its directors’ actions, there are not only implications for all the business’ employees, but threats to all the creditors—often other businesses and suppliers. In many cases, the business going under brings down other successful businesses that are the victims of a bad debt that they had no reason to expect was about to hit them. If they are too reliant on that business, the actions of its director can often be catastrophic, and can bring perfectly healthy businesses down.

In each report where insolvency practitioners believe the director’s behaviour merits further investigation for potential misconduct, they must submit a D1 form. Figures that we uncovered through a parliamentary question in 2012 showed that 10 years ago, 45% of completed D1 forms eventually led to a disqualification of a director, or to a director being given an undertaking by the Insolvency Service. By 2010, that was down to 27%, and now just 21% of those reports lead to a disqualification.

In 2011-12, of the 5,401 reports submitted by insolvency practitioners, only 1,151 resulted in a disqualification or an undertaking. Perhaps unsurprisingly, during the downturn, even though there was not a huge number more businesses going under, the number of D1 reports increased dramatically, reflecting in those desperate times an increase in fraudulent or delinquent behaviour, but while there was a big increase in the number of D1 reports, there has not been a corresponding increase in the number of director disqualifications. The disqualification process has simply failed to keep up. More dodgy directors are getting away scot-free, and are able to repeat their practices and bring other companies down. Let us not forget who their innocent victims are: the employees, and the creditors and suppliers to that business, who through no fault of their own are often plunged into crisis.

One insolvency practitioner reported submitting a D1 form against a director who had presided over seven different failed businesses, only to be told by the Insolvency Service that it was not in the public interest to pursue  the case, and the director was free to set up an eighth business and do the same all over again. It is crucial to get this right to protect the public, jobs, and healthy, law-abiding, responsible businesses. No one wants a delinquent director to be left unchallenged, and to be free to continue to cause damage to other well-run businesses. It undermines the confidence of suppliers in the vast majority of responsible, well-run businesses, which become, understandably, obsessed with the fact that it might happen to them again.

The Government estimate that for every disqualified director, there is an £88,000 benefit to the economy—that is the value of the economic damage that would have been caused if that director had been allowed to go on. To put that in context, the number of directors disqualified is a tiny percentage of the number of businesses that go under. We all understand that when many businesses go under, it is not the fault of the director or a result of malicious or irresponsible behaviour. We are not calling for the director to be disqualified every time a business goes under. Failure is an important part of the business process, and we should encourage businesses to take responsible risks. We should recognise that sometimes businesses will go under, because the market has changed, demand has reduced, or for a variety of reasons that are not the fault of the director.

We are focusing on the small number of irresponsible directors and the fact that insolvency practitioners recognise what happens in a small number of cases. We have all had businesses in our constituencies telling us about a business that has gone under and left them with a huge debt. The way in which the system operates often leads, through a pre-pack arrangement, to a new phoenix business appearing, and someone being able to walk away from all their debts and starting up again with impunity. Other businesses owned by the same directors thrive, with all the debts parked in one business that is allowed to go under. When responsible businesses see that no action is taken against people who have often profited from the failure of their business, because of the arrangements they put in place, they feel very much aggrieved.

In these tough times, Labour understands that Government agencies must find ways to do more with less. When an insolvency practitioner is appointed to a case, they have a legal duty to file a report on the conduct of the director. If they believe the director to be guilty, they complete a D1 form and return it to the Insolvency Service. If they do not believe there is a case to answer, they complete a D2 form. The form used is huge and has not been redesigned in more than 20 years. It fills a box file and must be filled in by hand. In addition to huge unnecessary printing costs and the additional time it takes to fill in forms by hand, the Insolvency Service pays for motorcycle couriers to deliver the forms to the practitioners.

In answer to a parliamentary question, the Government admitted that they had no idea how much the couriers cost. They do not keep any record of that. In 2011, R3 set up a working group to design a new online form that would save money, contain better information, and allow the Insolvency Service to access the information they need more quickly. This would allow more dodgy directors to be pursued. It would also reduce Government spending and the costs attached to the insolvency process.  Those costs are taken away from the amount of money that can be, and that we all want to be, recycled back to creditors.

After around a year of work, the project was cancelled. The working group was told by the Department for Business, Innovation and Skills that any redesign of the form—even though the redesign is deregulatory in nature, helpful to small businesses, supportive of the profession in general, and beneficial to insolvency practitioners in getting more money back to creditors—would not be allowed, because of the moratorium on new regulation for micro-businesses. We had something that would deregulate and support micro-businesses, but because it was a new regulation on micro-businesses, it fell foul of the criteria that the Government had introduced—no doubt for all the right reasons, but it was a barrier to making the process better. That is despite that fact that 82% of insolvency practitioners want to change to an electronic system, according to R3’s survey. Indeed, the survey further reveals that 80% of micro-businesses in the insolvency profession—the very businesses the moratorium purports to protect—support the change we propose.

There can be few examples that so clearly demonstrate how a stringent and stiff approach to regulation, in which there must be one in, two out, or a moratorium on all regulation because all regulation is bad, damages the people the Government set out to support. It underlines the point that we need sensible regulation, rather than a simple approach in which all regulation is bad and all deregulation is good. Micro-businesses, which the Government have set out to help, have been thwarted in what they are calling for. Our proposal would lead to a more cost-effective service for business, the public and creditors. We have a chance today to put the system right and repeal the legislation, which was enacted in 1996, when very different technologies were available, and which sets out how a hard copy D1 form must be laid out. Our proposal would allow more efficient, electronic forms to be used in future. I am pleased to commend the new clause to the Committee.

Photo of Oliver Heald Oliver Heald The Solicitor-General 4:15 pm, 25th March 2014

I am grateful to hon. Members for making this suggestion. I understand the intention behind the proposals; indeed, they reflect proposals on which the Government have been consulting. I agree with the hon. Member for Chesterfield that it is important that directors whose misbehaviour results in insolvency are disqualified, and 1,000 were last year. As he indicated, each case saved creditors approximately £100,000. I do not think that there is any basic disagreement between us as to what needs to happen. With regards to disqualification numbers increasing with D1 reports, the point about a D1 report is that it is necessary in every insolvency case. In some cases, in a difficult economic period, it is not necessarily misconduct that has led to the insolvency, so there would not always be a disqualification.

Our proposals are a more comprehensive package of reforms to the way that director conduct is reported and considered. They include streamlining the way in which insolvency office holders report and allow electronic submission of information in a single form. Those reforms will bring two main benefits. First, office holders  will find it easier to report, both as regards the content and the form. Secondly, the reforms will improve engagement between the office holder and the Secretary of State, and therefore produce better information earlier, which will improve the efficiency and efficacy of the enforcement regime. Although the majority of directors of insolvent companies have acted in a fair and honest fashion, there are some who have not. Their actions cause harm to the business community and the wider public. That is why we are developing proposals to improve the protection afforded against such rogue directors.

The Government consulted on the reforms as part of the red tape challenge last year. There was broad support. I would like to recognise the valuable contribution made by R3—the representative body for insolvency practitioners—on these matters, and more generally I would like to mention its constructive role in developing proposals on how unnecessary costs in the insolvency framework can be reduced. The reforms are at an advanced stage of development, and the Government intend to introduce them at the earliest opportunity that parliamentary time permits. We understand the intent behind the new clause, but it does not provide sufficient clarity on what would replace the current form and how the various necessary protections would be provided. It is better to introduce reforms with the wider provisions that we have been consulting on, such as measures on what happens when one form of insolvency follows another, and provisions on how director behaviour is reported, how soon action must be taken and what the consequences are.

I hope that in the light of those assurances and given the general nature of my remarks, the hon. Gentleman will think that he has, in effect, achieved what he was hoping for, and will withdraw the amendment.

Photo of Toby Perkins Toby Perkins Shadow Minister (Business, Innovation and Skills)

I am grateful to the Minister for his comments. It is pleasing to think that we will see some progress on this issue; we can certainly work with the Government to speed that up. He said that he wants to bring things forward at the earliest opportunity; this would appear to be the earliest opportunity. He is suggesting that there is broad agreement on this measure. We want to tease out on Report how the ideas that we put forward in our new clause can be slightly refined—we have discussed that process in debate on many other clauses—and it seems sensible for us to push ahead and do that now.

I ask the Minister to reconsider whether the best way forward is not to go forward with the our new clause and recognise that there might be some refining of it on Report. However, this is the earliest possible opportunity for change, as he set out.

Photo of Jimmy Hood Jimmy Hood Labour, Lanark and Hamilton East

I assume that the hon. Gentleman is not withdrawing his new clause.

Photo of Oliver Heald Oliver Heald The Solicitor-General

Perhaps I may make one further comment—

Photo of Jimmy Hood Jimmy Hood Labour, Lanark and Hamilton East

Order. The Minister made his contribution and invited the hon. Gentleman to withdraw his new clause. The hon. Gentleman has not withdrawn it—I  have double-checked that with him, and he has told me he is not withdrawing it—so we should proceed to the vote now.

Question put, That the new clause be read a Second time.

The Committee proceeded to a Division.

Photo of Thomas Docherty Thomas Docherty Shadow Minister (Environment, Food and Rural Affairs)

On a point of order, Mr Hood. Would it be out of order for the Law Officer to chunter from a sedentary position that your judgment was ridiculous?

Photo of Jimmy Hood Jimmy Hood Labour, Lanark and Hamilton East

What is out of order is the hon. Gentleman intervening when I am putting a vote to the Committee.

The Committee having divided: Ayes 5, Noes 9.

Question accordingly negatived.