Clause 2 - Unfit directors of dissolved companies: Great Britain

Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill – in a Public Bill Committee at 11:45 am on 8th July 2021.

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Question proposed, That the clause stand part of the Bill.

Photo of Christina Rees Christina Rees Labour/Co-operative, Neath

With this it will be convenient to discuss the following:

Clause 3 stand part.

New clause 1—Duty to report on directors of dissolved companies—

“(1) The Secretary of State must lay a report before each House of Parliament no later than three months after the day on which this Act is passed, and during each three month period thereafter.

(2) Each report under subsection (1) must include the number of former directors of dissolved companies the Insolvency Service has—

(a) investigated; and

(b) disqualified

both in the three-month period prior to the report being published, and in total since section 1 came into force.”

This new clause would place an obligation on the Secretary of State to report the number of former directors of dissolved companies investigated and disqualified by the Insolvency Service.

New clause 3—Effectiveness of provisions on former directors of dissolved companies—

“(1) The Secretary of State must, no later than the end of the period of one year after the day on which sections 2 and 3 come into force, lay before Parliament an assessment of the effectiveness of the provisions in section 2 and 3 of this Act.

(2) The assessment must include consideration of—

(a) the extent to which the provisions have achieved their objectives;

(b) the interaction of the provisions with other law and policy relating to the investigation and disqualification of directors; and

(c) possible related changes to law and policy.”

This new clause would place an obligation on the Secretary of State to publish an assessment of the provisions in section 2 and 3 of this Act.

Photo of Luke Hall Luke Hall Minister of State (Housing, Communities and Local Government)

I am grateful to the Committee for its useful input in the discussion so far. I welcome the opportunity to talk further about our insolvency regime, which is an international leader on speed and efficiency, returns to creditors and cost. A strong insolvency regime must be backed up by efficient and robust enforcement to tackle wrongdoing, and the UK has a first-class regime to deal with regulatory breaches, whether through criminal proceedings or disqualifying individuals who have shown themselves unfit to act in the management of a limited company.

It will not escape the Committee’s notice that the Company Directors Disqualification Act 1986 contains provisions that allow disqualification proceedings to be sought in live companies and in insolvent companies but not in dissolved companies. That is a loophole that has been exploited by unscrupulous company directors, and we heard many examples of that earlier in the week. For example, we have seen many instances where a company is dissolved in order to dump debts, such as those owed to the taxman or employment tribunal awards, only for a new company to pop up, running with the same directors in the same building, sometimes even with the same staff.

The process of allowing one company with debts to drop off the register and starting a new company without the burden of debt is sometimes known as phoenixism. We heard many worrying examples of that earlier this week and on Second Reading. We are therefore seeking to increase the scope of the CDDA to make it possible to challenge director misconduct, even where a company has been struck off the register and dissolved. The clause amends various sections of the CDDA, which will improve the enforcement regime by applying investigation and disqualification processes to former directors of dissolved companies.

On the whole, the amendments apply similar processes and standards to those cases as already exist for disqualification of directors of insolvent companies. That includes the option for a former director of a dissolved company to provide a disqualification undertaking to the Secretary of State rather than face court proceedings. Clause 2(2) amends section 6 of the CDDA to give a power to the court to make a disqualification order on the application of the Secretary of State where it is satisfied that a person was a company director of a dissolved company, and that their conduct makes them unfit to be concerned in the management of a limited company. It also clarifies which court has jurisdiction to make an order for the winding up of the company.

Clause 2(3) amends section 7 of the CDDA. It sets out that, where an application for a disqualification order against a former director of a dissolved company is made, it must be before the end of the three years, starting with the date of dissolution of the company. That mirrors the situation for insolvent companies, where a disqualification order must be made within three years of the date of insolvency. Clause 2(3) also makes an important amendment to section 7(4) of the CDDA to expand the power of the Secretary of State to investigate director conduct in dissolved companies. The outcome of such investigations will provide the evidence for disqualification proceedings and establish that public interest criteria are met.

Section 8ZA of the CDDA allows for the disqualification of a person where they have exerted influence over another person who has been disqualified as a result of their conduct as a director of an insolvent company. If the court is satisfied that the disqualified person acted under the instructions of another person, it may also disqualify that person on an application made by the Secretary of State under section 8ZB. Clause 2(4) and (5) amend those sections of the CDDA so that a similar application may be made by the Secretary of State where a former director of a dissolved company has been disqualified but acted under the instructions of another person. Again, that mirrors the current position with regard to disqualification in insolvent companies.

Sections 15A to 15C of the CDDA deal with the question of compensation to creditors where they have suffered losses due to the actions of a disqualified director. If the court is satisfied that that has happened, it may make an order for the disqualified director to make compensation payments to creditors from their own funds. Alternatively, a disqualified director may give an undertaking to the Secretary of State to make compensation payments as a way to avoid court proceedings. Clause 2(6) amends section 15A of the CDDA to bring the disqualification of former directors of dissolved companies into scope for compensation orders or undertakings.

The provisions of the CDDA apply beyond the companies registered at Companies House. Sections 22A to 22H apply the disqualification provisions to, among others, directors of building societies registered under the Building Societies Act 1986, directors of NHS foundation trusts, and trustees of charitable incorporated organisations, but only companies registered at Companies House will use the dissolution procedure of the Companies Act 2006, so clauses 2(7) and (13) make amendments to those sections to remove any references to dissolved companies, which have been added by clause 2, when those cases are being considered. Finally, clause 2(14) clarifies that the new provisions will apply to former directors’ conduct in all dissolved companies, including companies that were dissolved prior to commencement. The CDDA applies to England, Scotland and Wales, so the clause applies in those jurisdictions.

I will also speak to clause 3, as the matter of who may be appointed as a company director is one for which legislative competence is transferred to the Northern Ireland Assembly. Clause 3 applies similar provisions to those in clause 2, except that they are applied to the Company Directors Disqualification (Northern Ireland) Order 2002. A legislative consent motion has been provided by the Northern Ireland Assembly, so I hope the Committee will agree that the changes will increase confidence in doing business across the UK, protect the business community and the wider public from the actions of delinquent directors, and send a strong message that the dissolution procedure may not be abused. I recommend that clauses 2 and 3 stand part of the Bill.

Photo of Seema Malhotra Seema Malhotra Shadow Minister (Business, Energy and Industrial Strategy) 12:00 pm, 8th July 2021

It is a pleasure to serve under your chairship, Ms Rees. I thank the Minister for outlining in some detail the legislation before us and the rationale for clauses 2 and 3 of this short but important Bill. As my hon. Friend the Member for Manchester, Withington stated, and as we both outlined at Second Reading, Labour is broadly supportive of the Bill, including the measures to close the dissolution loophole, which are needed to help tackle phoenixism, and which had almost unanimous support in all the oral and written evidence that the Committee received. There was also support for allowing action retrospectively; it is a welcome addition to the insolvency framework.

As the Committee heard from witnesses on Tuesday, unscrupulous directors can cause significant suffering to those who have invested in, or provided loans to, their company. We have also heard that the payment of employment tribunal awards can be affected. Too often, corrupt directors are able to absolve themselves of their financial responsibilities through dissolution, due to the time and money required for creditors to restore the company before being able to take action against it or the directors. As we heard in evidence, the Bill should therefore positively impact on creditor confidence. We also know that the taxpayer is now becoming a victim of this process, and that the action being taken is more limited due to the blunt tools and insufficient powers currently available, as unscrupulous directors seek to avoid paying back covid support loans.

It is therefore welcome that clauses 2 and 3, which deal with Great Britain and Northern Ireland respectively, remove the requirement for a dissolved company to be restored before the Government can act. The key change being made is that the powers available to the Secretary of State to investigate former directors of insolvent companies will be extended to cover dissolved companies. It will become easier for the Government to investigate the conduct of dissolved companies and, consequently, to seek disqualification orders or undertakings if desired.

However, although the clauses are a positive step, there are a number of concerns, most notably around the resourcing of the Insolvency Service, the Government’s plans and performance in relation to action taken in the investigation and disqualification of directors, and Parliament’s ability to scrutinise the outcomes of the legislation. Those gaps will, in our view, significantly limit the potential effectiveness of the Bill in its efforts to tackle financial corruption—potentially costing creditors, the Government and the public billions of pounds. Labour is calling for new clauses 1 and 3, tabled in my name and that of my hon. Friend the Member for Manchester, Withington, to be added to the Bill to address those gaps.

New clause 1 would place an obligation on the Secretary of State to lay a report before the House every three months following the passing of the Bill, outlining how many directors have been investigated and disqualified by the Insolvency Service. New clause 3 would place an obligation on the Secretary of State to publish an assessment of the provisions in clauses 2 and 3 of the Bill a year after it comes into force. That assessment would consider the extent to which the provisions have achieved their objectives, the interaction of the provisions with other law and policy relating to the investigation and disqualification of directors, and possible changes to law and policy.

In relation to new clause 1, I will outline some concerns on resourcing for investigations and action, including disqualifications. As Duncan Swift, the former president of R3, highlighted on Tuesday, the Bill could result in the Insolvency Service taking on “10 to 15 times” the number of investigations that it currently undertakes. However, there is no indication in the Bill, or in the Government’s intentions around it, that the Government plan to increase funding and resources at all for the Insolvency Service, let alone by 10 to 15 times, to allow it to cope with that potentially huge increase in workload.

That is despite the fact that R3 members, as identified in its evidence, often report encountering cases showing significant legal breaches by directors that, to their surprise, do not lead to disqualification. Several witnesses have suggested that the Insolvency Service is woefully under-resourced as it is. Without the necessary extra funding and resources for the Insolvency Service, the Bill’s aims of disqualifying unscrupulous directors or seeking undertakings simply will not be met. In fact, the measures introduced by the Bill may come at the expense of what the Insolvency Service is currently able to do in terms of investigating insolvent companies.

On top of that, we know that the Insolvency Service cannot apply to court for the disqualification of a director whose company has been dissolved for three years or more. That means that the Insolvency Service does not just need the extra resources to carry out those additional investigations, but needs to carry them out promptly and within the three-year timeframe. As Dr Tribe summarised on Tuesday, the Insolvency Service

“needs to be properly funded to ensure that this additional disqualification work can happen.”––[Official Report, Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Public Bill Committee, 6 July 2021; c. 18, Q29.]

All may go smoothly. There may be no backlog, no issues and no need to review the effectiveness of the legislation in meeting its goals, but we need to know that, and Parliament must be able to scrutinise in a timely and effective way. I hope that the Minister will support Labour’s call for new clause 1 to be added to the Bill, because surely this will be a report that he, too, will want to receive. On Second Reading, the Minister for Small Business, Consumers and Labour Markets said that the Government

“will be working with the Insolvency Service to ensure that it has the resources to do its job.”—[Official Report, 28 June 2021; Vol. 698, c. 83.]

Those may have been reassuring words to get us through this week, but we want to be able to see the outcomes of the process and how well the system is working. Surely that is in all our interests, both as parliamentarians and as constituency MPs.

New clause 1 would ensure regular reporting on the number of directors of dissolved companies investigated and disqualified by the Insolvency Service. In doing so, it would provide oversight and scrutiny around the Insolvency Service’s ability to implement the measures in the Bill. It would alert the House to any resourcing issues facing the Insolvency Service and evidence the need for extra funding in order to fulfil the aims of this Bill.

Another significant gap in the Bill is the lack of detail surrounding how the Government plan to act following the potential disqualification of directors. Disqualification itself does not provide measures for repayment so, on its own, it is not enough of a deterrent to prevent directors from acting unscrupulously. As Duncan Swift summarised on Tuesday:

“The serious rogue directors do not see being disqualified as a significant deterrent.”––[Official Report, Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Public Bill Committee, 6 July 2021; c. 60, Q96.]

What does represent a deterrent is being held to account for misappropriated assets and having personal liability for actions wrongfully undertaken as a director. Compensation orders are mentioned in the Bill. Since they have been introduced, very few compensation orders have been issued and their effectiveness has been unclear. Insolvency is a tried and tested way of recovering monies owed to creditors. Thousands of insolvency procedures take place every year that return hundreds of millions of pounds to creditors, but these processes are not without time, cost and considerable stress.

In order for the Insolvency Service, the courts and creditors to have clarity over what this Bill means, the Government should address the legislative gap. In order for the Bill to be effective, they must ensure this policy acts as a deterrent to unscrupulous directors and allows the aims of this Bill to be met.

That is why Labour has tabled new clause 3, which I am speaking to now. It would ensure that an annual assessment was made of the Bill’s effectiveness in acting as a deterrent to unscrupulous directors and at recouping owed monies. It will encourage the consideration of changes to the Bill to aid its effectiveness, making up for the current gaps in the Bill’s detail.

Clauses 2 and 3, which makes the same change to legislation in Northern Ireland, are broadly welcomed by the Labour party. We are pleased that a legal loophole, exploited for too long by unscrupulous directors, will finally be closed, but the Bill does not contain the details and or provide the oversight that Parliament needs to scrutinise its effectiveness and the outcomes it seeks to achieve. That was why we tabled new clauses 1 and 3: to ensure that the Insolvency Service is given the funding it needs to carry out the Bill’s goals, and to see disqualified directors repaying their loans and being held accountable for their liabilities in the most effective way.

I hope that the Committee sees the value of these new clauses and what they bring to the Bill, and I look forward to the Minister’s response.

Photo of Luke Hall Luke Hall Minister of State (Housing, Communities and Local Government)

I again thank the Opposition for the constructive way in which they have approached this useful discussion throughout the passage of the Bill. I am grateful for the contributions on new clauses 1 and 3, which would require the Secretary of State to make reports every three months to Parliament on the number of directors investigated and disqualified under the provisions in the Bill, and to report their effectiveness after one year.

I reassure the Committee that the Insolvency Service routinely produces insolvency statistics, covering company insolvencies in the UK and individual insolvencies in England and Wales, as well as some of the underlying data alongside that. These are published online, available to everybody, every three months. At the start of the pandemic, the Insolvency Service undertook to provisionally add experimental monthly data releases concerning insolvency numbers. In this way, the statistics could act as an indicator on the pandemic’s impact on insolvencies.

As well as the quarterly releases of insolvency statistics, information about the Insolvency Service’s enforcement activities is published and updated monthly. This data includes the number of companies wound up in the public interest and the number of disqualification orders and undertakings, broken down by the relevant section of the CDDA under which they were sought. Information on the length of the periods of disqualification is included and there is an annual report on the nature of the misconduct being alleged.

Through online searches, people can see that a wealth of information is already provided. In future reports, enforcement outcomes will also include any disqualifications made against former directors of dissolved companies. In addition, an undertaking has been given in the impact assessment for the Bill to produce a post-implementation review of the measure to allow for investigation and disqualification of former directors of dissolved companies. That review will be done within five years of the commencement of the measure, which is in line with better regulation requirements. The exact form of the review is yet to be determined, and I am happy to work with the Opposition and hear their views about it. It is likely to be informed by the case numbers and to include an assessment of whether the powers are capable of being used as intended. I hope that that reassures hon. Members that there will be a review of the new provisions, and that they will therefore not press the new clauses.

On the resourcing point that the hon. Member for Feltham and Heston raised, the Insolvency Service employs its finite resources to maximum effect. It tries to prioritise cases where there has been most harm to the public and the wider marketplace. While it is clear that the resources of the Insolvency Service are not limitless, they are sufficient to take forward all cases where there is a realistic likelihood that investigation will result in the disqualification of directors, bankruptcy restrictions, the winding up of a company in the public interest or a successful prosecution. All cases requiring further investigation are prioritised and allocated so that the most serious cases are dealt with first. The Insolvency Service, the Department for Business, Energy and Industrial Strategy and the Treasury continue to work closely to respond to bounce back loan fraud, including by determining the resources that are required to tackle these cases.

The hon. Lady made a point about time limits. I reassure Members that the time limit referred to in the Bill does not relate to when the misconduct occurred. An application for a disqualification order may be made within three years of the date on which the company was dissolved, but that period can be extended with the leave of the court. That mirrors the provision for the investigation of conduct in companies subject to insolvency proceedings, where the period during which a disqualification application may be made is three years from the date the company becomes insolvent.

At present, the average time between the commencement of an insolvency to the stage of an investigation where a decision is taken to start proceedings is about 15 months. The bounce back loan scheme was launched on 4 May, so we are confident that a period of three years will be sufficient in most cases for an investigation into the conduct of former directors of dissolved companies with unpaid bounce back loans to be properly undertaken. We should also be clear that there is no limit to how far back conduct can be considered in evidence to support a disqualification report.

I hope that that offers some reassurance to Opposition Members. I am happy to work with them on the detail as we move through the passage of the Bill.

Photo of Christina Rees Christina Rees Labour/Co-operative, Neath 12:15 pm, 8th July 2021

Mr Grant, would you like to speak on these provisions before I put the Question?

Photo of Peter Grant Peter Grant Shadow SNP Spokesperson (Europe), Shadow SNP Deputy Spokesperson (Treasury - Chief Secretary)

I am very grateful for your understanding, Ms Rees, in allowing me to speak. I would like to make some comments on clause 2. I think that the new clauses are good and I hope that the Committee will agree to them.

There is widespread agreement that clause 2, or something very like it, is needed. We have seen only one dissenting submission from anybody, and that was from an individual solicitor. Speaking as a legal layperson, I thought that that submission contained inconsistencies and seemed almost to miss the point of the legislation. Although I respect the right of that individual to express their views, I cannot agree with them.

We already have legislation that gives the Insolvency Service three years to apply for a disqualification order against the director of a company that goes through a full liquidation if it finds evidence of misconduct in the running of the liquidated company. If the director chooses to dissolve the company without going through liquidation first, the Insolvency Service cannot move to have them disqualified from other directorships for misconduct in the running of the dissolved company.

To indicate how untenable that inconsistency is now that it has been identified, I invite the Committee to imagine that the clause we are debating had been included in the Company Directors Disqualification Act right at the beginning. If somebody had come forward with a proposal to change the Act to create a special exemption for directors who deliberately dissolved their company as a way of dodging the consequences of the own misconduct, nobody would have taken it seriously. We would not create a loophole deliberately. The only disappointment I have is that the proposal to close this loophole has taken so long and that there are still far too many other loopholes for criminals to exploit.

I want to repeat a comment I made on Second Reading, and on which I asked a number of the witnesses to comment on Tuesday. The Government rightly point to the increase in phoenix companies that are set up as part of, or immediately after the dissolution of, a dodgy company. A similar abuse can and does take place where the phoenix company is a long-established associate company of the one being dissolved. The abuse does not rely on a new company being set up if the directors have a few handy replacement companies already in the bank, or on the Companies House register.

During the evidence sessions, I asked a number of witnesses if they had any concerns about the retrospective nature of clause 2. It is important to remember, as the Minister has pointed out, that we are not retrospectively outlawing something that was legal at the time; all we are saying that if someone is strongly suspected of having acted improperly or illegally in the past, that misconduct can be properly investigated. We are not even giving additional powers to the regulator to act; we are removing an artificial barrier that should probably never have been there in the first place to allow that investigation.

We heard an interesting range of views from witnesses on the three-year time limit. As the Minister pointed out, that limit applies from the date of dissolution, not the date of misconduct. If, for example, the directors of a company dissolved it in 2019 because they realised that their misconduct of 2015 was beginning to be picked up by the Insolvency Service or anyone else, they would not get away with it. For now, I think it makes sense to retain the three-year limit that applies elsewhere in the original Act, but I ask the Minister to give careful consideration to extending the limit in future legislation.

In other debates, I have referred to the scandalous way in which Blackmore Bond plc targeted very high-risk investments at people it knew were looking for quite the opposite—a safe place to invest money they could not afford to lose, as they had told the directors of Blackmore Bond. The investors have lost pensions and life savings totalling £46 million. The shareholder directors, Phillip Nunn and Patrick McCreesh, still appear to be doing very nicely indeed, thank you very much.

In 2015, the Insolvency Service, as part of a much bigger investigation into at least one other company, found that through an earlier company called Nunn McCreesh limited liability partnership, the same Phillip Nunn and Patrick McCreesh had been paid nearly £900,000 to identify investors for Capita Oak—an investment scheme that is now under investigation by the Serious Fraud Office. At the very least, there are major questions about what Nunn and McCreesh did for their £900,000 and about whether it was legal or proper. Perhaps by complete coincidence, also in 2015, Nunn and McCreesh dissolved the limited liability partnership.

Under the existing legislation, the Insolvency Service would not have been able to use any misconduct in the running of Nunn McCreesh llp to apply for disqualification orders against Nunn and McCreesh. It could not have stopped them from setting up the much more lucrative Blackmore Bond in 2016. The Bill still would not allow it to do so because of the three-year time limit. That is one reason I am asking the Minister to consider the three-year limit in future.

At least this legislation means that if another Nunn McCreesh llp comes along now, the Insolvency Service will have one small but important additional weapon in its armoury to stop it. It came too late to stop Blackmore Bond making £46 million by making other people’s money—other people’s life savings and pensions—disappear. Hopefully, the next Blackmore Bond will be stopped in time and that will not happen again.

It took only the briefest of searches this morning to find that Phillip Nunn, one of the directors of Blackmore Bond and Nunn McCreesh, was a director of no fewer than 10 different companies that have been dissolved in the past year. For most of them, the only other director was Patrick McCreesh. I do not know whether Mr Nunn or Mr McCreesh was ever placed under formal investigation for their part in Capita Oak, and I do not know what was in the liquidator’s report that was submitted to the Secretary of State about their conduct, as happens with any insolvency case, but surely the fact that they were able to dissolve the company in 2015 should not make any difference to the investigations to which they can be subjected now or the sanctions they can face if they are found or suspected to be guilty of serious misconduct in the operation of Nunn McCreesh llp or any of their other companies. When I was looking at the activities of Blackmore Bond, one of the other companies with which it went into what was called a strategic partnership led to another of these fascinating spider’s webs of dissolved companies and resurrected companies, one of which has an ultimate owner that is a limited liability partnership registered in England with five partners who appear to be members of the same family—two people of similar age who are the designated partners, and three people about 25 to 30 years younger than them who are partners but not designated. It looks like mum, dad and kids—why not?

According to documents that the senior designated partner certified and submitted to Companies House, which Companies House accepted and still has displayed on its website, one of those younger partners consented to the responsibility of being a partner in that partnership when she was 16 years old. One of them, according to those documents, consented to those responsibilities when she was 14 years old. One of them was 10 years old.

Some of our witnesses referred to the gross inadequacies in the processes of Companies House for checking the documents that are submitted to it. Those documents are being used to demonstrate that a company is genuine and bona fide. Those kinds of thing make it clear to me that while the Bill should be supported today and while the clause should be adopted with or without the related new clauses suggested by the main Opposition party, there are still massive holes in our regulation of companies through the Financial Conduct Authority, Companies House and the register of companies, the Financial Reporting Council and the professional auditing bodies.

Not a single part of the regulatory framework is working properly. Sometimes that is because the regulators are not doing the jobs that they are there to do. Sometimes it is because they are not resourced and do not have the firepower to compete with some of what they are faced with. Sometimes it is because the legislation we have provided them with is not fit for purpose. When those three things come together in so many regulators at the same time, it is no wonder, as one of our witnesses pointed out, that the United Kingdom is seen as one of the softest of soft touches for fraudulent companies. An entire company can be set up for no other reason than to steal people’s money.

I welcome the Bill, I certainly support clauses 2 and 3, and I will recommend that the Bill be supported when it returns to the House on Third Reading, but it is only a tiny step on a much longer journey. I urge the Minister and his colleagues in Government not to see the Bill as the last step, but to see it as the first in making the United Kingdom, whatever format it might take in the future, and all our four nations no-go areas for the scammers, chancers and charlatans for whom we have been far too soft a touch for far too long.

Photo of Luke Hall Luke Hall Minister of State (Housing, Communities and Local Government)

I thank the hon. Gentleman for his powerful contribution; he is extremely well informed on these matters. I thank him also for his support and take into account his comments on the three-year limit. I am grateful for that.

The Government are certainly not pretending that the work stops here. However, the Bill is a positive step forward in the right direction and it is taking action. I will raise the points the hon. Gentleman has made today with the Under-Secretary of State for Business, Energy and Industrial Strategy, my hon. Friend the Member for Sutton and Cheam.

Question put and agreed to.

Clause 2 accordingly ordered to stand part of the Bill.

Clause 3 ordered to stand part of the Bill.