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.
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I turn now, if I may, to the amendments seeking to establish a statutory reporting requirement for investigations and the resourcing of the Insolvency Service.
I am pleased to confirm to noble Lords that, under an existing statutory requirement, Her Majesty’s Treasury directs the Insolvency Service to report annually on its work and finances. This is pursuant to a power in Section 7 of the Government Resources and Accounts Act 2000. Its annual report and accounts include both an overview and an analysis of the agency’s performance over the course of the year. There are sections on how it makes use of resources available, including those used for enforcement activities and enforcement case studies, including disqualification and criminal prosecution. The report also includes information on how much money was returned to creditors during the year. Full accounts are provided, which are audited and signed off by the Comptroller and Auditor-General, and the whole package is available to everyone online. Going forward, the annual reports and accounts will of course include relevant information on the new measures as part of the enforcement reporting package.
In response to a question from my noble friend Lord Leigh, specific information on money returned to creditors from compensation orders has not previously been published, as they are relatively new in this framework. However, I have asked the Insolvency Service to consider how this can best be achieved when such information becomes available. In addition, the Insolvency Service regularly makes available a large amount of insolvency and enforcement statistics and, again, these are readily available online.
Specifically regarding enforcement activities, the number of disqualification orders is published and updated monthly, and a breakdown of disqualification orders and undertakings obtained by the relevant section of the Company Directors Disqualification Act under which they were sought is provided. Other information provided on a monthly basis includes lengths of periods of disqualification. Furthermore, there is an annual report on the nature of misconduct in disqualification allegations. Future releases of statistical information will include the number of disqualified former directors of dissolved companies.
I note the concern of the noble Lord, Lord Fox, and my noble friend Lord Leigh about the reporting of how much money will be returned to creditors, and of course the Government are also concerned about getting money back for taxpayers. But I should emphasise that this measure expands the Secretary of State’s powers to investigate and disqualify culpable directors, and disqualification itself is not a process which is a mechanism for returning money to creditors. Instead, it is intended to protect creditors from future losses caused by those directors who, through their reckless or irresponsible behaviour, have shown themselves unfit to hold that position—and to deter others from behaving similarly.
The Secretary of State’s power to seek compensation from disqualified company directors was a welcome addition to the enforcement regime in 2015, which will obviously benefit from these new cases. Nevertheless, the purpose of the legislation is primarily as I described.
On the part of the amendment that requires a statutory review of the effectiveness of the mechanism for the new investigation and disqualification measures, I hope that noble Lords will be pleased to note that the
Bill’s impact assessment gives an undertaking for a post-implementation review to take place within five years of commencement. As well as being in line with better regulation requirements, this will ensure that a proper assessment is undertaken of whether the use of the new powers has been effective.
Finally, I know that noble Lords, in particular the noble Baroness, Lady Blake, are keen to ensure that the Insolvency Service is sufficiently resourced to tackle wrongdoing and misconduct. Following the outcome of the spending review 2021, the Government are currently considering the resourcing level needed for the Insolvency Service to undertake its statutory functions, and that includes the additional proposed enforcement requirement contained in the Bill, should it be passed by the House. That process is ongoing, with budgets set to be finalised ahead of the next financial year.
I apologise for the length of my reply, but I hope that I have been able to satisfy noble Lords and reassure them that all the information they seek through their amendments will be published—some as part of an existing statutory requirement—and that the reviews that they look to secure are in fact already in place. Once again, while thanking all noble Lords for their contributions, their continued interest in this Bill and, of course, for their amendments, I hope I have been able to convince them not to press their amendments.