Corporate Insolvency and Governance Bill: Second reading in House of Lords

10 June 2020

Following on from last week's debate in the House of Commons, where it passed through all its stages in the lower chamber in one day, the Corporate Insolvency and Governance Bill had its second reading in the House of Lords yesterday (10 June). The Hansard transcript of the second reading can be read here.

Once again, R3 was mentioned by name by several Peers, while many of the points we raised on behalf of the insolvency and restructuring profession with members of the Lords were also aired – with the issue of granting preferential status to HMRC from December most prominent among them.

The debate

As in the Commons, the opening speech of the session on the Bill, delivered by Lord Callanan, mentioned R3, with the Minister quoting R3's view that:

"The proposed legislation will give both solvent and insolvent businesses crucial breathing space and increased legislative flexibility to review options without being pushed prematurely into an insolvency procedure. This new approach could make a significant contribution to repairing the economic devastation caused by the current pandemic."

Responding, the Shadow Minister, Lord Stevenson, brought up the point that giving HMRC a higher place in the insolvency waterfall will "[run] a coach and horses through this Bill", as it will make business rescue – one of the Bill's aims – more difficult, by making rescue finance for struggling but potentially viable businesses much harder and more expensive to obtain. (The HMRC proposals are contained in the Finance Bill 2020, which is also due to be debated in the House of Lords later this month.) Lord Stevenson added:

"Many issues need a cross-government approach, which is appropriate. Our insolvency framework touches almost every part of the economy and helps to create the confidence and public trust which underpin trading, lending and investment."

Baroness Burt of Solihull was one of several Peers to expand on the topic of preferential status for some kinds of tax debts, calling for the proposals to be mitigated, if not scrapped altogether:

"At the very least, can the policy be paused so that a proper impact assessment can be done or could a 12-month cap on age debts eligible for preferential status be imposed? Would the Minister consider an amendment ensuring HMRC's preferential claim does not outrank floating charges created before December 2020?"

She also raised the issue of how suppliers may be put at an inadvertent disadvantage by the new rules around 'essential supplies' to insolvent companies:  

"...small suppliers are required to continue supplying a company which has succeeded in obtaining a moratorium. Given small suppliers' position at the bottom of the creditor waterfall, what protections will be in place to prevent small businesses having to continue supplying an entity that may then enter an insolvency procedure?"

Minister's response

It was disappointing that the Minister's response to numerous criticisms of the plans to make HMRC a preferential creditor did not engage with the substance of its detractors. He relied instead on the original argument put forward by the Chancellor when the plans were announced back in October 2018, and did not address the cogent and pressing questions around the provision of floating charge finance, such as stocking finance, which is vital both to businesses which aim to grow their operations, and to companies which are struggling but which could potentially return to profitability given new funding.

At a time of economic crisis, which was of course completely unforeseeable back when the policy was first announced without consultation, pressing ahead with this retrograde step will cause avoidable damage to UK plc. R3 will – as ever – continue to make this point to politicians, not least when the Finance Bill is next debated, and will carry on working with Government officials to make sure that the new tools in the Corporate Insolvency and Governance Bill are ready for implementation as soon as possible, to give distressed businesses a breathing space to consider their next move.