My Lords, Clause 14 gives tribunals powers to impose a financial penalty on an employer who is in breach of their employment responsibilities where there has been aggravating features over and above any award. The intention is to provide a deterrent to employers from neglecting their responsibility towards employees and to discourage them from repeating the breach that has been identified by the tribunal. However, we wonder whether the impact of penalties against an insolvent company has been properly considered.
In most formal insolvencies the management of a company is no longer in place having been replaced by an insolvency officeholder, so any financial penalty would simply represent an additional claim on the assets of the already insolvent company. Needless to say, this would reduce the amount available for creditors, including the HMRC as well as employees. With a maximum penalty of £5,000 per worker, the impact could be significant where there is a large workforce. For example, in the recent insolvency of a retail company, tribunals made awards to 24,000 employees. Should penalties then be added to those awards, substantial amounts would be lost from the money available for distribution to staff or creditors.
Penalties on companies in formal insolvencies where the management is no longer in place would clearly have no deterrent effect as those responsible would no longer be around and not themselves liable for such penalties. Any penalty would therefore deliver no benefit to employees but would simply reduce returns to creditors. It is for this reason that Amendment 20L calls for an exemption from penalties for companies in formal insolvencies.
I am aware that R3 has been in contact with the Bill team on this and so I am sure that the Minister will be well briefed on the issue and on the intention behind the amendment. However, I hope he will not say that the amendment is not proportionate to the size of the issue. At a time of slow growth, which we all acknowledge is going to continue for some time, there will, sadly, be many insolvencies yet to come, and very often in the retail and other employee-rich sectors. I also hope that the Minister will not tell us that there is some magical alternative non-statutory solution, such as guidance to tribunal chairs or enforcement officers. That would be rather silly with a new Bill. It may often be sensible where something unplanned has happened after Royal Assent or when a new Act is bedding down and unforeseen problems occur, but here we could make the provision in the Bill right from its inception.
Furthermore, having this provision in the Bill would give clarity to insolvency practitioners and others dealing with insolvent estates and would remove the threat of such additional costs and all the extra time that is taken in arguing against them, which in itself adds even more to the costs of the insolvency procedure and has to be met out of funds that would otherwise go to creditors. We all know that once a power has been granted in legislation, any amount of non-statutory guidance often fails to prevent its exercise.
Even if enforcement officers are advised that the penalty should not be collected, that would not deal with the problem because the penalty will still exist as a claim against the estate. Also, an insolvency practitioner might have a legal duty to pay regardless of whether such payments are being pursued by the enforcement officer.
Perhaps the biggest disadvantage of relying on non-statutory means is the uncertainty that that creates. Whether or not financial penalties are actually awarded or collected in a formal insolvency does not change the fact that they could be under the Bill as it is currently worded. That uncertainty is particularly damaging in the case of a potential business rescue, where the insolvency practitioner has to be able to predict the liabilities and outgoings of a company that is in administration when deciding whether it is possible to trade it. Obviously, trading such administrations can increase the returns to creditors as well as reducing job losses. Therefore, the addition of potential liability could mean that fewer companies are saved from liquidation.
Our amendment, granting specific exemption for companies in formal insolvency—ie, where the management is no longer in place—would remove such uncertainty. It would not harm employees, who may still have an award made in their favour, and it would merely prevent the creditors of insolvent business having to pay a fine to the Secretary of State for a transgression for which they bore no responsibility.
It seems silly to send this Bill into the world unfit for purpose. The clause was meant to fine those who had transgressed and deter them from becoming repeat offenders, but an IP running an insolvent company is not the transgressor and any such fine would only be paid by blameless creditors.
To ensure that we can find a route to those who have transgressed, we have a second amendment in this group—Amendment 20PA. Because the present Clause 14 would fail to act as a deterrent to directors of companies in insolvency, as any penalty does not fall on them, there may be merit in meeting the Government’s quite correct desire to increase deterrence by introducing a different deterrent for these particular people via an amendment to the Company Directors Disqualification Act 1986. This would ensure that where a breach has occurred that has, or would have, attracted a financial penalty were the company not in formal insolvency this matter is taken into account when considering directors’ conduct.
In a formal insolvency, the insolvency practitioner, who is acting as the liquidator, administrator or administrative receiver, has a duty to report on any director whose conduct makes them unfit to be involved in the management of a company. The matters that IPs have to consider when deciding whether to make such a report are listed in Schedule 1 to the Company Directors Disqualification Act 1986. This amendment would add to that list the issues covered in Clause 14 of this Bill, so that the IP could still consider these matters when deciding whether to report on those whose behaviour has been found wanting but who would currently escape any penalty because they are no longer running the company. I beg to move.