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Wed September 19 2018

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Insolvency Service to tighten up on phoenix firms

28 Aug Directors who dissolve companies to avoid paying workers or pensions could face fines or be disqualified from running a business under new government plans.

Insolvency Service powers to ban directors will be extended to those who use insolvency to dodge paying debts to their own staff and creditors, before re-emerging phoenix-like, in a similar guise.

The move is part of a raft of measures proposed in the wake of several high profile corporate collapses, including Carillion and retailer BHS, including reform of dividend policies.

Directors will be required to explain to shareholders how the company can afford to pay dividends alongside financial commitments such as capital investments, workers’ rewards and pension schemes.

The Investment Association is being asked to investigate whether action is needed to ensure that companies are giving their shareholders an annual vote on dividends.

But while some companies have collapsed due to bad management decisions, others have been brought down by impatient lenders. So the government is also introducing new measures in response to its corporate insolvency consultation that will give financially-viable companies more time to rescue their business.

These include:

  • giving viable companies more time to restructure or seek new investment to rescue their business, helping to safeguard jobs
  • enabling companies in financial distress to continue trading through the restructuring process, ensuring that small suppliers and workers still get paid
  • a new restructuring plan to help rescue viable businesses and preserve jobs.

The measures, which will be set out in further detail in the autumn, are being put forward as part of the government’s response to the corporate governance and insolvency consultation, launched in March 2018.

Business minister Kelly Tolhurst said: “While the vast majority of UK companies are run responsibly, some recent large-scale business failures have shown that a minority of directors are recklessly profiting from dissolved companies. This can’t continue.

“That is why we are upgrading our corporate governance to give new powers to authorities to investigate and hold responsible directors who attempt to shy away from their responsibilities, help protect workers and small suppliers and ensure the UK remains a great place to work, invest and do business.”

Stuart Frith, president of insolvency and restructuring trade body R3, said: “Our members have long raised concerns that some directors are deliberately dissolving businesses to avoid paying their debts. A strengthened disqualification regime will be an important part of ensuring that directors are less likely to walk away from their responsibilities.”

Chris Cummings, chief executive of the Investment Association, said: “There is a concern among investors that some companies are utilising interim dividend payments in order to avoid shareholder approval. This removes the ability of shareholders to properly scrutinise the payment of dividends and risks undermining the strength of the UK’s corporate governance framework, which has long been a model respected around the world.

“We welcome the opportunity to study how significant the issue of companies not seeking approval for dividend payments is, and look forward to working with the government to ensure that the investor voice continues to be a central plank in the UK corporate governance regime.”

The Department for Business, Energy & Industrial Strategy has published its response to the Insolvency and corporate governance consultation online here.

MPU

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