Insolvency overhaul to tackle ‘phoenixing’

The government has unveiled proposals to shake-up the insolvency regime, including hefty fines or disqualifications for directors who dissolve companies to avoid paying workers or pensions, in response to a consultation on corporate governance within companies which are in or are approaching insolvency

The consultation, which ran from March to June this year, heard from 93 organisations. The government has now said it will strengthen the insolvency framework in cases of major corporate failure in a number of areas.

These include taking forward measures to ensure greater accountability of directors in group companies when selling subsidiaries in distress; legislating to enhance existing recovery powers of insolvency practitioners in relation to value extraction schemes; legislating to give the Insolvency Service the necessary powers to investigate directors of dissolved companies when they are suspected of having acted in breach of their legal obligations; and creating alternative procedures to support business rescue.

Regarding corporate governance, the aim is to strengthen transparency requirements around complex group structures; enhance the role of shareholder stewardship; strengthen the UK’s framework in relation to dividend payments; and bring forward proposals to improve board-room effectiveness.

As well as tackling so-called ‘phoenixing’, where directors dissolve one company and then start up a near identical business with a new name, the new rules would also give financially-viable companies more time to rescue their business.

The proposals are designed to give viable companies more time to restructure or seek new investment, and to enable them to continue trading through the restructuring process, ensuring that small suppliers and workers still get paid.

Kelly Tolhurst, business minister, 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.’

The proposals were welcomed by insolvency and restructuring trade body R3.

Stuart Frith, R3 president, 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.’

In addition, the Investment Association will be asked to investigate to see if action is needed to ensure that companies are giving their shareholders an annual vote on dividends.

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.’

ICSA – the Governance Institute is to convene a group of investors and companies to develop a code of practice for external board evaluations, in order to ensure that boards can demonstrate they have the necessary skills and tools to run the organisation as effectively as possible.

Insolvency and corporate governance government response is here

Report by Pat Sweet

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