On 20 March 2018, the Department for Business, Energy & Industrial Strategy, in conjunction with The Insolvency Service, opened a consultation which proposes a number of measures to improve corporate governance in companies that are in or approaching insolvency.
The consultation also seeks views on some other aspects of the wider corporate governance framework and whether they are working as intended.
Here we briefly outline the main features of the consultation.
The consultation follows a number of recent high profile corporate governance failures which have raised alarm bells that company directors can unfairly shield themselves from the effects of insolvency and in exceptional cases profit from business failures to the detriment of employees and suppliers. It recognises the important role that the UK’s insolvency regime plays in the UK’s business environment and its international reputation.
Main sections of the consultation
The consultation is divided into the following sections:
1. Sale of businesses in distress
This section proposes changes to ensure that directors responsible for the sale of an insolvent subsidiary within a corporate group take proper account of the interests of the subsidiary’s stakeholders. The intention is to deter reckless sales which damage a subsidiary’s creditors and stakeholders. Under the proposals, the directors involved in any sale (including the directors of a holding company that controls the sale of shares in a subsidiary) would be held to account where the sale of an insolvent subsidiary causes harm to creditors and the harm was foreseeable at the time of sale. The directors should satisfy themselves that the sale would result in a better outcome for creditors than putting the company into formal insolvency. Failure by the directors to do this would, according to the Government, enable an administrator or liquidator of the former subsidiary to apply to court seeking a contributory order from the director towards the subsidiary’s creditors.
2. Reversal of value extraction schemes
This part of the consultation seeks views on the introduction of new powers to allow an insolvency office-holder to apply to court to reverse transactions which unfairly removed value from a company in its run-up to insolvency. The proposed new powers would target those investors who ‘rescue’ a company in financial difficulty and then strip the company of its assets to lessen their loss, or protect their profits, should the company eventually become insolvent.
The Government suggests that such powers should only apply where the company (i) received new investment, (ii) had value extracted in one or a series of transactions designed to benefit the investor or its connected parties but without adding value to the company and (iii) subsequently enters liquidation or administration within a lookback period of two years. In order for the proposed new powers to be invoked, the value extraction scheme must have unfairly put the beneficiary in a better position than other creditors in a subsequent formal insolvency than would otherwise have been the case.
3. Investigation into the actions of directors of dissolved companies
This section explores proposals to enhance the powers of the Insolvency Service to investigate the conduct of directors of companies which have been dissolved and removed from the company register. Under proposed new powers, the Secretary of State should have the power, where there is sufficient evidence of wrong-doing and it is in the public interest, to order the disclosure of information to enable the Insolvency Service to investigate the conduct of former directors of a dissolved company. Additional powers would allow, where appropriate, for a disqualification order to be made against the former director, as well as a financial compensation order in favour of those creditors who suffer identifiable losses by reason of the director’s conduct.
4. Strengthening corporate governance in pre-insolvency situations
Finally the consultation seeks views on whether the Government should take further action to deal with a number of issues which commonly arise when companies find themselves in financial difficulty. The issues identified include the following:
- Group structures: This section looks at whether steps should be taken to improve accountability and internal controls within complex corporate group structures.
- Shareholder responsibilities: This section seeks views on whether there may be opportunities to strengthen the role of shareholders in stewarding those companies in which they hold investments.
- Dividend payments: This section considers whether the framework within which dividend decisions are made could be improved but without discouraging investment.
- Protection of companies in the supply chain: This section explores whether suppliers and other creditors should be better protected and, if so, how this could be achieved whilst preserving the primacy of shareholder interests.
Responses to the consultation are sought by 11:45 pm on 11 June 2018 and the consultation document can be accessed by clicking on the following link: https://www.gov.uk/government/consultations/insolvency-and-corporate-governance