Government Launches Consultation on Insolvency and Corporate Governance

9th April, 2018 by Morris Peacock

Following on from a number of recent high profile corporate failures, the Government has issued a consultation focused on specific issues concerning companies which are insolvent or approaching insolvency.

Below is a summary of the areas under consultation. The full consultation can be found here.

Sales of businesses in distress: This section proposes potential changes to ensure that directors responsible for the sale of an insolvent subsidiary of a corporate group take proper account of the interests of the subsidiary’s stakeholders. This proposal seeks to deter reckless sales, which could potentially harm stakeholder interests, in those limited circumstances. Where a large company or business cannot support itself then the directors involved in any sale, including directors of a holding company controlling the sale of shares in a subsidiary, should satisfy themselves that the sale would lead to a better outcome for creditors than putting the company into formal insolvency. The proposals seek to ensure fair outcomes when major companies get into difficulties, whilst avoiding putting barriers in the way of credible business rescue efforts.
Reversal of value extraction schemes: This section proposes where a company in financial difficulties has been ‘rescued’ by investors who then strip it of its assets to lessen their loss, or protect their profits, should the company eventually become insolvent. These arrangements are often complicated and designed to avoid existing protections for creditors. Government wants all creditors to be treated fairly in an insolvency situation and is seeking views on potential changes to how certain transactions, or a series of transactions, entered into before insolvency can be challenged.
Investigation into the actions of directors of dissolved companies: This section explores proposals to extend existing investigative powers into the conduct of directors to cover directors of dissolved companies. Difficulties are caused when companies are dissolved with outstanding debts or allegations of director misconduct, because the Insolvency Service does not currently have the necessary powers to investigate.
Strengthening corporate governance in pre-insolvency situations: This section explores a number of wider corporate governance issues that can be particularly relevant when companies get into financial difficulties and seeks views on whether further action by Government is needed.
Group structures: This section considers whether steps should be taken to improve governance, accountability and internal controls within complex company group structures;
Shareholder responsibilities: This section seeks views on whether there may be further opportunities, such as through the Financial Reporting Council’s review of the Stewardship Code, to strengthen the role of shareholders in stewarding the companies in which they have investments;
Payment of dividends: This section seeks views on whether the legal and technical framework within which dividend decisions are made could be improved and made more transparent whilst ensuring that dividend payments should remain for directors to decide, having regard to their legal obligations and guidance;
Directors’ duties and the role of professional advisers: This section asks if directors are commissioning and using professional advice with a proper awareness of their duties as directors and the requirement to apply an independent mind;
Protection for company supply chains in the event of insolvency: This section explores whether supply chain and other creditors should be better protected and, if so, how this could be achieved while preserving the primacy of the interests of shareholders.

Morris Peacock, an insolvency partner at Howes Percival, comments:

“Following measures announced in 2017 relating to executive pay, the introduction of employee stakeholders and greater transparency, the Government has set out a number of potential measures to tackle perceived irresponsible conduct by the directors of a company that is either insolvent or facing insolvency. Such conduct can have an adverse knock on effect on any business and the consultation documents state that it is specifically seeking to ‘ensure the highest standards of behaviour in those who lead and control companies in, or approaching, insolvency’.”

Responses to the consultation can be sent to [javascript protected email address] and the closing date is 11 June 2018.

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