Accountability is the major theme of the recent government consultation regarding ‘Insolvency and Corporate Governance’, which follows high profile failures such as BHS and Carillion. The consultation contains proposals relating to four main areas as set out below.
Sales of businesses in distress
The proposal represents a significant extension of the current duties owed by directors. Under the proposal, a director of a parent company may be held liable for losses following a sale of a subsidiary if:
- at the time of the sale the subsidiary was insolvent and relied upon parent support to continue trading;
- the subsidiary entered into a formal insolvency process within two years of the sale;
- the creditors’ interests have been adversely effected following the sale; and
- at the time of the sale, the directors of the parent could not have been reasonably satisfied that the sale would lead to a better outcome for the subsidiary’s creditors than placing the subsidiary into a formal insolvency process.
No causal link between the sale of the subsidiary and the failure of the business would be required.
Value extraction schemes
Office-holders would be able to apply to unwind transactions where an investor has unfairly removed value from a company, coined a “value extraction scheme”, and the company subsequently enters liquidation/administration.
The new powers are aimed at companies where:
- there has been a new investment;
- value has been extracted in a transaction which benefits the investor, without adding value to the company (e.g. in management fees or excessive interest on loans); and
- the company subsequently enters liquidation/administration.
Unlike other antecedent transaction powers, the proposal would not require the company to be insolvent at the time of the transaction. Rather, the proposed test is whether the transaction has unfairly placed the beneficiary in a better position than other creditors in a subsequent liquidation or administration.
The consultation proposes granting powers that would enable the Secretary of State to investigate the conduct of, and take necessary action against, directors of dissolved companies without having to first restore the company to the register.
Strengthening corporate governance
A series of consultation questions are posed asking for proposals on how corporate governance can be strengthened pre-insolvency, including reviewing the accountability, transparency and protection of companies in group structures and supply chains, the role of institutional shareholders and professional advisors and director’s duties and considering whether the technical definition of “distributable profits” is still fit for purpose.
The Government consultation suggests ways to enhance the responsibilities of directors, shareholders and investors when a company is distressed and approaching insolvency.