Following a number of corporate governance failures in situations of insolvency, the Government has published a consultation paper (located here) aimed at cracking down on directors and employers behaving irresponsibly. “These reforms will give the regulatory authorities much stronger powers to come down hard on abuse and to make irresponsible directors bear the consequences of their actions.” Greg Clark

Responses are required by 11 June 2018.

Sale of Businesses in Distress

Although directors of an insolvent company must act in the best interests of that company’s creditors, there is no wider duty in a group context.

To encourage directors selling an insolvent subsidiary within a corporate group to consider subsidiary stakeholder interests, the Government proposes that holding company directors should be held to account if they conduct a sale which harms the subsidiary’s employees/creditors and that harm was reasonably foreseeable at the time of sale.

  • Directors would only suffer penalties (disqualification and personal liability) in exceptional situations ie. where the group subsidiary was in financial difficulty; the directors could not reasonably have believed that the sale was in the interests of creditors; the group subsidiary subsequently entered into administration or liquidation; and the harm that should have been foreseen has occurred with creditors suffering losses. However, liability would cease two years from the date of sale.

Value extraction schemes

The Government is seeking views on extending the antecedent recovery powers of insolvency office-holders by allowing them to apply to court to reverse a connected party transaction which unfairly strips value from an ailing company. These powers would only apply where the company (i) had received an investment; (ii) had value extracted in a transaction(s) designed for the benefit of the investor (eg. excessive interest on loans or management fees) without adding value to the company; and (iii) subsequently enters liquidation/administration.

Investigation into the actions of directors of dissolved companies

This section explores Government proposals to extend existing investigative powers into the conduct of directors to cover situations where directors avoid accountability by allowing their companies to be dissolved instead of putting them into a formal insolvency process. The proposals envisage the scope of the current investigation and enforcement regime being extended to include former directors of dissolved companies. This will avoid the need to first restore a company to the Register of Companies.

Strengthening corporate governance in pre-insolvency situations

The Government considers a number of areas of corporate governance law including:

  • Group structures – are stronger corporate governance and transparency measures required in relation to the oversight and control of complex group structures?
  • Shareholder responsibilities – bearing in mind recent corporate failures, should large institutional shareholders be more actively engaged with long term company strategies?
  • Payment of dividends – does the definition of ‘distributable profits’ remain fit for purpose to avoid situations where companies can pay out large dividends just before they become insolvent?
  • Directors duties – are directors commissioning professional advice without being fully aware of their duties as directors?
  • Protection of companies in the supply chain – should more be done to help protect payments to SMEs in a supply chain in the event of insolvency of a customer?

This consultation paper is a good opportunity to get an advanced view of hot corporate governance topics for UK companies in or approaching insolvency; we recommend it highly to those regularly in the insolvency field, and even more highly to those who find themselves in the insolvency field unexpectedly.