Will new insolvency laws make businesses more accountable?

Following a number of high profile company failures, the government is consulting on insolvency and corporate governance with the intention of updating the law. The major theme is ‘accountability’. The consultation contains proposals relating to four main areas.

1. Sales of businesses in distress

The consultation looks at encouraging directors who are responsible for the sale of an insolvent subsidiary of a corporate group to take into account the interests of the subsidiary’s stakeholders. They are proposing to do so by holding directors of a holding or parent company to account and penalising them where the sale of an insolvent subsidiary has caused (foreseeable) harm to creditors. The penalties which are being considered include disqualification and personal liability.

2. Value extraction schemes

The consultation considers the situation where a company facing financial difficulty has been ‘rescued’ by investors who go on to extract the value out of the company to reduce their potential loss should the company subsequently fail. These arrangements could be in the form of, management fees, excessive interest on loans, charges over company property being granted, excessive director pay or other payments and the sale and leaseback of assets.

The aim is to ensure fair outcomes for creditors while not hindering credible business rescue proposals. However, there is the risk that this proposal may make it more difficult to put in rescue funding.

3. Dissolved Companies

Companies can be closed in a number of different ways. When a company becomes insolvent, there are a range of formal insolvency procedures available to wind up its affairs and dissolve it. In formal procedures, the Insolvency Service or office holder has the power to investigate the conduct of the directors. Alternatively, Companies House can strike off and dissolve the business at the request of the company providing it complies with the legislative requirements. The consultation proposes granting powers enabling the secretary of state to investigate the conduct of directors of dissolved companies, and take necessary action against them, without having to first restore the company to the register.

4. Strengthening corporate governance in pre-insolvency situations

There are a number of other areas of corporate governance law and practice that have been highlighted following recent company failures. As a result, the consultation seeks views on whether action is required in relation to:

1. the framework for paying dividends with a view to improving accountability and transparency and considering whether the technical definition of “distributable profits” is still fit for purpose;
2.  the protection of companies in group structures and supply chains and the role of institutional shareholders; and
3. the use of professional advisors in the context of the duties of directors and the requirement to apply an independent mind.

The closing date for responses is 11 June 2018.

For more information of for help with any finance and insolvency issues, please contact the Banking and Finance team.