Consultation on Insolvency and Corporate Governance

Regular readers of our blog will know that the government has been grappling with how to deal with the fallout of various high profile corporate failures. There seems to be a cross party feeling that currently insolvency arrangements may not be going far enough to protect against abuse by directors acting in breach of their duty.

The department for business, energy and industrial strategy issued a consultation on insolvency and corporate governance on 20th March 2018.

A link to the consultation document can be found here

The government is consulting on new powers, responsibilities and remedies in a number of areas.

For example, it is suggested that directors of parent companies may be liable to contribute in the event of an insolvency of a subsidiary company. It seems primarily this would apply where a sale has taken place at the time the subsidiary was insolvent, the subsidiary then enters into formal insolvency within two years, the interests of creditors are adversely affected and the parent company directors “could not have reasonably believed that the sale would lead to a better outcome for those creditors by placing it into administration or liquidation.”

These would be responsibilities that would normally pertain to the directors of the subsidiary, but the government is obviously considering widening out the responsibility.

Another key area involves proposals in relation to value extraction schemes: these are schemes where a company may be sold to an investor who buys, and thereafter whether through management charges or otherwise extracts the value of the company, before placing it into insolvency, for example with large pension deficit. In certain circumstances a director or a shareholder of the company involved may be subject to some liability. The idea of shareholders being liable beyond their capital would be an interesting development and it remains to be seen that if there would be consequences in the availability of finance for distressed companies.

There are also proposals to be able to investigate conduct of directors in dissolved companies to strengthen corporate governance in pre-insolvency situations, particularly in the case of groups of companies, and whether reforms are required in relation to the technical and legal framework affecting declaration of dividends. Questions are also asked in the consultation about whether directors commissioning professional advice, for example in relation to tax planning schemes, are aware and properly engaged with their duty in terms of section 172 of the Companies Act 2006 to promote the success of the company.

There is also discussion of protection of payments to SMEs, how this could be achieved and whether there should be an increase in the £600,000 prescribed part set out in the Insolvency Act 1986 (prescribed part) order 2003. The consultation is open for responses until 11th June 2018 and it will be interesting to see where government take the consultation responses from this point.