For the first time, directors who dissolve companies in order to avoid paying workers or pensions could now face hefty fines or be disqualified from running a business. In a bold and necessary move, the Government is to press ahead with new plans to safeguard workers, pensions and smaller suppliers when a company goes bust. Under the shake-up, bosses will face thorough investigation if they try to escape paying a dissolved company’s debts to their own staff and creditors.
While the majority of UK companies are run very responsibly, there are a minority of directors who deliberately seek to dodge debts by dissolving operations then starting up a near identical business with a new name. This practice is known as ‘phoenixing’ or ‘bumping companies’. Under the new powers invoked at Westminster, though, the Insolvency Service will be able to fine directors who engage in such tactics or even have them disqualified.
Business minister Kelly Tolhurst said: “The UK is a great place to do business with some of the highest standards of corporate governance. Some recent large-scale business failures, though, have shown that a minority of directors are recklessly profiting from dissolved companies. This simply cannot continue. That’s why we’re upgrading corporate governance to give new powers to relevant authorities to investigate and hold responsible those directors who attempt to shy away from their responsibilities. We want to assist in protecting workers and smaller suppliers.”
In parallel, the Investment Association will be asked to investigate to see if action is needed to ensure that companies are giving their shareholders an annual vote on dividends.
The Government is further raising standards by ensuring that bosses explain to shareholders how a given company can afford to pay dividends alongside financial commitments such as capital investments, workers’ rewards and pension schemes.
Additionally, the Government is introducing new measures in response to its corporate insolvency consultation that will give financially-viable companies more time to rescue their business. These include giving viable companies more time to restructure or seek new investment to rescue their business (in turn helping to safeguard jobs). This enables companies in financial distress to continue trading through the restructuring process, thus ensuring that smaller suppliers as well as workers are still paid. New restructuring plans are afoot to assist in the rescue of viable businesses and to preserve jobs.
The Government is also announcing new measures designed to improve the quality of directors’ work by developing proposals to introduce new and better training for them such that they’re more aware of their legal duties, while at the same time inviting ICSA: The Governance Institute to convene a group of investors and companies in order to develop a dedicated Code of Practice for external Board evaluations.
These reforms will help to strengthen the UK’s business environment. An emboldened disqualification regime in particular is going to be a vital element in ensuring that directors are less likely to simply walk away from their responsibilities.