Directors who dissolve companies in order to avoid paying workers or pensions could now face hefty fines or be disqualified from running a business for the first time. The Government is to press ahead with new plans to safeguard workers, pensions and small suppliers when a company goes bust. Under the shake-up, bosses will face 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 responsibly, there are a minority of directors who deliberately dodge debts by dissolving companies then starting up a near identical business with a new name. The practice is known as ‘phoenixing’ or ‘bumping companies’.
Under the new powers, the Insolvency Service will be able to fine directors 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. While the majority of UK companies are run responsibly, some recent large-scale business failures have shown that a minority of directors are recklessly profiting from dissolved companies. This cannot continue. That’s why we are upgrading our corporate governance to give new powers to authorities to investigate and hold responsible those directors who attempt to shy away from their responsibilities, help protect workers and small suppliers and ensure the UK remains a great place in which to work, invest and do business.”
Annual vote on dividends
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.
In addition, 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), enabling companies in financial distress to continue trading through the restructuring process, and thus ensuring that small suppliers and workers are still paid and introducing a new restructuring plan to help rescue viable businesses and preserve jobs.
Training for directors
The Government is also announcing new measures to improve the quality of directors’ work by developing proposals to introduce new and better training for directors to make them more aware of their legal duties and inviting ICSA: The Governance Institute to convene a group of investors and companies in order to develop a Code of Practice for external board evaluations.
These measures, which will be set out in further detail in the autumn, are being put forward as part of the Government’s response to the corporate governance and insolvency consultation launched in March this year.
The proposed reforms will help to strengthen the UK’s business environment which is a key part of the UK’s Industrial Strategy – the Government’s long-term plan to build a Britain fit for the future – ensuring the UK remains one of the best places in which to start and grow a business and is an attractive place to invest.
Progressing corporate insolvency proposals
Stuart Frith, president of insolvency and restructuring trade body R3, said: “R3 welcomes the Government’s announcement that it’s progressing its corporate insolvency proposals, which should help to ensure that the UK’s insolvency and restructuring framework retains its world-class status. Our members have long raised concerns that some directors are deliberately dissolving businesses to avoid paying their debts. A strengthened disqualification regime will be an important part of ensuring that directors are less likely to walk away from their responsibilities.”
Chris Cummings, CEO at the Investment Association, added: “There’s a concern among investors that some companies are using interim dividend payments in order to avoid shareholder approval. This removes the ability of shareholders to properly scrutinise the payment of dividends and risks undermining the strength of the UK’s corporate governance framework, which has long been a model respected around the world. We welcome the opportunity to study how significant the issue of companies not seeking approval for dividend payments is, and look forward to working with the Government to ensure that the investor voice continues to be a central plank in the UK corporate governance regime.”
“Rigorous and reported” evaluation
Simon Osborne, CEO of ICSA, observed: “We’re delighted to accept the Government’s invitation to convene a group of investors and companies to develop a Code of Practice for external Board evaluations. We firmly believe that a high-quality independent Board evaluation or Board effectiveness review is valuable for companies, indeed organisations, of all sizes and in all sectors.”
Osborne concluded: “A rigorous and reported Board evaluation can also provide comfort for investors and the market as a whole that the Board has the necessary skills and tools to run the organisation as effectively as possible.”