Government takes a closer look at insolvency and corporate governance
Insolvency Bitesize - April 2018
Following a string of recent high profile corporate insolvencies - in particular, BHS, Monarch and Carillion - the role of corporate stakeholders is under the microscope and questions are being asked whether existing governance structures are fit for purpose. The Government is now consulting on a broad reform package to reduce the risk of major company failures resulting from weak governance or stewardship.
The new Insolvency and Corporate Governance consultation is focussed on improving the transparency and running of group structures that because of their size and complexity may expose flaws in the current regime. Proposals could also significantly expand the duties of directors to consider a wider range of interests and lead to a shift in the behaviour expected from institutional investors:
- Sales of businesses in distress: the Government is exploring whether parent company directors should be liable if a sale of a subsidiary harms that subsidiary's stakeholders (including, notably, pension creditors) – e.g. where the purchaser is not financially viable, the acquired subsidiary subsequently enters administration/liquidation, its stakeholders are worse off than they would have been had the sale not happened and such damage was reasonably foreseeable.
- Value extraction schemes: distressed investors will follow closely the extent of proposed new powers to reverse “value extraction” schemes – such as being able to overturn security, loan interest payments, management fees etc. – where a distressed company is ‘rescued’ by investors who, in the words of the consultation paper, then strip it of its assets to lessen their loss, or protect their profits, should the company eventually become insolvent.
- SME suppliers: the Government is looking for ways to improve the protection of SMEs in the supply chain by encouraging prompt payment. The use of retention payments in the construction industry is put under the spotlight (and we also understand that a private members bill will receive its first reading shortly on this issue). The consultation suggests better promotion of existing steps which suppliers could take, including checking to see if a customer has published its Payment Practices and Performance Report (exposing large companies slow to pay their suppliers) and enquiring about the use of Project Bank Accounts (allowing money to be ring-fenced in a customer’s insolvency by using a trust, so it is only available to supply chain members).
- Strengthening corporate governance in pre-insolvency situations: the paper asks for views on a broad range of issues – whether better stewardship of large group structures is needed, especially by institutional investors; whether the framework for paying dividends needs revisiting; and whether directors are not properly exercising an independent mind but are wrongly delegating decisions to professional advisors.
This consultation is at an early stage and the proposals are vague. But, it should very much be seen as a corollary to the Government’s recent publication of a White Paper on protecting defined benefit pension schemes. It also comes hot on the heels of a review into pre-pack reforms (as highlighted in this edition of Insolvency Bitesize), discussion in the Spring statement on the use of phoenixism and tax avoidance/evasion and suggestions that the stalled 2016 corporate insolvency reform proposals will resurface later this year. Whether concrete legislation results from any of these exercises remains to be seen, but Parliamentary time for new proposals is severely restricted. We will follow developments.