The reforms are aimed at reducing the risk of major company failures occurring through shortcomings of governance or stewardship, and strengthening the responsibilities of directors of firms when they are in or approaching insolvency.

The proposals include changes to ensure that directors responsible for the sale of an insolvent subsidiary of a corporate group take proper account of the interests of the subsidiary’s stakeholders. Where a large company or business cannot support itself then the directors involved in any sale, including directors of a holding company controlling the sale of shares in a subsidiary, should satisfy themselves that the sale would lead to a better outcome for creditors than putting the company into formal insolvency.

Failure to do so would mean director was required to contribute a sum that the court thinks fit towards the subsidiary’s creditors. The director should also be liable to be disqualified where appropriate.

There are plans to address situations where a company in financial difficulties has been ‘rescued’ by investors who then strip it of its assets to lessen their loss, or protect their profits, should the company eventually become insolvent. This could include new powers to allow an insolvency office-holder to apply to a court to reverse a transaction (or series of transactions) considered to have unfairly removed value from a company. This will sit alongside rather than replace the existing antecedent recovery powers.

The consultation explores proposals to extend existing investigative powers into the conduct of directors to cover directors of dissolved companies, and also asks for views on whether further action is need on a number of wider corporate governance issues. These could include steps to improve governance, accountability and internal controls within complex company group structures, as well as ways to strengthen the role of shareholders in stewarding the companies in which they have investments. 

It also looks at the payment of dividends, with BEIS saying that while the law and accounting principles which underpin decisions about dividend payments are well established, examples of large companies continuing to pay out large dividends in the period immediately before their insolvency raise questions about whether reform is needed.

One of these is whether the definition of ‘distributable profits’ remains fit for purpose. A further question is whether there is sufficient transparency and accountability to shareholders and other stakeholders for decisions taken by companies on how to allocate capital as between, for example, the competing demands of investment in R&D, returns to shareholders, pay and benefits for employees, making the business more sustainable and contributions to pension funds.

The consultation states: ‘The government has no plans to interfere with decisions about dividend payments. These are matters for directors and shareholders and interference could have a chilling effect on future investment. It is however, interested in views on whether the legal and technical framework within which distributable profits are determined and within which directors exercise their judgements about what distributions to make could be improved.’

In addition, BEIS says it is interested in views on whether some directors are commissioning and using professional advice without a proper awareness of their duties as directors, and in particular the requirement to apply an independent mind.

As part of the consultation BEIS is seeking views on whether more should be done to help protect payments to suppliers, particularly smaller firms, in the specific event of the insolvency of a customer.

Business Secretary Greg Clark said: ‘These reforms will give the regulatory authorities much stronger powers to come down hard on abuse and to make irresponsible directors bear the consequences of their actions.’

The consultation closes on 11 June.

Insolvency and Corporate Governance is here.

Report by Pat Sweet