The UK’s Department for Business, Energy and Industrial Strategy (BEIS) has announced new powers to crackdown on “reckless” directors who have dissolved companies to avoid paying workers or pensions.
Announced by Business Secretary Greg Clark, the powers could see such directors face hefty fines or be disqualified from running a business for the first time.
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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 vast 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.
“The UK is a great place to do business with some of the highest standards of corporate governance. While the vast 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 can’t continue,” says Business Minister Kelly Tolhurst.
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By GlobalData“That is why we are upgrading our corporate governance to give new powers to authorities to investigate and hold responsible directors who attempt to shy away from their responsibilities, help protect workers and small suppliers and ensure the UK remains a great place to work, invest and do business.”
Meanwhile, the government is further raising standards by ensuring bosses explain to shareholders how the company can afford to pay dividends alongside financial commitments such as capital investments, workers’ rewards and pension schemes.
In addition, the Investment Association will be asked to investigate to see if action is needed to ensure companies are giving their shareholders an annual vote on dividends.
The government is also 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, helping to safeguard jobs;
- Enabling companies in financial distress to continue trading through the restructuring process, ensuring that small suppliers and workers still get paid;
- And a new restructuring plan to help rescue viable businesses and preserve jobs.
The government will also announce 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;
- Inviting ICSA – the Governance Institute – to convene a group of investors and companies 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 of 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 to start and grow a business and is an attractive place to invest.
Stuart Frith, president of insolvency and restructuring trade body R3, welcomed the announcement, noting the move should help to ensure 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,” he said. “A strengthened disqualification regime will be an important part of ensuring that directors are less likely to walk away from their responsibilities.”
Chris Cummings, chief executive of the Investment Association, adds: “There is a concern among investors that some companies are utilising 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.”
