What are the changes to corporate governance and the insolvency frameworks?

On 26th August 2018 the Government announced its findings following consultations into corporate governance and insolvency.

The high profile insolvencies that have hit the headlines and continue to do so have sparked debate as to what can be done in terms of reform in this area.  It is a difficult balancing act for the Government to encourage business and to maintain the UK’s business environment as one of the best in the world against the need to reduce the risks posed by poor corporate governance, irresponsible directors and insolvency.  The spotlight is very firmly on Directors’ conduct in many areas and for rogue directors to be held to account as well as on trading companies to be more open.

Corporate governance proposals aim to improve corporate transparency and accountability and also to look at ways that shareholders and regulators can raise concerns and intervene if Directors’ conduct falls below the standards required.

The consultations looked at areas such as the payment of dividends, greater intervention by investors and regulators, training for Company Directors and Directors’ conduct.

The Government continues to explore some areas of corporate governance.  One of these is where dividends are being paid to shareholders without full consideration of the Company’s current and long term solvency.  The current system is seen as complex and ineffective and the Government has promised further consultation to establish a system that protects the integrity of the Company’s finances.

The focus on Directors’ conduct has lead to the Government intending to strengthen access to training and guidance for Directors – possibly even making this mandatory for larger companies.

Regulations are already in process with the aim of being effective from January 2019, for large companies to explain their compliance with S172 Companies Act 2006 showing what decisions have been made and how these have affected the business and stakeholders such as employees.

One important area of reform is the Government’s proposed extension of the Directors’ Disqualification rules to dissolved companies.  Our profession has raised concerns in the past that some companies were being dissolved with outstanding creditors whilst a new phoenix business was started under a new company.  The new rules will give the Government the powers to disqualify directors who act irresponsibly and who attempt to dump creditors in this way.

The proposed insolvency reforms announced are wide ranging and it is clear that a wide range of stakeholders have contributed to the consultation – not just insolvency practitioners.

The Government have announced that a new moratorium will be available to Companies which will provide them with a breathing space of initially 28 days from any creditor action while they take advice on restructuring.  Interestingly the moratorium heralds quite a different approach in that it will not be available to companies that are already insolvent but for those that anticipate difficulties – thus encouraging earlier action to avoid insolvency.

A new restructuring option as a standalone procedure is also to be brought in which will provide for all classes of creditor to be bound by the restructuring plan.  Known as “cross class cram down” even dissenting creditors will be bound by the plan if voted for by other creditors.

The reforms will also prevent “ransom” creditors from scuppering restructuring proposals by terminating contracts due to insolvency.  These represent creditors who are essential to the Company’s future and they will no longer be able to terminate contracts solely due to insolvency.

It is unclear when Parliamentary time will permit the necessary legislation to go through for these reforms however in light of the insolvencies in the news recently there is some pressure on the Government to address these areas.  The corporate governance and insolvency landscape needs to balance effective business operation with transparency, accountability and protection for creditors in addition to ensuring that rogue directors are dealt with.  Increasing access to training for directors is also to be welcomed in improving the skill sets of those running companies and it will be interesting to see to what extent this is taken up.

For more information please contact Lisa Haste.