On 26 August 2018, The Department for Business, Energy and Industrial Strategy (“BEIS”) published a response to two separate consultations that both looked at issues of corporate governance and the UK corporate framework, and in particular in the context of insolvency.
The first response, to a May 2016 consultation, included proposals to introduce an extendable 28 day moratorium for companies in financial distress to appoint an insolvency practitioner to “monitor” the situation. During this period, creditors would not be able to take action against a company whilst a rescue is attempted, but any debts falling due during that period must be paid.
Other proposals included the prohibition of the enforcement of termination clauses in contracts for supply of goods where a party has entered into a formal insolvency procedure, and the option for a company to propose a restructuring plan which would (subject for example to voting majorities) bind dissenting classes of creditors who vote against it.
The second response was to a more recent consultation in March 2018, but which itself followed on from a number of developments including the publication of BEIS Committee reports on BHS and Sports Direct in 2016 and an inquiry into various aspects of corporate governance.
The Government has confirmed that it will take forward a number of specific actions, of which the most notable insolvency-related measures include greater accountability of directors of group companies when selling a subsidiary that is in distress, enhanced recovery powers where schemes have been used to extract value from a distressed company and powers for the Secretary of State to take action against directors of dissolved companies (but without the existing need to restore them to the register).
Alongside these measures, the proposals include improving the oversight of complex group structures (working in conjunction with the FRC following recently revised UK Corporate Governance Code 2018), looking again at the basis for the distribution of dividends and also whether directors have sufficient experience of financially distressed situations.
Morris Peacock, Partner at Howes Percival, comments:
“Whilst one of the responses is to a consultation dating back to (a pre-referendum) May 2016, the Government is making it clear that any restrictions in available Parliamentary time are not going to hold back the progress of some of the most wide-ranging changes proposed to corporate law, and in particular where there is an insolvency scenario, for many years.
Although the Government agreed with many respondent’s views that there should not be an automatic prohibition on paying dividends simply because a company’s pension scheme is in deficit, it is clear that where a company is in financial distress, directors will need to give careful consideration to the decisions they make, particularly where they involve the disposition of assets or subsidiary companies.
BEIS are currently seeking views on previously announced plans to make public the beneficial owners of overseas entities wishing to own, let or sell land in the UK where the potential sanctions for doing so without complying with the required declarations include up to 5 years imprisonment. Simply failing to register can attract a custodial sentence up to 2 years and an unlimited fine.”
You can keep up to date with all the developments on the Howes Percival website.
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