The government has published details of the next steps it is proposing to take to reduce the risk of major company failures occurring through poor governance or stewardship, and to improve the insolvency framework in such situations.
Publication of these proposed next steps follows a consultation on insolvency and corporate governance published by the government in March 2018. This in turn followed the reforms that are currently in progress in relation to executive pay, strengthening the employee and wider stakeholder voice in the boardroom, and corporate governance in large privately held businesses (click here for an overview of these).
Subject to any further necessary consultation, the government's proposed principal next steps are as follows.
Strengthening corporate governance in pre-insolvency situations
Group structures: The government will work to improve transparency requirements around group structures and will pursue options to require groups to provide explanations of their corporate and subsidiary structures. It will also continue to work with the Financial Reporting Council to underline the importance of boards having a thorough understanding of how governance applies throughout a group and set stronger expectations that directors will keep complex group structures under review.
Shareholder stewardship: The government will work with the investment community, regulators and other interested parties to strengthen shareholder stewardship in particular by considering:
- how the investment mandates given to asset managers by pension funds and other asset owners can, as a matter of good practice, make explicit reference to stewardship; and
- how to establish safe channels through which institutional investors and others can escalate concerns about the management of a company by its directors, including the discharge by directors of their duties under section 172 of the Companies Act 2006.
Payment of dividends: The government will review the UK's framework relating to dividend payments. A particular concern is transparency around the affordability of dividends in relation to a company's liabilities and other demands on its capital. It will legislate to require companies to disclose and explain these decisions if investor pressure and the new section 172 reporting requirements (click here for more information) do not deliver sufficient progress. It also intends to ensure that shareholders have an annual say on dividends if the practice of companies avoiding such a vote by only declaring interim dividends is widespread and investor pressure to improve this situation proves insufficient.
Boardroom effectiveness and directors' training and guidance: The government will invite ICSA: The Governance Institute to convene a group of investors and companies to identify further ways of improving the quality and effectiveness of board evaluations including the development of a code of practice for external board evaluations. It will also bring forward proposals to strengthen access to training and guidance for directors, including for raising their awareness of their legal duties when making key decisions.
Action to improve the insolvency framework in cases of major failure
Sales of subsidiaries in distress: The government intends to take forward measures to ensure greater accountability of directors in group companies when selling subsidiaries in distress, but having regard to concerns that the new measures should not disincentivise rescues or unnecessarily hold directors liable for the conduct of others over which they have no control.
Clawing back money for creditors: The government intends to legislate to enhance existing recovery powers of insolvency practitioners in relation to value extraction schemes which have been designed to remove value from a business at the expense of its creditors when the business is in financial distress.
Dissolved companies: The government intends to legislate to give the Insolvency Service the necessary powers to investigate the conduct of directors of dissolved companies where they are suspected of having acted in breach of their legal obligations.
The government has also announced a package of reforms designed to help companies in distress, on which it first consulted in May 2016. It proposes reforms which aim to increase protections for creditors and to strike a fair balance between the rights of the company seeking rescue and the rights of the creditors seeking payment of the company's debts. Specific proposals include:
- the introduction of a new moratorium to help business rescue so that financially distressed companies which are ultimately viable can benefit from protection against action by creditors (including secured creditors) allowing them to make preparations to restructure or seek new investment;
- the creation of a new restructuring plan procedure that would include the ability to bind dissenting classes of creditors who vote against it; and
- a prohibition against suppliers enforcing termination clauses in contracts for the supply of goods and services on the grounds that a party has entered a formal insolvency procedure, the new moratorium procedure or the new restructuring plan procedure.
The Department for Business, Energy & Industrial Strategy has stated that the various measures proposed will be set out in further detail in autumn 2018.
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