On 26 August 2018, the Government published a response to the Insolvency and Corporate Governance consultation launched in March 2018 (Response).

The March 2018 consultation sought views on proposals to improve corporate governance in companies in or approaching insolvency, including:

  • new measures to enable directors of parent companies to be held accountable and penalised where they make a decision to sell large insolvent subsidiaries where this results in harm to creditors and at the time of the decision could not reasonably believe the sale would lead to a better result for creditors;
  • whether new powers should be introduced to undo a transaction/series of transactions where the transaction(s) have unfairly stripped value from a company; and
  • whether existing investigative powers of the Secretary of State should be extended to include the power to investigate the conduct of former directors of dissolved companies.

The consultation also sought views on certain aspects of the corporate governance framework and asked for feedback on matters such as whether stronger corporate governance and transparency measures are required and what more could be done through a revised Stewardship Code (the code of best practice published by the FRC with respect to the stewardship by investors of their investments and shareholdings in listed companies).

Respondents, particularly those representing shareholders, argued the need for reform and suggested that a framework is needed to support effective intervention by shareholders and regulators at the first signs of troubles, but also warned that good stewardship alone is not sufficient to prevent insolvency where the underlying business is not viable.

Respondents from professional organisations gave general support to targeted reforms where a regulatory gap was identified but cautioned against wider action until investigations into existing high profile insolvencies have finished, so it can be seen whether existing powers are sufficient

Many respondents also argued that the existing regime is sufficient, and high profile failures were due to the actions or inactions of directors, in breach of their duties. These respondents instead suggested that more should be done to ensure proper enforcement of the existing regime.

In light of the responses received, the Government announced it would take forward the following specific actions:

  • strengthen transparency requirements around group structures to require groups to provide explanations of their corporate and subsidiary structures;
  • strengthen shareholder stewardship by working with the investment community, the FRC and other interested parties to incorporate stewardship within the mandates given to asset managers by asset owners and establish safe channels through which institutional investors and others can escalate concerns about directors actions;
  • strengthen the U.K.'s framework relating to dividend payments to avoid the practice of companies avoiding an annual shareholder vote on dividends by only declaring interim dividends;
  • bring forward proposals to improve boardroom effectiveness and strengthen training and guidance provided to directors;
  • take forward measures to ensure greater accountability of directors in group companies when selling distressed subsidiaries;
  • legislate to enhance recovery powers of insolvency practitioners in relation to value extraction schemes designed to remove value from a firm at the expense of its creditors; and
  • legislate to give the Insolvency Service powers to investigate directors of dissolved companies where they may have breached their legal obligations.

The BEIS stated that the proposed measures will be set out in further detail in Autumn 2018. It is likely that a number of proposals will require additional consultations.

The full Response can be found here:

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