Insolvency overhaul to tackle ‘phoenixing’

The government is aiming to shake-up the insolvency regime, including hefty fines or disqualifications for directors who dissolve companies to avoid paying workers or pensions.

The proposals come in response to a consultation on corporate governance within companies that are in or are approaching insolvency.

The consultation, which ran from March to June this year, heard from 93 organisations, and the government has now said it will strengthen the insolvency framework.

These include taking forward measures to ensure greater accountability of directors in group companies when selling subsidiaries in distress; legislating to enhance existing recovery powers of insolvency practitioners in relation to value extraction schemes; legislating to give the Insolvency Service the necessary powers to investigate directors of dissolved companies when they are suspected of having acted in breach of their legal obligations; and creating alternative procedures to support business rescue.

Regarding corporate governance, the aim is to strengthen transparency requirements around complex group structures; enhance the role of shareholder stewardship; strengthen the UK’s framework in relation to dividend payments; and bring forward proposals to improve board-room effectiveness.

As well as tackling so-called ‘phoenixing’, where directors dissolve one company and then start up a near identical business with a new name, the new rules would also give financially viable companies more time to rescue their business.

The proposals are designed to give viable companies more time to restructure or seek new investment, and to enable them to continue trading through the restructuring process, ensuring that small suppliers and workers still get paid.

Business minister Kelly Tolhurst said: “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.

“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.”

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