Insolvency and corporate governance: New powers to tackle reckless directors

News / / Insolvency and corporate governance: New powers to tackle reckless directors

The Government has responded to the consultation by the Department for Business, Energy & Industrial Strategy (BEIS) and The Insolvency Service on proposals to improve the corporate governance of firms that are in or approaching insolvency.


Following the collapses of numerous retail companies leading to multiple job losses, and the continuation of Carillion’s dividend payments to shareholders whilst ignoring pension commitments, the Government has been consulting on a range of potential reforms to corporate governance and insolvency issues.

Set out below is a basic timeline of key developments in the corporate governance landscape.  

Image removed.

The Government response

The government response to BEIS’s consultation paper was published on 26 August 2018. It sets out the views of professional advisers, professional associations, business and trade representative groups, and individual businesses from a number of sectors. Having considered the views provided in response to the consultation, the Government proposes taking the following actions.

1.  Increasing protections for creditors through:

a)  ensuring greater accountability of directors in group companies when selling subsidiaries in distress;

b)  legislating to enhance recovery powers of insolvency practitioners where value has been removed from a firm at the expense of its creditors when a firm is in financial distress; and

c)  legislating to give the Insolvency Service the necessary powers to investigate directors of dissolved companies(particularly as regards the “phoenixing” of companies). This means that Directors who have dissolved companies to avoid paying workers or pensions could be disqualified or fined;

2.  Improving the insolvency framework for major failures by:

a)  introducing a new moratorium to give companies more time to rescue the business and safeguard jobs;

b)  preventing the enforcement of termination clauses by suppliers on the grounds that a party has entered a formal insolvency procedure, the new moratorium or the new restructuring plan; and

c)  creating a new restructuring vehicle that would include the ability to bind dissenting classes of creditors who vote against it.

3.  Reinforcing the UK’s corporate governance framework by strengthening:

a)  transparency requirements in response to concerns about the oversight and control of complex groups. The Government is therefore considering options to require groups to explain their corporate and subsidiary structures;

b)  the FRC's Stewardship Code by working with the investment community, the FRC and other interested parties to establish safe channels through which institutional investors and others can address the warning signs of corporate distress;

c)  the dividend payment framework to allay concerns regarding companies paying dividends when in financial distress. The Government will explore methods to ensure shareholders have an annual say on dividends if investor pressure proves insufficient, this includes the Company explaining to shareholders how it can afford to pay dividends alongside capital investment, workers’ rewards and pension schemes; and

d)  directors’ training and guidance as it was suggested that training should be provided to directors on their legal duties. The government will bring forward proposals to strengthen access to training and guidance for directors, and the ICSA has been invited to identify further ways of improving the quality and effectiveness of board evaluations including the development of a code of practice.

Further consultation on the details of the proposals expected in autumn 2018 will be needed before any firm action is taken.


This Government response follows the issue of the 2018 Corporate Governance Code, the Wates Principles, and the Companies (Miscellaneous Reporting) Regulations 2018. Between them these aim to improve corporate governance, long-term performance and corporate cultures.

Government intervention in this area is to be welcomed but whether the measures outlined will reduce corporate failures when short term success is often valued by the current Board and CEO, over long term sustainability remains to be seen.

Francesca Jus-Burke

Francesca Jus-Burke Senior Associate

Related services: