Corporate insolvency and corporate governance reforms: Government announcement offers opportunity for improvement

26 August 2018

Commenting on the announcement from the Department for Business, Energy, and Industrial Strategy on corporate governance and corporate insolvency framework reform proposals, Stuart Frith, president of insolvency and restructuring trade body R3, says:

"R3 welcomes the government's long-awaited announcement that it is moving forward with its corporate insolvency framework reform proposals, which will be the most significant update to the corporate insolvency landscape since the 2002 Enterprise Act. As the date of the UK's exit from the European Union approaches, ensuring that the UK's world class insolvency and restructuring framework for dealing with distressed businesses is flexible, responsive and fit for purpose will be an important component of UK plc's success. Reform of the corporate insolvency framework is especially urgent as other countries are moving forward with reforms of their own, aimed at taking a greater slice of the restructuring and insolvency work which is currently carried out in the UK. "

Corporate insolvency reforms

"R3 has campaigned for a short moratorium (with the ability to extend), to facilitate business rescue under the supervision of a duly qualified and regulated insolvency practitioner, for some time. This rescue tool will give businesses in distress a 'breathing space' from creditors, to put in place a plan to deal with debts and try to avoid insolvency. The moratorium must strike a balance between the needs of the distressed business and its creditors to ensure that it provides confidence to creditors to continue to supply and extend credit. The government's new restructuring tool should also go some way in helping to rescue viable businesses and save jobs."

Corporate governance reforms

"R3 raised a number of concerns around the government's insolvency and corporate governance paper when it was published in the spring. The proposals looked to create significant new liabilities for directors and new risks for directors that could harm business rescue and returns to creditors. We hope the government has listened to the concerns of a number of other stakeholders who shared the same view."

Directors of dissolved companies

"R3 members have raised concerns for a long time that some directors are deliberately dissolving businesses to avoid paying their debts. The government's announcement that it will look to disqualify directors of these companies is an important part of ensuring that directors are less likely to walk away from their responsibilities. R3 would also urge the government to consider how it can work with the insolvency and restructuring profession to investigate the conduct of directors of dissolved companies and to hold them accountable for their actions.

"There already exist a number of tools available to the government, and to the insolvency profession, to tackle reckless behaviour and wrongdoing by directors, and R3 would like to see the government reconsidering how these powers could be exercised more fully. For example, for the past few years, the annual number of directors who are disqualified has hovered around 1,200, while R3's members have reported frustration at making reports to the Insolvency Service of misbehaviour on the part of directors which are then not followed up. Likewise, greater coordination between different parts of the government, such as HMRC and the Insolvency Service, would help to identify patterns of misconduct in a more timely fashion, which would prevent further losses to creditors, suppliers, employees, and the public purse."

Raising corporate governance standards

"R3 welcomes measures that will improve transparency and trust in corporate governance and tackle rogue directors. However a balance must be struck between ensuring that directors are held to account, and allowing distressed businesses to have the chance to be restructured and given the prospect of a sustainable long term future. Measures that focus more on holding directors to account will only discourage enterprise and entrepreneurship and damage the UK's reputation as one of the most attractive places to do business.

"We are looking forward to working with the government to move these proposals forward once we have seen the full detail, thereby helping to strengthen the framework which underpins corporate insolvency and restructuring in the UK."

• The BEIS consultation response can be read here.