
Earlier director engagement and more private school failures forecast after King’s Speech
29 July 2024
Insolvency professionals speaking to Recovery News have forecast that new laws and reforms scheduled for the next session of Parliament could lead to directors engaging earlier with IPs, forcing more private schools to close, and increasing employment regulation obligations for liquidators.
But another bill heralded in the King’s Speech is likely to make insolvencies of small banks less likely, it is thought.
The new government set out its priorities for the next session of parliament in the King’s Speech and its accompanying memorandum this month.
Some 40 bills and other changes have been proposed, including reforms to banking recapitalisation, employment rights, planning and infrastructure approval and audit reform.
Linton Bloomberg, partner at Reed Smith, said that the changes to audit may be beneficial in terms of earlier engagement by directors with insolvency processes.
The audit reform and corporate governance bill seeks to replace the Financial Reporting Council with a new Audit, Reporting and Governance Authority that will have the power to investigate and sanction directors, as well as extend ‘public interest entity’ status to large private companies and increase requirements for their audits. All of this means that directors could seek advice earlier in instances of financial distress, Bloomberg said.
“The bill will lead to greater scrutiny of the balance sheets of companies and the accountability of directors and the specific mention of BHS in the 104-page government briefing paper cannot go unnoticed, especially following on so shortly from the recent [BHS] wrongful trading judgment which was not only one of the longest ever chancery judgments but also one of the largest ever successful claims since the statutory offence was introduced under the Insolvency Act 1986.”
He added: “The extension of public interest entity status to large private companies, which subjects them to greater audit requirements, may lead to financial distress being identified earlier and consequently an uptick in directors seeking advice as to their duties earlier in the insolvency process than previously.”
Bloomberg also highlighted the bank resolution (recapitalisation) bill in the King’s Speech, which he said will enhance the Bank of England’s flexibility in managing the failure of small banking institutions rather than allowing them to fall into insolvency. “Where intervention is in the public interest, the Bank of England [will be allowed to] utilise funds procured from the banking sector to manage a failing bank and engineer its sale.
“It is clear that the government is conscious that the speed that the FSCS can pay out customers in the event of a failure is significantly better than what could be expected in an office-holder-based special insolvency process, albeit sufficient funding will come at a financial cost to the sector.”
One of the promises before the general election was the Labour party’s proposal to add VAT to school fees. Independent schools are expected to face increased financial pressure and may even face closure if the new Government proceeds with its policy to remove tax exemptions for private schools and introduce a 20% rate of VAT, it has been forecast by the independent schools' leaders.
Currently about 6–7% of pupils study in private schools, and the addition of VAT is expected to generate approximately £1.5bn in revenue for the government.
Philip Watkins, partner in the restructuring advisory team at FRP, commented: "Independent schools are set to face significant financial challenges due to the government’s proposed changes to VAT exemptions and business rate reliefs. This policy will likely increase school fees by 15-17%, forcing parents to reconsider their schooling arrangements putting pressure on smaller and already marginal schools who may already be struggling to maintain pupil numbers.
“There is now a real need for school governors and leadership teams to rigorously assess their short, medium and longer-term financial positions and update with good operational and financial forecast models. They should explore additional revenue streams, such as utilising their facilities for events, and potential cost savings but even these measures might not be sufficient for some schools to maintain viability. In such cases, considering mergers or private sales could be viable options, though closure might be necessary if financial pressures are insurmountable."
The new Government also plans an employment rights bill, which proposes a ban on zero-hours contracts, fire and rehire or fire and replace, and the introduction of changes to sick pay. Future employment plans could also increase obligations on liquidators.
Steve Goderski, partner and head of advisory at restructuring and insolvency firm, PKF Littlejohn Advisory, said: “Looking at Labour's pre-election change manifesto, commitment to workers' rights might result in enhanced protections for employees in insolvency situations. This could involve amendments to collective redundancy laws and increased obligations for liquidators and receivers to consult with employees' representatives.”
While there is no bill wholly focused on insolvency, R3 said that it expects proposed legislation such as the audit bill to provide a vehicle for parliamentary discussion of reforms to the insolvency framework. The association said that it is waiting for more detailed bills to be released before it can be certain that there are no proposed changes that will affect the profession.
Mike Pavitt, partner at Paris Smith, said that reforming insolvency is not necessarily a popular policy with voters. “Unlike other higher profile areas of law where it is possible to make quite meaningful predictions about planned legislative changes and to consider the likely impact of the new government’s proposed strategies, the Labour government’s agenda for the insolvency profession is not really known at this point, at least not in detail,” he said.
“For no doubt sound political reasons, financial rehabilitation and the shoring up of investor confidence in British business and its reputation for well, but fairly, regulated trade, in which the work of insolvency professionals plays a key part, never seems to be a particular vote winner on the doorstep.”