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Insolvency regime: Raking over the ashes

01 October 2018 by Peter Swabey

Insolvency regime: Raking over the ashes

Following the government’s insolvency regime review, ICSA has been tasked with improving the quality of board evaluations

On 26 August, the government published its feedback statement and response to the consultation on insolvency and corporate governance, which closed in June.

Much of the response dealt with the UK insolvency regime and it is clear that there are substantial changes afoot, with measures to minimise the likelihood and mitigate the impact of major corporate failure; to increase protections for creditors; and to provide a fair balance between the rights of the company seeking to be rescued and the rights of the creditors seeking payment of the company’s debts.

This will include legislation to enhance the recovery powers of insolvency practitioners, in respect of value extraction schemes, and ‘give the Insolvency Service the necessary powers to investigate directors of dissolved companies where they are suspected of having acted in breach of their legal obligations.

This also responds to the many calls for the government to act against the practice of “phoenixing”, where a company is dissolved and another is created [soon after] … often used to avoid liabilities.’

“Phoenixing is where a company is dissolved and another is created soon after, often used to avoid liabilities”

The feedback statement notes that responses ‘from professional organisations gave general support to targeted reforms where a regulatory gap was identified, but cautioned against wider action until investigations into recent high-profile insolvencies have been completed and it can be seen whether existing rules and powers are sufficient.’

Our own response cautioned against the potential unintended consequences of significant changes, while noting that, in many of the failures, the issue seems more to do with decisions taken – or not taken – by directors than with the insolvency regime and that, as the feedback statement notes, ‘more should be done to ensure that current powers are used and enforced.’

We were particularly pleased to note that, although the government intends to ‘ensure greater accountability of directors in group companies when selling subsidiaries in distress’, it has taken note of our concern that ‘the new measures should not disincentivise rescues or unnecessarily hold directors liable for the conduct of others over which they have no control.’

On corporate governance, action is proposed to strengthen transparency requirements around group structures, shareholder stewardship, and the UK’s framework relating to dividend payments. Finally, it will ‘bring forward proposals to improve boardroom effectiveness and strengthen directors’ training and guidance.’

“I was particularly pleased when Kelly Tolhurst MP wrote to ICSA to ask for our assistance in improving the quality of board evaluations”

On this note, I was particularly pleased when the minister for small business, consumers and corporate responsibility, Kelly Tolhurst MP, wrote to ICSA to ask for our assistance in improving the quality of board evaluations.

This will involve convening a group – including representatives from the investment community and companies – to identify ways of improving the effectiveness of board evaluations and the development of a code of practice.

This is an important piece of work – especially given the additional focus on the reporting of board evaluation in the revised UK Corporate Governance Code, where the annual report is now required to describe ‘how the board evaluation has been conducted, the nature and extent of an external evaluator’s contact with the board and individual directors, the outcomes and actions taken, and how it has or will influence board composition.’

We are now discussing the composition of the steering group and timescales with the BEIS team, before starting to think about some of the key issues that the group will need to consider and on which we will seek feedback from the market.

This will, potentially, include questions such as: what does a company seek to achieve from an externally facilitated board evaluation; what are the expectations of investors; whether there should be any sort of prescription as to how an independent board evaluation is carried out; and what constitutes a ‘good’ externally facilitated board evaluation.

This work will have implications beyond the corporate space, for governing bodies in all sectors, as the value of a board performance review is not sector-limited. I have no doubt that many of our members will wish to contribute to this review and look forward to hearing from them.

As always, I would be happy to receive any feedback or suggestions as to what the policy team can do on policy@icsa.org.uk.

Peter Swabey FCIS is policy and research director at ICSA: The Governance Institute

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