UK consultation on insolvency recovery and governance reforms

The UK government is consulting on law reform with a view to, in its words,

“to improve the UK’s corporate governance framework to ensure the UK remains one of the best places to start and grow a business”,

and perhaps to end one.

Its insolvency regime 

“is another important part of the UK’s business environment and is well regarded internationally. The Government recognises however, that the regime must be continually improved to ensure it delivers the best possible outcomes now and in the future. 

The Government wants to take this work further to reduce the risk of major company failures occurring through shortcomings of governance or stewardship, and to strengthen the responsibilities of directors of firms when they are in or approaching insolvency”.


The purpose of this consultation is to seek views on various proposals to try to achieve that aim as well as maintaining a fair balance of interests for relevant stakeholders. The consultation also explores options to improve the government’s investigatory powers into corporate failure.

Specifically, the government wants to ensure that the law

“facilitates creditors’ continued operations beyond periods of financial difficulty or insolvency experienced by debtors. By creating optimal conditions for dealing with the processes and impacts of insolvency, we can help to ensure that creditor stakeholders can continue their operations, pursue new contracts, or make new investments and, in doing so, continue to contribute to the UK economy by creating jobs and paying taxes.

In particular, the consultation will consider: 

Sales of businesses in distress: Law reform is contemplated to ensure that directors responsible for the sale of an insolvent subsidiary of a corporate group take proper account of the interests of the subsidiary’s stakeholders. This proposal seeks to deter what are called “reckless sales”.

“Where a large company or business cannot support itself then the directors involved in any sale, including directors of a holding company controlling the sale of shares in a subsidiary, should satisfy themselves that the sale would lead to a better outcome for creditors than putting the company into formal insolvency.

The proposals seek to ensure fair outcomes when major companies get into difficulties, whilst avoiding putting barriers in the way of credible business rescue efforts.   

Reversal of value extraction schemes: This section proposes to deal with a situation

“where a company in financial difficulties has been ‘rescued’ by investors who then strip it of its assets to lessen their loss, or protect their profits, should the company eventually become insolvent.  These arrangements are often complicated and designed to avoid existing protections for creditors”.  

The consultation is looking at how certain transactions, or a series of transactions, entered into before insolvency can be challenged.

Investigation into the actions of directors of deregistered companies: There is contemplated an extension of existing investigative powers into the conduct of directors of deregistered companies. Difficulties are caused when companies are deregistered with outstanding debts or allegations of director misconduct, because, in the UK, the Insolvency Service does not currently have the necessary powers to investigate. 

Australia has a similar issue with its many deregistered companies, although it seems there is no investigation by ASIC on those entities, described as a potential ‘black hole’ of unlawful conduct.

Strengthening corporate governance in pre-insolvency situations: This focuses on a number of wider corporate governance issues that can be particularly relevant when companies get into financial difficulties, in particular the duties of the directors in that pre-insolvency period. 

The duties of directors in Australia are comparable to those in the UK, save that we now have the safe harbour reforms which may change those duties.

The Insolvency Service in the UK says it disqualifies only around 1,200 directors each year, which hardly seems to provide adequate general deterrence.  More pro-active and pre-emptive measures seem to be needed in the UK, as they are in Australia

• Directors’ duties and the role of professional advisers:  The consultation is asking if directors are engaging and using professional advice with a proper awareness of their duties as directors and the requirement to apply their own independent minds. Again, this is relevant to the professional adviser in insolvency under our safe harbour laws in Australia, and the extent to which the director can rely on that advice.   

In a comment pertinent to Australia’s safe harbour law, the consultation paper says:

“It is important to recognise, however that the duties and responsibilities of directors to the company are different from those of professional advisers. Directors are subject to the duty under … the Companies Act, as well as duties to exercise independent judgement and to exercise reasonable care, skill and diligence.  Professional advisers, on the other hand are subject to whatever legislation, standards or supervision applies to their particular profession and contractual obligations to their client”.

In the Australian safe harbour context, the latter list of issues would refers to the restructuring code standards, and professional body regulation, of the adviser, and the contractual retention arrangements with the client company.  IFT in the UK has its Code of Ethics, and TMA Australia also has its best practice guidelines for navigating safe harbour. The law of negligence in giving professional and financial advice exists overall.

Closing date

Other aspects of this consultation – group structures, payment of dividends etc – are contained in the paper. It is open for comment until 11 June 2018.


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