Corporate insolvency framework: proposed major reforms

The Department for Business, Energy & Industrial Strategy (BEIS) has consulted on new proposals aimed at improving the UK’s corporate governance and insolvency framework. The overriding aim being to ensure the highest standards of behaviour in those who lead and control companies in, or approaching, insolvency. The three separate consultations were as follows:

• In May 2016, BEIS launched “A Review of the Corporate Insolvency Framework: A consultation on options for reform“. It consulted on a package of insolvency reforms all intended to help businesses to continue trading through the restructuring process. The consultation closed on 6 July 2016 and BEIS published a summary of responses on 28 September 2016.
• In March 2018, BEIS published “Insolvency and Corporate Governance”. Views were sought on proposals to reduce the risk of major company failures occurring through shortcomings of governance or stewardship, to strengthen the responsibilities of directors when companies are in or approaching insolvency, and to ensure a fair balance of interests for all stakeholders. This consultation ended on 11 June 2018.
• Tackling corporate insolvency and the risks associated with phoenixism was also included in the Autumn Budget 2017 and Spring Budget 2018. The Government announced that it would explore ways to tackle those who deliberately abuse the insolvency regime in trying to avoid or evade their tax liabilities, including through the use of phoenixism. Comments were invited on two potential approaches to this problem: (i) transferring liability from corporates to directors and other officers in certain circumstances; and (ii) joint and several liability for those linked to the avoidance or evasion. On 11 April 2018, HMRC published a discussion paper “Tax Abuse and Insolvency”. The consultation ran until 20 June 2018 and HMRC published a “Summary of Responses” on 7 November 2018.

The March 2018 consultation was partly triggered by several high-profile business failures, including BHS Ltd and Carillion plc.  For many stakeholders, the 2016 consultation was the UK Government’s response to the European consultation issued earlier in 2016, which eventually led to EU Preventive Restructuring Framework Directive 2019/1023. In both consultations, the government said that it was seeking views on how to ensure that UK insolvency regime retains its “world-leading status”, promotes business rescue and remains competitive post-Brexit.

On 26 August 2018, the government published its Response to the March 2018 consultation on “Insolvency and Corporate Governance” and the earlier 2016 review of the “Corporate Insolvency Framework”. The Response outlines the major reforms the government will be taking forward. Key proposals include:

• directors responsible for the sale of an insolvent subsidiary of a corporate group to take proper account of the interests of the subsidiary’s stakeholders;
• reversal of value extraction schemes;
• investigation into the actions of directors of dissolved companies; and
• strengthening corporate governance in pre-insolvency situations.

 In respect of the broader aspects of insolvency law outlined in the 2016 consultation, the specific reforms include:

• The creation of a new flexible restructuring plan procedure that would include the ability to bind dissenting classes of creditors who vote against it (that is, cross-class cram-down provisions).
• The introduction of a new moratorium to help facilitate business rescue. This would enable financially distressed companies which are ultimately viable to benefit from protection against action by creditors (including secured creditors) allowing them to prepare to restructure or seek new investment.
• The prohibition of enforcement by suppliers of termination clauses (so-called “ipso facto” clauses) in contracts for the supply of goods and services on the grounds that a party has entered either: a formal insolvency procedure, the new moratorium or the new restructuring plan. This is to enable companies in financial distress to continue trading whilst they formulate a rescue plan.
• Action to improve the insolvency framework in cases of major failure.

Collectively, the proposed reforms will involve either legislative reform or further consultation. The timing is unclear; the government has said it intends to bring forward legislation to implement the measures as soon as parliamentary time permits.

This Commons briefing paper considers all three consultaions in detail and summarises those reforms the government has said it would be taking forward. It should be noted that corporate governance falls outside the scope of this insolvency paper. However, detailed information is provided in a separate Library briefing paper, “Corporate Governance Reform” (CBP8143).