Corporate governance and insolvency – the Government’s response

The Department for Business, Energy and Industrial Strategy (BEIS) has published the Government’s response to a consultation on corporate governance and insolvency. The response confirms that the Government will take a number of actions aimed at strengthening the corporate governance of companies in or approaching insolvency, preceded by further consultation where necessary.

Background

In March 2018, BEIS issued a consultation paper proposing reforms designed to reduce the risk of companies failing wholly, or in part, as a result of the shortcomings of corporate governance.  The consultation followed some large-scale business failures, including BHS and Carillion. The consultation also sought views on introducing new measures to strengthen the responsibilities of directors of firms approaching insolvency and improving the Government’s investigatory powers into the conduct of directors.

Response

The response contains a number of proposals aimed at strengthening corporate governance, improving the insolvency framework in cases of major failure and increasing protections for creditors, including pension funds, in the event of a company’s insolvency. The response also addresses the question of whether the payment of dividends should be restricted where a company’s pension fund is in significant deficit.

Pension funds and dividend payments

Several respondents to the consultation suggested that there should be more transparency and stronger regulatory oversight of dividend payments where the company is a sponsoring employer of a pension fund which has a substantial deficit. However, there was little support for a prohibition on the payment of dividends where a company’s pension fund is in significant deficit, with one respondent warning that “stopping dividend payments until a pension deficit has been cleared would make the UK a very unattractive place to raise equity capital.”

The Government agreed with the views expressed, that there should be no automatic bar on dividend payments in these circumstances. However, the Government has confirmed that it will give further consideration to the ways in which directors could provider stronger reassurances for shareholders and stakeholders that proposed dividends will not undermine the affordability of any deficit reduction payments agreed with pension fund trustees.

The Government intends to look at this as part of the case for a review of the UK’s dividend regime and intends to raise standards by “ensuring bosses explain to shareholders how the company can afford to pay dividends alongside financial commitments such as capital investments, workers’ rewards and pension schemes.”

The response also expressed concern over a seemingly growing trend for companies to pay interim dividends rather than final dividends.  Unlike the payment of final dividends, the payment of interim dividends does not require shareholder approval, meaning a reduction in a company’s accountability to its shareholders over the decision to pay dividends.  The Investment Association has been tasked with investigating the prevalence of this practice and legislation to ensure that there is at least one shareholder vote on dividends each year may be introduced for listed companies, if this is thought to be necessary.

New powers to investigate directors’ misconduct

The Government has confirmed that it will introduce powers to disqualify or fine directors who have dissolved companies to avoid meeting liabilities, such as the payment of workers or pension contributions. This is intended to address a current gap in the law which does not permit the investigation of potential misconduct by directors of companies which have been dissolved.

The future 

BEIS has stated that further details on the measures proposed will be set out in autumn 2018, with a further consultation process likely to follow.