Government introduces new powers to ban reckless directors

Directors could soon be banned from running a business and face large fines if they dissolve their companies to avoid paying employees or making required pension contributions.

The crackdown is part of government plans to safeguard workers, pensions and small suppliers when a company goes bust.

Under the shake-up, bosses will face investigation if they try to escape paying a dissolved company’s debts to their own staff and creditors.

Ministers say most UK companies are run responsibly but there are a minority of directors who deliberately dodge debts by dissolving companies then start up a near identical business, with a new name. The practice is known as ‘phoenixing’ or ‘bumping companies’.

Under the new powers, the Insolvency Service will be able to fine directors or even have them disqualified.

Business Minister Kelly Tolhurst said: “Some recent large-scale business failures have shown that a minority of directors are recklessly profiting from dissolved companies. This can’t continue.

“That is why we are upgrading our corporate governance to give new powers to authorities to investigate and hold responsible directors who attempt to shy away from their responsibilities, help protect workers and small suppliers and ensure the UK remains a great place to work, invest and do business.”

In a further development, the Investment Association will be asked to investigate to see if action is needed to ensure that companies are giving their shareholders an annual vote on dividends.

Directors will also have to explain to shareholders how the company can afford to pay dividends alongside financial commitments such as capital investments, workers’ rewards and pension schemes.

The government is also introducing new measures in response to its corporate insolvency consultation that will give financially-viable companies more time to rescue their business.

These include:

• giving viable companies more time to restructure or seek new investment to rescue their business, helping to safeguard jobs
• enabling companies in financial distress to continue trading through the restructuring process, ensuring that small suppliers and workers still get paid
• a new restructuring plan to help rescue viable businesses and preserve jobs.

These measures, which will be set out in further detail in the autumn, are being put forward as part of the government’s response to the corporate governance and insolvency consultation, launched in March this year.

We shall keep clients informed of developments.

Please contact Sarah Liddiard if you would like more information about the issues raised in this article or any aspect of company law.