Counteracting the Curse of Carillion

Counteracting the Curse of Carillion

24th September 2018

There’s some more good news for small to medium construction companies as the Insolvency Service takes measures to tighten up on “phoenix firms”.  The plan is part of a raft of measures that were proposed after several high profile corporate collapses, including Carillion (with the fallout affecting so many small to medium construction companies and suppliers), and retail giant BHS. In future, directors who dissolve companies to avoid paying the workforce (or pensions) could face hefty fines or be disqualified from running a business under new government plans.  The Insolvency Service powers to ban directors will extend to those who use insolvency to avoid paying debts to their own staff and creditors, before reappearing in a similar guise.

In future, company directors will be required to explain to shareholders how the company can afford to pay dividends alongside its financial commitments such as capital investments, workers’ rewards and pension schemes. 

The Insolvency Service is an executive agency of the Department for Business, Energy and Industrial Strategy with headquarters in London and offices in 21 other locations across the UK.  It administers compulsory company liquidations and personal bankruptcies and deals with misconduct through investigation of companies and enforcement.  The Insolvency Service also makes redundancy payments in cases where a company is insolvent. 

According to Business Minister, Kelly Tolhurst, despite the fact that the majority of UK companies are run responsibly, some of the recent large-scale business failures have revealed that a minority of directors are recklessly profiting from dissolved companies.  This is why the government is giving new powers to authorities to investigate directors who avoid their responsibilities and hold them responsible in a bid to protect both workers and small suppliers. 

There have been concerns in recent years that some directors deliberately dissolve business to avoid paying their debts.  A more stringent disqualification regime will play an important role in ensuring that this is a less attractive option in future and deter directors from shunning their obligations in this way.

There have also been concerns voiced among investors that some companies use interim dividend payments to avoid shareholder approval.  This prevents shareholders from properly examining the payment of dividends and risks undermining the strength of Britain’s corporate governance framework, a framework that has long been held in respect across the world.

Although many companies collapse as a result of poor management decisions, others are brought down my impatient lenders.  This has led to the government introducing new measures in response to its corporate insolvency consultation in order to allow financially viable companies more time to rescue their business.  These include:

  • Allowing viable companies more time to restructure or find new investment to save their businesses, also helping to safeguard jobs.
  • Enabling financially distressed companies to continue trading through the restructuring process which would ensure that small suppliers and workers still get paid.
  • A new restructuring plan to help rescue viable businesses and preserve jobs.

These measures will be set out in more detail over the coming months and will be added to the government’s response to the corporate governance and insolvency consultation launched in March 2018. 

We will be bringing you more news on this issue as it happens as the Carillion collapse was particularly damaging to so many small to medium construction companies.  Why not follow us on Facebook or Twitter and stay up to date with the new developments.