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Business secretary unveils insolvency safeguards

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Directors who have dissolved companies to avoid paying staff or pensions could be fined or disqualified for the first time, the government has announced. In a package of reforms announced today, struggling companies will be given more time to explore rescue options while shareholders will be given more powers to hold boardrooms to account. Greg Clark, business secretary, launched a consultation into corporate governance and insolvency in March, in the wake of what it called “recent corporate governance failures”. That was widely seen as a reference to the failures of high street retailer BHS and Carillion, the construction and outsourcing group. BHS went into administration in April 2016 and its stores shut soon afterwards, throwing 11,000 people out of work and leaving a £571m deficit. A Commons inquiry blamed Sir Philip Green, former owner, and Dominic Chappell, a former bankrupt who bought the company from him for £1. Carillion went into liquidation in January, leaving a £1bn pension deficit and numerous debts. Mr Clark’s plans are a wider attempt initiated two years ago by Theresa May, the prime minister, to bring irresponsible capitalism to heel. Mrs May said on becoming Tory leader that she would impose various boardroom reforms to help ordinary workers. The plans were an attempt to rebrand the Conservatives away from their traditional reputation as the party of big business and landowners. But some of those promises — such as having workers on boards — have since been watered down. Mr Clark said Sunday’s announcement represented a plan to safeguard workers, pensions and small suppliers when a company goes bust. He said the vast majority of British companies were run responsibly but there was a minority of directors who deliberately dodged debts by dissolving companies then re-starting a similar business under a different name — a practice known as phoenixing. Under the plan, bosses will be investigated if they attempt to avoid paying a dissolved company’s debts — whether to staff or creditors. Under the existing rules, whenever a corporate insolvency occurs the conducts of directors is considered and they can be disqualified for up to 15 years. About 1,200 irresponsible directors are disqualified every year. However, at present the Insolvency Service — which oversee this process — is not able to investigate complaints or disqualify directors where a company has been dissolved without creditors first applying for the company to be reinstated to the Companies House register. “While the vast majority of UK companies are run responsibly, some recent large-scale business failures have shown that a minority of directors are recklessly profiting from dissolved companies. This can’t continue,” said Kelly Tolhurst, a business minister. At the same time the Investment Association, a trade body for investors, will ensure that executives will regularly have to explain to shareholders how the company can afford to pay dividends. “The Association will have the power to investigate firms to ensure shareholders are getting an annual vote on dividend payments and have a safe way to voice concerns about how directors are managing and leading the company,” the business department said. Separately the government hopes to give financially viable companies more time to rescue their business when facing insolvency — for example by allowing them to continue trading through the restructuring process. There will also be an attempt to make it easier for creditors to claw back money by reversing inappropriate asset stripping of companies on the verge of insolvency. Lastly Mr Clark will announce measures to improve directors’ capabilities and make them more aware of their legal duties. It will invite ICSA: The Governance Institute, the professional body for governance, to convene a group of investors and companies to develop a code of practice for external board evaluations.