Contractors and SME suppliers in the UK could finally be in line for legal protection from losses in the event of a client collapsing.
In the wake of several high-profile insolvency cases such as that of Carillion, which raised fears that suppliers could be left billions out of pocket in unpaid invoices, the government has launched a review of corporate governance regulations for companies entering insolvency.
Consultation is now open on a policy paper called Insolvency and Corporate Governance, which outlines a number of proposals for curbing some of the more dubious practices associated with the directors of struggling businesses.
Strengthening the rights of suppliers in relation to recovering monies owed from insolvent companies is a key focus of the consultation, which will be music to the ears of thousands of small businesses in the UK.
Amongst a range of areas where the government believes corporate governance could be improved to dissuade more business from entering insolvency, the consultation specifically asks for views on how payments to SME suppliers can be safeguarded in the event of a collapse.
Other suggestions include looking at transparency and oversight in complex group structures, what binding duties directors and shareholders should shoulder, and the practice of paying out dividends just before a company collapses.
Also included in the proposals are measures to make company directors personally liable in circumstances where their actions are considered be detrimental to creditors’ financial interests. This includes situations where directors allow a company to be dissolved in a bid to avoid paying creditors, rather than entering insolvency proceedings.
As things stand, directors of dissolved companies escape investigation into their conduct in the lead up to the collapse. The proposals would see this protection end, with directors open to charges of criminal liability in cases where dishonesty and negligence can be proven in the lead up to company dissolution.
The government also proposes to hold liable directors of holding companies who might sell an insolvent subsidiary to get rid of the problem, even if they know the sale is likely to lead to a worse deal for creditors than if the company entered formal insolvency proceedings.
Other measures put forward include a clamp down on so-called value extraction schemes, which amount to asset stripping in anticipation of liquidation. There is specific concern over cases where an investor apparently comes to the rescue of a struggling company, only to then recover value from the business via various investment vehicles before it eventually collapses anyway.
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