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Will ‘phoenix’ companies and corporate failures be a thing of the past?

Many companies in the UK have suffered due to ‘phoenix’ arrangements. This is the well-known process where a debtor goes into liquidation owing money to its supplier and then miraculously starts trading again under a new name. Effectively the same company and the same owners arise from the ashes like a phoenix and carry on in business having avoided paying old debts.

In the wake of high profile insolvencies such as Carillion, the government issued a consultation document on insolvency and corporate governance.  The consultation had 93 responses from a wide range of interested parties including professional advisers and unions.

The government’s response was published in August indicating some reforms to the insolvency process may be forthcoming. Particular areas of action that were highlighted:

  • strengthen transparency requirements around complex group structures – the responses put forward a number of suggestions and the government will pursue options to require groups to provide explanations of their corporate and subsidiary structures
  • enhance the role of shareholder stewardship – the consultation document highlighted concerns about shareholder stewardship (particularly from institutional shareholders) and whether, and how, it could be made stronger and more effective. The government agrees with many respondents that stewardship should be strengthened. Working with the investment community, the FRC and other interested parties the government will identify means to incorporate stewardship within the mandates given to asset managers by asset owners and establish safe channels through which institutional investors and others can escalate concerns about the management of a company by its directors, including the discharge of their duties under section 172 of the Companies Act 2006
  • strengthen the UK’s framework in relation to dividend payments – significant concerns were raised that companies could pay dividends even when in financial distress
  • bring forward proposals to improve board-room effectiveness – the government want to identify further ways of improving the quality and effectiveness of board evaluations possibly through increased training.

Whether these planned reforms will work in the future remains to be seen. There will be further consultations ‘if needed’ and the full reforms are due to be announced later in the autumn.

Article from ACCA In Practice