Government plans to crack down on ‘reckless’ directors with hefty fines

Directors who dissolve companies to avoid paying workers or pensions could face hefty fines or be banned from running a business under Government plans.

The Department for Business, Energy and Industrial Strategy said it was planning to press ahead with proposals to help protect staff, pensions and small suppliers when a company goes bust.

It comes following large-scale insolvencies such as the collapse of construction giant Carillion earlier this year and high street chain BHS in 2016.

Under the shake-up, the Insolvency Service would have the power to fine or even disqualify bosses who deliberately dodge debts by dissolving companies and setting up a near-identical business with a new name – a practice known as “phoenixing” or “bumping companies”.

Other measures in the Government plans include giving struggling companies more time to restructure or attract new funding to rescue the business, in order to help safeguard jobs.

Shareholders would also be given more powers to hold boardrooms to account, with executives told to explain to them how they can afford to pay dividends.

Business Minister Kelly Tolhurst said the new measures were needed after some “recent large-scale business failures” showed that a “minority of directors are recklessly profiting from dissolved companies”.

She said: “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.”

The Insolvency Service, part of the Government’s Business Department, is the regulator charged with investigating bosses when a company falls into administration, and disqualifying those found to be incapable of running companies.

It currently disqualifies around 1,200 directors a year.

Business Secretary Greg Clark launched a consultation over planned action against “irresponsible” company directors in March, and the measures are expected to be set out in more detail in the autumn.

Stuart Frith, president of insolvency and restructuring trade body R3, said its members had long raised concerns about directors deliberately dissolving businesses to avoid paying their debts.

He said: “A strengthened disqualification regime will be an important part of ensuring that directors are less likely to walk away from their responsibilities.”

The Government is also planning to introduce better training for directors to make them aware of their legal duties, and will invite ICSA: The Governance Institute to convene a group of investors and companies to develop a code of practice for external board evaluations.