Directors who dissolve companies in order to avoid paying out salaries or pension pots to workers could get hit with large amounts of fines under a new initiative that is mandated by the government.
The Insolvency Service (IS) will be taking on the directors who avoid paying the debts of their company by dissolving the company and then setting up a near identical business, in a process that is also known as “phoenixing.”
Kelly Tolhurst, the business minister, said that the IS will be given the powers to impose a fine on the directors or have them disqualified.
In a statement that was published today, she stated: “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.”
The bosses in the UK will also be required to provide more detailed explanations to the shareholders on how the firm would be able to afford to pay out dividends, in comparison to the firm’s other financial commitments including workers’ rewards, pension schemes, and capital investments.
Currently, IS disqualifies approximately 1,200 directors per year.
The announcement arrives as part of a strategy that was launched last March by the Department for Business, Energy and Industrial Strategy. It was aimed to safeguard pensions, small suppliers, and workers when a company goes bust.
It comes after various large-scale company collapses, including that of Carillion, the construction firm, and BHS, the retail chain, in 2016.
The Pensions Regulator continues to argue that Dominic Chappell, the buyer of BHS for only £1 from Sir Philip Green, a retail tycoon, was aware that it was insolvent before making the deal to acquire the firm.
The watchdog is continuing efforts to make Chappell pay £9.5m into BHS’ pension pot for its former workers.
Today’s initiatives are scheduled to be set out in further detail later this autumn.
The chief executive of the Investment Association, Chris Cummings, said that there had been some concerns among the investors for some time that companies were “utilising interim dividend payments to avoid shareholder approval.”
The president of the insolvency and restructuring trade body R3, Stuart Frith, welcomed the said announcement.
He stated: “Our members have long raised concerns that some directors are deliberately dissolving businesses to avoid paying their debts. A strengthened disqualification regime will be an important part of ensuring that directors are less likely to walk away from their responsibilities.”