Consultation to improve governance in insolvency situations

The Government has launched a consultation to improve governance processes of companies that go bankrupt. The launch of the government’s consultation around improving corporate governance and stakeholder outcomes in insolvency situations, is expected to be welcomed by many UK businesses.

With several high-profile collapses bringing corporate governance to the fore recently, it is essential that businesses at risk of insolvency are aware of the proposals contained in the consultation and follow best practice when it comes to dealing with any resulting HR issues.

The Government’s primary objective for launching its new consultation is to crack down on irresponsible behaviour of some UK directors and offer greater protection to employees throughout the insolvency and liquidation process.

For example, while there have been instances of individuals setting up companies only to run them into the ground and set up another, leaving a trail of destruction behind them, any investigation against them would be dependent on the business entering liquidation.

The consultation proposes potential changes to ensure that directors responsible for the sale of an insolvent subsidiary of a corporate group protect the interests of the subsidiary’s shareholders, in particular by deterring reckless sales and ensuring fair outcomes when major companies get into difficulties.

It is important for businesses in insolvency situations to have a set of clear processes and procedures in place to protect the interests of the workforce and help to limit reputational damage. The most common HR issues are likely to arise around monies owed to employees made redundant, which may include outstanding salary, accrued holiday pay, unpaid pension contributions and redundancy pay.

When it comes to the rights of former employees, it is also vital to understand the distinction between those whose contracts are terminated during the first 14 days of the administration period (‘ordinary creditors’) and those made redundant after this period (‘preferential creditors’). Whereas ordinary creditors are in the last category to receive monies owed, preferential creditors stand a better chance of recouping any outstanding payments due to them. In addition, while ordinary creditors are only entitled to outstanding wages and redundancy payments, preferential creditors may also be entitled to up to six weeks of accrued holiday pay and some occupational pension payments.