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Government plans to shake up insolvency regime

Julie Webster, corporate recovery and insolvency associate at Mitchell Charlesworth, comments on the Government’s plans to introduce tougher insolvency laws.

In August the UK government announced a range of proposed changes to insolvency law.

Ministers propose to introduce new insolvency laws which improve restructuring options for companies in financial distress and address issues highlighted by major company failures. Following the recent high-profile collapses of major organisations like BHS and Carillion, which heavily impacted on workers and pension schemes, the proposals put more emphasis on directors’ duties and examine their behaviour with the greatest of scrutiny.

The Government is already making changes to the way insolvencies are processed but in the Budget 2018 the Chancellor announced new measures to protect taxpayer’s money in insolvency proceedings.

From April 2020, HMRC will have secondary preferential status for taxes collected by businesses on behalf of taxpayers (including VAT, PAYE income tax, employee National Insurance Contributions and Construction Industry Scheme deductions). This is in part, a return to the preferential status held by HMRC in 2003 but surrendered in the reforms brought in that year. This demonstrates the Government’s continuing intention to improve year-on-year on the amount recovered in respect of tax collected by companies which then fall into an insolvency procedure without paying such sums over to HMRC. The Budget also sets out that following the Royal assent of the Finance Bill 2019-20, directors and other persons involved in tax avoidance, evasion or inappropriate “phoenixism” will be jointly and severally liable for company tax liabilities, where there is a risk that the company may deliberately enter insolvency.

As part of the proposed changes the Government is also seeking to tackle “phoenixism”, where directors deliberately employ inappropriate methods to set up a new company to deny existing creditors their rights whilst continuing to trade. It is right that in such circumstances, “phoenixism” of this type should be stopped and dealt with and the Government’s reforms on this are to be encouraged.

The proposals also concentrate on corporate transparency and director responsibility making it clear the Government is responding to recent corporate collapses and scandals and seeking to ensure that the lessons from these earlier failures are not repeated to the cost employees, creditors and the Government.

It is not yet clear when the reforms will be implemented but we will provide further updates when any announcements are made by the Government.

To discuss any corporate recovery or insolvency issues you may have, please contact Julie Webster below.